China's labor unrest leading to wage raises in several industries

Like us on Facebook

The CEOs of many manufacturing companies in China may wonder if the labor unrest will drastically change China’s role as the biggest—and most reliable—supplier of cheap labor?

There are a number of factors that are provoking the worker discontent and militancy.

The first is the often-wretched working conditions. Workers by the thousands toil on production lines doing repetitious tasks like human robots without, or with few, breaks. The work week is often 60 hours.

The next factor is the low pay. According to the All-China Federation of Trade Unions, a quarter of Chinese workers have not had a raise in the past five years—during a period of unprecedented and prosperity in China. One employer, Merry Electronics, Taiwan’s leading manufacturer of acoustic components for computers and communications equipment, had been making employees work on weekends for no pay. Then, after promising to begin to pay for working on weekends, Merry reneged on the promise.

In addition, the central government has for years subordinated the interests of laborers to those of entrepreneurs and foreign manufacturers.

“For many years [the central government] has been friendly in its policymaking towards businesses to rachet up economic growth,” wrote Li Hong, a columnist for People’s Daily Online, “but [it has] done little to solidify the interests of the workers. As a result, as the country has raked in stacks of foreign currencies as reserves, and businesses and tycoons had deep pockets, the welfare of vast [numbers of] laborers has been hardly improved.”

A host of demographic factors had also made workers more abject. According to Arthur Kroeber, managing director at the Dragonomics consulting firm in Beijing, earlier workers had no choice because they knew that, if they didn’t like their job, “there were 10 other guys waiting to take their job.”

More recently, however, other demographic factors have begun to favor workers. Because of China’s longtime one-child, family planning policy, the population of 20-to-39 year-old workers, the backbone of China’s labor force, has gone down 22 percent in the last 10 years.

The recession has also affected labor relations, because it has altered the migratory habits of migrant workers. Many workers had migrated to factory towns and had been living in congested dormitories far from friends and families. When the recession hit China, many of them went back to their home regions. During 2008-2009, an estimated 20 million migrant workers went back to their home regions. When they got home, many found their villages to be more prosperous and offering employment, and they decided not to return to the factory.

Such trends are making recruiting more difficult for factories, and, to hire the numbers of workers they needed, many plants have had to hire older workers. The older workers have not been as willing as the younger workers to put up with wretched working and living conditions.

Migrant workers are now “pickier about their wages, benefits, and working conditions,” says Chang Kai, director of Renmin University of China’s labor relations institute.

Then too, as the Chinese economy has prospered, workers now have far more opportunities to find work elsewhere, says Geoffrey Crothall, director of communications of the China Labor Bulletin.

According to Liu Kaiming, a workers’ rights advocate at the Institute for Contemporary Observation in Shenzhen, where several of the earliest strikes began, the new generation of workers “have a better awareness of their rights.”

“Today’s migrant workers have higher expectations than their parents,” says Liu. “they will choose where to work and ask for better salary.”

They also seem to have realized the power of collective bargaining.

Says Tom Hout, a consultant at the Boston Consulting Group who teaches for part of each year at Hong Kong University business school, “This has been a long time coming.”

Previously China’s response to such labor dissidents had been arrest and detention. Now militant workers are realizing they are not getting as much pushback from the government as they might have gotten previously.

The central government is reportedly working to empower the migrant workers to help them cope with rising living costs and to close a widening gap between rich and poor. The central government is actively encouraging local governments in various parts of the country to raise the minimum wage.

Last Friday, Beijing’s municipal government said it would raise its minimum wage by 20 percent. Seven Chinese provinces raised their minimum wage in the first quarter of 2010.

“These labor actions [were] not accidental,” says Handel Jones, the CEO of International Business Strategies, Inc. of Los Gatos, Calif., a market and strategy consulting firm with expertise in international business investments in China. “They would not have happened if the government was not willing to allow them to happen.”

“These [strikes and the way they were resolved] wouldn’t have happened at a state-owned enterprise, where the unions are weak,” says Jones. “But the government isn’t too concerned about what happens at a plant owned by a foreign company. If you’re a foreign facility, then your wages are going to go up.”

How much?

According to Tao Dong, a Hong Kong-based economist at Credit Suisse Group AG, wages for migrant workers in China are expected to grow at a double-digit rate “over the next few years.

Cai Fang, director of the Chinese Academy of Social Sciences institute of population and labor economics, believes that China has hit the “turning point” where developing countries’ industrial wages begin to rise quickly because the supply of surplus labor from the countryside declines.

Says Mars Hsu, a Taipei-based analyst at Grand Cathay Securities, as quoted by Agence France Presse, “The era of cheap Chinese labor is over.”

China has probably already lost some of its allure as a haven for cheap labor manufacturing. But China was never simply a sweatshop. It was a sweatshop with a gigantic local consumer market. One in which manufacturers could sell a lot of their production in China. Now wage increases are putting more money in the pockets of hundreds of millions of laborers. That will promote local consumption.

Worrisome as the wage increases may seem to manufacturers, there are a number of reasons why China will probably retain its primacy as a relatively cheap labor manufacturing center.

China has large numbers of new, highly automated factories where workers have gotten a significant amount of training. China has well-developed infrastructure. Moving manufacturing out of China can’t be done quickly. Finally, manufacturers will probably be able to still find cheap labor by moving to provinces further inland.

Then there are the comparative advantages. Even if Honda pays its workers 2,000 yuan a month, a 100 percent increase, that’s still cheap, says Handel Jones.

If Honda agrees to the wage demand, analysts say it would hardly dent Honda's margins. According to JPMorgan analyst Kohei Takahashi, Honda's labor costs account for just 5-6 percent of its total revenues even in high-labor-cost Japan. Assuming that "wages in China are between one-fifth and one-third those in Japan, the cost of factory workers in China comes to around 2 percent of sales," Takahashi said.

According to Stephen King, group chief economist at HSBC, it’s too early to assume that recent wage hikes will take away very much of China’s advantage or appeal as a cheap labor manufacturing base.

“Even if there are pockets of wage rises coming through, the relative [efficiencies of Chinese labor] are still very huge,” the Financial Times quotes King.

“Where would you go?” asks Handel Jones, the consultant who advises a number of foreign manufacturers in China. He says that India does not have a very good modern manufacturing base. Vietnam is dangerous. The wages there are cheaper, but its infrastructure is inadequate.

“Vietnam is coming up, but it doesn’t have the huge local market [that China has],” says Jones. “We don’t expect to see an exodus out of China, frankly. I don’t see this as a big game changer.”

Compared to the wages that foreign automakers pay their non-Chinese workers elsewhere, the wages of Chinese auto workers is still very low.

From the government’s standpoint, there are good reasons to accept the labor unrest and wage increases. The increased costs incurred by foreign companies who manufacture in China helps the Chinese companies who compete with them. In addition, the pay raises will increase domestic consumption.

“We [that is, the Chinese] won’t use credit cards or debt to consume more. But we’ll give workers more money for them to spend at home on things made in China,” says Ting Lu, an economist with Bank of America-Merrill Lynch.
Lu thinks it’s a good idea if labor disputes are resolved with wage increases. “If China wants to build up a new growth model driven by consumption, you have to find a channel to redistribute GDP more to labor, especially to the low-income class,” he says.

Raising workers’ pay means those workers can buy the products made in China. Manufacturers of those products, whether foreign or Chinese, will be able to sell those products where they are produced.

“In the long run the trend towards higher wages should be good for the development of the Chinese economy, by stimulating domestic consumption,” says Geoffrey Crothall.

Honda probably isn’t making cars in China just because of the cheap labor. It probably wants to sell its cars to the Chinese, once they go back to work and the cars start rolling off the assembly line again.