China’s manufacturing wages: The Olympic hangover

By Dominique Numakura

A recent newspaper article reported in early July that a Japanese manufacturing company in Guangdong Providence China received a formal letter from the local government informing it to increase the minimum monthly wage by approximately 20 percent to 900 RMB.

The Guangdong government announced plans to double income for workers in five years, and the July wage increase signals the first step in this overall plan.

The Shanghai government announced a 14 percent increase in the minimum wage beginning in April. This was the second increase in the last seven months, raising the minimum wage in Shanghai by more than 27 percent in one year.

If wages continue to increase at the same percentage, salaries will double every three or four years.

Salary levels in China rapidly increased prior to the start of the Beijing Olympics.  To prepare as the host country for this year’s Olympics, construction projects were plentiful, labor was in high demand, and local governments did not hesitate to increase minimum wages.

While workers in manufacturing companies are happy with the bump in wages, the increase was not met with open arms by executives from foreign companies doing business in China. (See, also: Outsourcing Calculator for OEMs)

Manufacturers have to deal with overall cost of labor increases as well as a currency appreciation from the Chinese RMB.

The RMB has risen steadily since 2005, and has appreciated 20 percent when compared to the US dollar. Additionally, exporting power for companies has continuously weakened over the last few years. Rising inflation directly affects the cost of materials and this cancels out any importing power from a strong RMB.

Unfortunately, governments are not concerned with productivities from manufacturers. Individual companies must formulate their own plans to increase productivity and survive under such difficult circumstances.

Asia hourly manufacturing wages vs developed economies
South East Asian manufacturing strategy
Asia labor costs and China manufacturing relocation impact considerations

Originally, foreign manufacturers moved production facilities to China to take advantage of low labor costs compared to their own domestic work force. Now, faced with rising wages throughout China, foreign manufacturers are faced with two choices to keep costs down. (See, also: How China manufacturing labor rates and cost are impacting EMS)

The first is to move their manufacturing operations to other countries with low labor costs, and / or the second is to make capital investments in their Chinese operations and automate most of the facilities to increase productivities.

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.

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