Rising labour costs erode China's competitiveness

Building Brics: As times change in the world's second-biggest economy and growth slows, it is perhaps counter-intuitive to think labour may be a problem. But as recent company relocations show, firms must go where the workforce is.

Workers at a garment factory in China's Jiangxi province. The country's per hour labour costs have risen more than 60 per cent since 2009. AP Photo

During the years of double-digit Chinese economic growth, Yiwu in eastern China's Zhejiang province was the focal point for manufacturing of consumer goods in China.

It was once home to the world's five biggest sock manufacturers, the largest zip factory and the world's largest wholesale market.

Trade conducted in Yiwu totalled 51.51 billion yuan (Dh30.8bn) in 2011, and fuelling this enviable position was cheap labour. But since the heady days of 2007, labour costs have doubled in China and much of the big, low-end production has shifted to cheaper countries and to poorer parts of China.

Some analysts believe the rise in labour costs may have been even higher. A report last month by the Nikkei news agency showed per capita labour costs climbed by more than 60 per cent between 2009 and last year, which would make it higher than all its significant competitors in Asia.

Chen Yi is the owner of a packaging company in Yiwu. His company started in 2009 supplying both the domestic and foreign markets, in places such as Europe and the Middle East.

"Since 2010, it has been difficult to get workers. There are three reasons. First, a lot of young people choose to stay in their villages to grow food because the government subsidies to farmers are better than before now," he says.

"They can make about the same money by growing food as coming out to work in the city. So there is a shortage of supply in the city."

The difference between the west of China and the east is diminishing. Many people can make a good living now in the west of China, which was previously much more economically backward than the prosperous east.

"There are some factories now close to the villages. So the workers choose to work close by," says Mr Chen.

The third factor is that workers have become more demanding, he says.

"In 2010, an assembly line worker costs about 2,000 yuan per month, but now it is about 2,700 yuan per month. Every year, salaries increase by 10 per cent to 15 per cent.

"For technicians, even more. Sometimes when we receive an order and we don't have enough workers, we have to hire temporary workers and it costs much more," he says.

"Because of the rising labour costs, we have lost our price advantages for our product."

A survey last month showed how, after 12 years out of contention, the United States reclaimed first place among top executives in a survey on foreign direct investment (FDI) sentiment, displacing China.

The US jumped to first from fourth place last year, according to the 2013 Foreign Direct Investment Confidence Index, a survey of more than 300 executives from 28 countries by the global consulting firm AT Kearney.

Executives surveyed between October and November said they believed US workers were becoming more competitive.

What badly affected the outlook for FDI into China were a doubling of labour costs since 2007, combined with rising transport costs and the appreciation of the yuan currency.

This means China is losing out to other low-cost alternatives, especially Mexico, which is coming up more and more as an alternative to China.

The push by China, the world's second-largest economy, for the past 30 years to be a global manufacturing powerhouse has given way to trying to create a more consumer-driven economy, "sparking internal debates about companies' future plans", the survey said.

Writing in the South China Morning Post last month, Li Qiang, the founder and executive director of China Labour Watch, a New York-based non-profit organisation that advocates for the fairer treatment of Chinese workers, argued labour costs still only occupied a fraction of overall costs associated with products from multinational corporations.

Citing research by Accenture Consulting in 2011, Mr Li said even if labour costs increased by 30 per cent, the effect on company profit would only be 1 to 5 per cent, which implied they only had a marginal effect on multinationals' decisions to keep manufacturing in China.

The cost is actually being felt in other areas.

"Companies are facing comprehensive increases in the cost of manufacturing in China, including the cost of land, materials, energy, taxes, trade, capital and administration. The prices of residential and industrial property have risen substantially in the past few years," says Mr Li.

Another labour activist group, China Labour Bulletin, points out how rising labour costs have become a major political issue for the new leadership under the president Xi Jinping because, while wages for factory workers in China have certainly increased, the rate of increase has not kept pace with that of higher-income earners.

"The cost of labour in China has risen significantly over the last few years, prompting many low-cost, labour intensive manufacturers to relocate to cheaper production areas such as Bangladesh and Cambodia," the China Labour Bulletin group wrote in a report titled Wages in China.

"The minimum wage is supposed to be set at 40 per cent of the local average wage but in many cities and provinces it is less than 30 per cent.

"Internationally, China's minimum wage is now in the mid-range of Asian economies," the report said.

Earnings for rural migrant workers in China are typically just over half the average national salary and there are considerable variations in wage levels from industry to industry.

"Average salaries in finance are now more than double those in manufacturing and three times higher than for catering and hotel workers. Moreover, the gap between the highest and lowest-paid has been growing constantly, with one survey showing top executives in China earn 10 times the average wage," the report found.

And looking ahead, there are other issues facing China's labour market. The working-age population fell by 3.45 million last year to 937 million, according to China's national bureau of statistics data and there are growing calls for the government to end the one-child policy of population control to help give the labour market a boost.