China’s manufacturing wages: The Olympic hangover

The low-end manufacturers for toys and textiles will choose to relocate their facilities, while high-tech companies (mainly the electronics industry) will make the investments.

The dilemma facing most foreign electronics companies is where to invest in new plants - home or abroad. If domestic labor rates are equivalent to Chinese labor rates, it may not be beneficial to invest significant resources in China.

Domestic manufacturers in China have limited options, mainly due to their own shortsightedness.

When business was in full bloom, they did not invest much in technologies nor were they able to retain capable engineers. In my opinion, owners of these Chinese companies were used to paying lower wages; they made great money, and did not keep up with the increasing pay scales. Some larger Chinese electronics companies which started manufacturing operations can weather the storm; however, small and mid-sized companies are struggling.

A local organization of Taiwanese manufacturers in Shenzhen commented that more than 150 Taiwanese operations, representing almost 8 percent of the plants in the area, closed during the first half of 2008 because of increasing labor costs.

Taiwanese manufacturers returned home or moved plants to the other countries where labor rates are still considered very low such as Vietnam or Indonesia.  Meanwhile, several major electronics companies have earmarked more investment money in Taiwan rather than China.

The Japanese exporting industry experienced a similar labor situation during the 1960's and 70's. The manufacturing business in Japan was booming during this time; salaries increased more than ten percent every year, and the exchange rate of the Japanese yen tripled against the U.S. dollar. Japanese companies survived by increasing productivities and maintaining a high level of quality across all products.  Today, salary levels at Japanese electronics companies remain the highest in the world.

Now that the Beijing Olympics have concluded, the Chinese government is focusing its attention on the next big event the 2010 Shanghai EXPO. This will probably not be beneficial to manufacturing companies in China where the exporting business is facing several hurdles: weaker demands spurred by the sub-prime issue in the U.S., increasing labor costs, a strong RMB, inflationary pressures from raw materials, and more.

Small and mid-sized companies in China have many hurdles to clear, and may not finish the race unless they lay down some fundamental improvement plans.

VentureOutsource.com, September 2008

    

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