AP: Rising Costs, Higher Wages Drive Low Cost Manufacturing Out of Southern China

By @ibtimes on

Even in a country of over a billion the relentless push to find cheaper and cheaper labor has limits.  First the relatively prosperous coastal east became pricey in terms of labor, and now it appears it has spread to the south.   [Jan 27, 2011: China Raises Minimum Wage... Again] [Feb 27, 2008: China Raising Minimum Wage] [Jun 2, 2010: Cheap Labor Fighting Back in China]   The far more remote western and central regions appear to be the last bastions... then?  If the supply chain is not going to move wholesale to Indonesia or Vietnam (which would be doubtful) the multi decade push down in exported product prices that the Chinese manufacturer has produced, could reverse.  Then again, automation could prosper for Chinese manufacturers to lower costs... but then what to do with all the excess labor?

Via AP:

  • When millions of workers didn't return to their southern China factory jobs after Lunar New Year holidays, a turning point was reached for foreign manufacturers scraping by with slim profit margins.  Companies were already under pressure from rising raw material costs, restive workers and lower payments for exports because of a stronger Chinese currency. Despite hiking wages, labor shortages kept getting worse as workers increasingly spurned the often repetitive and unskilled jobs that helped earn China its reputation as the world's low-cost factory floor.
  • I don't know of any factory in China that can absorb both the raw material prices we have, the labor issues we've been looking at and the renminbi, China's strengthening currency, said Hubbs. The currency is also known as the yuan.  He's joining a wave of export manufacturers, big and small, that are moving from China's coastal manufacturing regions to cheaper inland provinces or out of the country altogether, in a clear sign that southern China's days as a low-cost manufacturing powerhouse are numbered.
  • Foxconn Technology Group -- the world's biggest contract electronics manufacturer with customers including Apple Inc., Sony Corp. and Hewlett-Packard Co. -- is planning to gradually cut its workforce of 400,000 in the southern Chinese city of Shenzhen by a quarter and move the bulk of manufacturing inland. 
  • China watchers at Credit Suisse, an investment bank, call the shift an historical turning point for China's economy and perhaps the world as the country's role in keeping global inflation low by supplying cheap goods is set to end.
  • It may take a decade for China to see its export competitiveness erode, but we have seen the beginning of this happening, the Credit Suisse report said, predicting that salaries for China's estimated 150 million migrant workers would rise 20 to 30 percent a year for the next three to five years.
  • That's partly because China's traditional advantage -- its vast, cheap pool of workers -- is drying up. Economists say it's the result of a rapidly aging population after 40 years of the one-child policy.
  • The ripple effects of rising costs in China are already being felt around the globe. U.S. clothing retailers are raising prices for shirts and other garments by 10% on average after a decade of price falls, partly due to higher labor costs in China.
  • China's blistering growth has also lifted incomes and created more opportunities in poorer inland provinces, which means fewer people leaving for jobs in the richer coastal cities.  Some 30 to 40% of migrant workers didn't return to their factory jobs in Guangdong province's Pearl River Delta manufacturing heartland after the annual Lunar New Year holiday in February, said Stanley Lau, deputy chairman of the Hong Kong Federation of Industries. Typically the proportion is 10 to 15%.  That was despite Guangdong authorities raising minimum wages by up to 20% in March.
  • Many factories already pay more to retain workers but are still having a hard time finding manpower.  Hubbs employs about 500 workers earning 1,800 to 2,000 yuan ($275 to $306) a month, a lot higher than Guangzhou's 1,300 yuan minimum wage, which came into effect March 1. But he's still short about 100 people, resulting in a 90-day turnaround time for orders, twice as long as he'd like. 
  • He wants to move 30 to 40% of production to a new factory in Cambodia, Laos or even Myanmar in six to eight months.  Hubbs has looked at moving elsewhere in China but doesn't think the cost savings would last beyond two or three years as wages and prices even out across the country.
  • Greater use of automation is also becoming more economic.  CBL Group, a contract manufacturer, has five welding robots used to assemble brackets for hospital beds and seat frames for new carriages on the New York subway. Chairman Gideon Milstein said he bought them in 2007 and 2008 for $600,000 because they could track welds by computer to ensure they were up to standard.  At the time, it was cheaper to weld by hand but that's changing because wages for skilled human welders are going up.  It will soon be cheaper to weld by robot than it is by human in China, Milstein said.

[Apr 7, 2010: Vietnam Begins to Lure Business Away from China]

[Rising Factory Costs Erode China's Edge]

[China's Inflation Hits American Price Tags]

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