China’s staffing conundrum: is plentiful labour a benefit or an obstacle?
14 December 2010
The tragic deaths this year of young workers at Foxconn’s plant in Shenzhen, Southern China, placed the contract electronics manufacturing giant and many of its customers such as Apple, Dell, HP, Nokia and Sony under intense international media scrutiny.
The ramifications of this tragedy are not only being felt within China’s electronics manufacturing industry, but have also brought the entire future of China as a low cost manufacturing hub into question. Until very recently, this proposition would have seemed laughable, but in very quick time the Foxconn tragedy has acted as a catalyst that has inspired workers at plants owned by companies such as Honda to take industrial action. As a result of this, employers have offered significant pay increases and there is now upward pressure on labour rates across all sectors.
This has lead to analysts speculating that global consumer brands may consider moving their factories to lower cost Southeast Asian countries such as Vietnam, India, Indonesia, Bangladesh, and Sri Lanka; Africa has even been mooted as a viable alternative as wages in China appear set to continue to rise.
According to pieces during the summer by Lorraine Luk of Dow Jones Newswires and Clarissa Ward of ABC News, Taiwan-headquartered Foxconn announced plans to increase salaries by 67%, after an earlier 30% pay rise that took effect on 1st June 2010. Although this is a big percentage increase, it comes off a very low base, and the take home pay of its workers remains low when compared to Western pay rates. The pay rise boosted the monthly wage of Foxconn's shop-floor workers in Shenzhen from $US130 to $US175, and those who pass a three-month assessment can now earn 'as much' as US$290.
According to an ABC News business story in June 2010, hundreds of
workers walked off the job at a Honda plant for two weeks in the summer, forcing the company to increase the workers' pay by up to 32%. At around this time, Beijing announced it would raise its minimum wage by 20% to roughly US$140 a month.
The minimum wage in Guangzhou has increased by 20% this year, while Shenzhen’s has increased by 10%. Across China, wages for manufacturing workers have increased by 14% over the past year, and according to a report in China Daily, analysts at the All-China Federation of Labor in Beijing said that the recent labour disputes indicated that it was vital to increase wages and adopt better working conditions for labourers.
The labour-related stories surrounding Foxconn of late seem to bring into focus the often cut-throat nature of contract electronics manufacturing, both locally in China, and globally. Foxconn employs more than 800,000 workers in China; many of these workers are immigrants from the rural inland provinces and live onsite in the company’s dormitories. The Shenzhen facility alone employs more than 420,000. Typically, contract electronics manufacturers such as Foxconn operate on wafer-thin profit margins of around 5%. Most of the profits go to brand owners, technology patent holders and retailers. According to market research firm, iSuppli, the assembly fee for an iPad which retails for US$499 is less than US$12.
There have been murmurs from Foxconn that it will have to increase its prices to compensate for the pay increases it has given its workers. The company announced plans to move its major production line from Shenzhen to Langfang in North China's Hebei province in an attempt to reduce labour costs, leaving only a small part of its business in Shenzhen. Foxconn also hinted that it might relocate manufacturing to other lower cost Asian countries.
While the deaths at Foxconn may have acted as some sort of catalyst for wage reform, in reality a combination of factors has meant that rising labour costs in China have been inevitable for a number of years, the only surprise perhaps being the size of recent pay hikes. The China government introduced tough labour laws and a minimum wage back in 2008. Recently, its policies designed to improve rural economic conditions have slowed the flow of migrants from the countryside to the cities in search of work. Workers already in the cities are demanding higher compensation to match the fast-rising cost of living. It’s a fine balance, and the temptation must always be there to act rashly to counter often conflicting trends without looking long-term and adopting a big picture philosophy.
A recent report in China Daily looked at the effects that rising labour costs are having on China’s status as ‘the world’s factory’. The report canvassed the opinions of a number of experts and contained range of views.
For example, Dr Eric Thun, lecturer in Chinese Business Studies at the University of Oxford China Centre, was quoted saying that too much can be read into recent labour unrest. "Strikes happen all the time. The current generation of workers has higher aspirations than perhaps their parents had," he said.
Thun also believes current labour cost pressures could be a catalyst for change in China. "One of the problems that China historically has faced is that it has never been pushed into innovation-based activities because of this excess supply of labour," he said. "Pushing manufacturing into high value-added activity is very much what the government wants. This kind of cost pressure stimulates upgrading." To a large extent, he is right. For example, the Special Economic Zones in the south of the country, such as Shenzhen, grew exponentially in a very short space of time with a major contribution from the thousands of factories manufacturing lower-tech products in huge volumes. For many years, it was hard to see beyond the profits that this type of activity were reaping, but almost inevitably this led to China (and neighbouring Hong Kong) being left somewhat behind in the race to innovate, certainly in the electronics field, a situation that China is desperate to put right.
That said, Jim Pinto, a California-based expert in automation who predicts future trends in manufacturing, said China's manufacturing sector was likely to prove more resilient than many realise.
"Labour is not the big element to manufacturing costs many people think. A lot of manufacturing is relatively automated. What distinguishes China is the low margins its companies can survive on," he said.
"China has really learnt how to ramp up manufacturing. It can provide quantity and quality at speed and this gives it real advantages over many other countries. It is not going to lose that any time soon," Pinto said.
Dr Stefan Halper, a senior research fellow at Magdalene College, Cambridge, and author of the recent book 'Beijing Consensus' about China's future economic outlook, said recent events put China's manufacturers at some form of crossroads. "China is desperately trying to hang onto its export market. It really doesn't want to give up its advantages which it has carved out of granite," he said. He also said that attempts to cling onto its manufacturing prowess by making some of its goods offshore in Southeast Asia and then re-exporting them from China carried risks.
"They are going to find themselves in the same situation as American manufacturers, which will add a new interesting dimension to the globalisation process. They will not win friends in the countries they site their new factories in if they also export the worst conditions of China factories," he added.
Dr Dyer at global management consultants A.T. Kearney said this constant seeking of some form of labour arbitrage would not work for China or any other country in the long term.
"This idea that Vietnam is the next Shangri-La and that we can keep on moving production to the lowest cost place is not really the future of manufacturing. In theory there will be eventually nowhere lower cost to move and costs will be equal everywhere, although I doubt that will be the case in reality," he said.
Dyer predicts manufacturing would take place in future in the markets where the goods were intended to be sold.
Whoever is right, the speed and the scale of changes that occur in China today are at levels that have never been seen before. China may be forced to move up the value chain faster than it had originally planned and the transition may leave millions of victims in its wake.
So, what’s the China price? Whatever it is today, it seems likely that tomorrow it will be higher.
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