Rising Chinese wages pose relocation risk

By Kevin Brown Published: February 15 2011 17:33 | Last updated: February 15 2011 17:33 Financial Times www.ft.com

Han Zheng, the mayor of Shanghai, has just delivered a pleasant surprise to the city’s workers: their minimum wage is to rise by more
than 10 per cent in April. No one will be getting rich – the new rate amounts to a less than princely Rmb1,232 ($187) a month. But Mr
Han’s announcement is part of an emerging trend. Chinese officials are seeking to head off a repeat of last year’s labour unrest amid
fears that persistent and rising inflation could provide a further irritant in wage discussions. In a rash of disputes between May
and August, employers were hit by strikes or other problems, including Honda’s Chinese subsidiary and some of its China-based
Japanese suppliers, such as Omron. The outcome was a wave of pay rises, notably a 30 per cent increase at Foxconn, the
Taiwanese owned manufacturer of electronic products such as Apple’s iPad, after a spate of suicides drew attention to working
conditions.

Shanghai is not alone in moving early to head off further unrest this year. Beijing’s municipal
government raised minimum wages by 21 per cent in January, and the southern province of
Guangdong is also considering a rise. The increases are likely to reignite debate about whether
China’s rising wages will prompt companies to shift production to other locations in emerging Asia.
Plenty of business leaders think they may.

Matt Rubel, chief executive of Collective Brands, the US footwear group that owns the Payless shoe
stores chain, is shifting a chunk of production from China to Indonesia, south- east Asia’s largest
economy. “The utopia for one stop sourcing for quality and low price has been China . . . but utopias
never last,” says Mr Rubel.

Harry Lee, chief executive of Tal Apparel, a Hong Kong garment maker, takes a similar view. “Five
years ago, if you asked me the best place to set up a factory, first would be China, second would be
China and third would be China,” he says. “Today it’s very different.” There is substantial room for
doubt, however, about the long-term impact on China as an Asian manufacturing centre.

Rising labour costs in China are not a new phenomenon. Research by the International Labour
Organisation suggests that Chinese wages have been outpacing the rest of Asia for at least a decade.

Chinese workers received real wage rises averaging 12.6 per cent a year from 2000 to 2009,
compared with 1.5 per cent in Indonesia and zero in Thailand, according to the ILO. At about $400 a month, Chinese workers are now
three times more expensive than their Indonesian counterparts, and five times as costly as in Vietnam, although they remain
considerably cheaper than in Taiwan and Malaysia.

However, that simple calculation takes no account of changes in relative productivity. Stephen Roach, chairman of Morgan Stanley
Asia, says World Bank data indicate productivity growth in Chinese manufacturing of 10 to 15 per cent a year since 1990. That
averages out at close to the same level as annual real wage increases over the last decade, suggesting unit labour costs may have
risen very little, if at all.

Accenture, the global management consultancy, concluded in a report published on Monday that a minimum wage rise of 30 per cent
would cut margins by just 1 to 5 per cent for companies with a large Chinese manufacturing base. Accenture said that such a small
change in margins could be offset by higher productivity, cost cutting and better supply chain management, and was likely to have “no
significant impact” on demand for Chinese made goods.

That might explain why foreign direct investment in China continues to soar. Research by fDi Intelligence, a Financial Times unit, shows
that China won 1,314 new green field projects in 2010, up 13 per cent on the previous year. That compares with a 6 per cent fall for
Asia as a whole. Separate figures from the United Nations Conference on Trade and Development show that FDI into China remained
fairly constant throughout the global financial crisis, compared with wild gyrations in many other Asian countries between 2008 and last
year. Noticeably, much of the discussion about production shifts relates to labour-intensive, low-margin sectors such as footwear and
textiles, which have been relocating for years to Vietnam, Bangladesh, Cambodia and elsewhere.

Life in China may well be getting tougher for these companies. Ronald Van der Vis, chief executive of Hong Kong’s Esprit Holdings,
Asia’s third biggest garment retailer by market value, said that the company planned to switch more sourcing to Bangladesh from
China. Earlier, Victor Fung, chairman of Hong Kong based Li & Fung, the world’s biggest sourcing company, revealed that some of
his Chinese customers were making unprecedented requests for supplies of such products to be sourced from other countries.
There is little talk, however, of shifting more complex manufacturing such as silicon chips and flat panel screens, for which labour
makes up as little as 2-3 per cent of total costs. Intel, the US chipmaker, recently opened a $1bn plant in Vietnam, and Hon
Hai and Compal, the Taiwanese equipment manufacturers, have also set up assembly plants there.

However, manufacturing experts doubt that many high-tech companies are planning to abandon China – not least because many rely
on suppliers who have co-located in southern China’s vast technology clusters specifically to be near their customers. Bhavtosh
Vajpayee, head of technology research at CLSA in Hong Kong, says: “It is not possible for these high-tech companies to shift much of
their production to Asean countries; they just don’t have the skills and the infrastructure that is needed. It just cannot be done.”

Additional reporting by David Pilling in Hong Kong, Anthony Deutsch in Jakarta and Robin Kwong in Taipei

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Chinese companies struggle to find workers

By Rahul Jacob in Hong Kong and Patti Waldmeir in Shanghai Published: February 21 2011 13:10 | Last updated: February 21 2011
13:10

On one of the busiest recruiting days of the year, Yang Guowei of New Happiness Hair Accessory
Company sits slumped behind a small table, one of many set up at a labour exchange in Yiwu, a city
in China’s eastern province of Zhejiang. Mr Yang is trying to recruit migrant workers as the Chinese
New Year holidays wind down. He is offering a monthly salary of Rmb1800-Rmb3000 ($274-$456),
and looking to hire 10 workers to make rhinestone-embellished hair baubles, but has had no takers
in spite of offering wages 30 per cent higher than last year.

Sewn-up: a garment factory in Guangdong, where workers are seeing improvements in their
employment conditions

EDITOR’S CHOICE beyondbrics: SOEs top MNCs in China’s talent war - Jan-31 Chinese steer
clear of ‘Jasmine Revolution’ - Feb-20 FT Alphaville: Koo goes unconventional on China -
Jan-31 Rising Chinese wages pose relocation risk - Feb-15 In depth: Chinese labour - Jun-17

“I have been here for four days and I haven’t found anyone yet,” Mr Yang says. Nearby, Langsha Knitting, one of the world’s largest
sock producers which makes 1m pairs of socks a day, is having an easier time. Its human resources manager, Wang Lai, reports that
he has signed up nearly all the 2,000 workers he needs. Labour shortages for manufacturing workers have dominated headlines in the
Chinese media as migrant workers return from their holidays, but some employers are proving more
able to hire workers than others.

While smaller factories struggle with a nationwide tightening in the labour market, larger firms that offer
better wages and benefits – those that are more likely to have HR managers – are able to recruit the
staff they need.

Across the country, local governments have been raising the minimum wage. Next month, Guangdong
province, home to a large share of China’s manufacturing, will raise the minimum wage by 18 per cent.
In Dongguan, a city in the province that is home to many of China’s light manufacturing factories,
employers are promising an annual bonus, annual leave, and even rewards on their birthdays in a bid
to sign up workers.

“Workers are God now,” complains Mr Yang. His hyperbole underlines an important demographic
shift. China’s once endless supply of workers is looking less infinite. The cohort of those entering the
workforce, defined in China as those between 15 and 24 years old, peaked in 2005 at 227m and is
expected to fall to 150m by 2024.

William Fung, who heads Li & Fung, the largest supply chain company in the world with half of its
manufacturing operations in China that makes everything from garments to furniture, says the world must brace itself for “a bout of cost-
push inflation.”

Alongside double-digit increases in the cost of labour in China in 2010 and 2011, input prices are also soaring. The price of cotton, for
example, is up more than 150 per cent over the past year.
“The reality is that [suppliers] will have to pass these costs on,” says Mr Fung.

There is also likely to be a divergence between the fortunes of multibillion-dollar companies like Li & Fung, which saw half-yearly sales
as of June 2010 rise by almost 20 per cent, and the small, low-tech Hong Kong firms many of which are based in the Pearl River Delta
that are not well integrated into their developed world customers’ businesses.

Guangdong is not the only region facing labour shortages. In poor provinces like Anhui, which has traditionally been a source of migrant
workers, higher wages nearer home mean more migrant workers are opting not to travel long distances to seek work. Li Weining, 23,
left his job at the Honda parts plant in Guangzhou that had a strike last year and chose instead a factory in Zhanjiang, 400km from the
city, because it is closer to his home town and living costs are lower.

“I earn Rmb1,600, which is almost the same as at Honda,” says Mr Li. Mr Li’s calculus for moving closer to home is simpler than that of
multinationals comparing costs of production in different countries. Most companies are unlikely to shift manufacturing operations in
China to countries like India or Bangladesh.

Dragonomics, a research consultancy, calculates that labour productivity in China grew by 13 per cent annually in apparel
manufacturing between 2003 and 2010, offsetting most of the increase in wages. China’s rate of labour productivity growth comfortably
outstrips that of Brazil, Vietnam, Indonesia and Turkey, it says.

Moreover, for industries such as the assembly of electronic components, efficient and tightly knit supply chains passing products from
factories in Japan or Taiwan to the Pearl River Delta for labour-intensive work make it difficult to move manufacturing facilities
elsewhere. And behind the headlines about China’s exchange rate lurks a more lethal secret. China’s infrastructure is on a par with
South Korea, according to the World Bank. Dragonomics says than means China combines “Third World wages with First World
infrastructure”. Copyright The Financial Times Limited 2011. You may share using our article tools. Please don't cut articles from
FT.com and redistribute by email or post to the web.

Chinese companies struggle to find workers

By Rahul Jacob in Hong Kong and Patti Waldmeir in Shanghai

Published: February 21 2011 13:10 | Last updated: February 21 2011 13:10

On one of the busiest recruiting days of the year, Yang Guowei of New Happiness
Hair Accessory Company sits slumped behind a small table, one of many set up
at a labour exchange in Yiwu, a city in China’s eastern province of Zhejiang. Mr
Yang is trying to recruit migrant workers as the Chinese New Year holidays wind
down. He is offering a monthly salary of Rmb1800-Rmb3000 ($274-$456), and
looking to hire 10 workers to make rhinestone-embellished hair baubles, but has
had no takers in spite of offering wages 30 per cent higher than last year.

“I have been here for four days and I haven’t found anyone yet,” Mr Yang says.
Nearby, Langsha Knitting, one of the world’s largest sock producers which makes
1m pairs of socks a day, is having an easier time. Its human resources manager,
Wang Lai, reports that he has signed up nearly all the 2,000 workers he needs.

Labour shortages for manufacturing workers have dominated headlines in the

Chinese media as migrant workers return from their holidays, but some
employers are proving more able to hire workers than others. While smaller
factories struggle with a nationwide tightening in the labour market, larger firms
that offer better wages and benefits – those that are more likely to have HR
managers – are able to recruit the staff they need.

Across the country, local governments have been raising the minimum wage. Next month, Guangdong province, home to a large share
of China’s manufacturing, will raise the minimum wage by 18 per cent.