News focus: The end of a low-cost era?

5 July 2010

6 July 2010 | Andy Allen

After strikes, resulting in wage rises and improved conditions for Chinese workers, Andy Allen explains how prices may rise accordingly

There is reportedly an ancient Chinese curse which says: “May you live in interesting times”. It has been an interesting month for the labour market in China, with strikes and wage rises. Few buyers are expecting this activity will prove to be a blessing, but will it be a curse?

The most high-profile protests were carried out by workers at Taiwanese gadget supplier Foxconn about conditions which have allegedly led to suicides and suicide attempts among 13 workers this year. Foxconn ended up raising wages by 30 per cent with a promise of a further 70 per cent by October. Production was also stopped at a Honda factory by strikes, which resulted in a 20 per cent pay increase.

Coming hot on the heels of these concessions were announcements by municipal authorities, mainly in the southern exporting hotspots of China, that they will raise the minimum wage.

In Guangdong province, the minimum wage will increase by 10 per cent to 1,100 yuan per month (around £110) from 1,000 yuan (£100). The minimum wage in Beijing will rise by 20 per cent to 960 yuan (£95) a month from 800 yuan (£80) from 1 July. Rises have also been announced in several other provinces.

Is this the end of the road for low-cost sourcing in the world’s manufacturing hub?

What is clear is that China’s wage hikes are part of a concerted plan to stimulate domestic demand. This was confirmed by China’s Xinhua state news agency which wrote: “The wage hikes fit Beijing’s economic strategy, which calls for encouraging China’s own consumers to spend more in order to reduce reliance on exports.

“The government is also trying to shift more money down the economic ladder to defuse public anger.”

Independent industrial protest is normally banned in China, and Xinhua also noted the significance of the fact that the government allowed recent industrial action take place.

All this has made for uneasy reading for buyers dependent on China. Larry Beard, chief executive of consultancy EIPSC, said the moves have “set the alarm bells ringing” among many buyers, particularly those dependent on a single source of supply in China.

Beard also pointed to the comparative strength of the yuan as a another factor that could drive up costs and make sourcing from Chinese factories less competitive.

Foxconn chief executive Terry Guo has been quoted as threatening to shift production back to Taiwan and also to countries such as India. This has led to debate that companies could shift sourcing to other economies such as Vietnam, India or Turkey.

But procurement experts believe the vast range of suppliers and infrastructure present in China will keep it in pole position. Michael Zhou, head of procurement in China for BT, said: “Countries like India have their own inflationary pressures on wages.” Zhou adds: “If you look back to the past five years, Chinese local and provincial governments have raised the minimum wage on an almost annual basis. The only exception is in 2009 when the global recession hit China.”

Ben Schmittzehe, chief executive of China-focused finance advisory consultancy Schmittzehe & Partners noted that most of the recent strikes in China had been over conditions rather than wages and added minimum wages were generally much lower than real blue-collar wages in China.

He points out several years ago a few companies tried to move production into Vietnam or cheaper areas of China only to find savings in wages were offset by poorer infrastructure and increased logistics costs.

Merry Liu, procurement contracts manager, Northern China global sourcing, passenger division for Bombardier, shares the views of many when she points out China is undergoing the same transformation many other low-cost economies such as Japan or South Korea before it
have undergone.

“This a wake-up call,” she said. “Wage increases would certainly impact upon the saving percentage the buying organisation anticipates achieving.”

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