Is This the End of Cheap Chinese Labor?

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It's been the lament of everyone for years now: Cheap Chinese labor is killing the job market.

With lower wages and lax regulation, the giant sucking sound we heard was manufacturing jobs headed from Sheboygan to Shenzhen.

But now China's new found riches are starting to turn in on themselves in the form of much higher wages.

In fact, The Wall Street Journal has found that over the past decade – while no one was watching – manufacturing wages in China have gone up – conservatively – by 20% annually.

And as those workers pocket ever-fatter paychecks, they're demanding more in the way of decent working conditions and better hours. And that costs money.

It's not that much different than what happened in the United States in the early 20th century. It's just that China is doing it much faster.

A Victim of Her Own Competitiveness

Like the U.S. once did, China has become a victim of her own competitiveness.

Chinese workers have now seen what's possible when they begin to demand the same conditions that American manufacturing workers enjoy. That crimps profits and manufacturers in China are, for the most part, no longer earning crazy margins.

Stanley Szeto, who runs Lever Style (a manufacturer for Armani Collezioni, Banana Republic, J. Crew, Ralph Lauren, and a slew of other brands) explained it best. He told the Journal, "Operating in Southern China is a break-even proposition at best."

A China Labor Watch report on Lever Style's factories in China is telling in this regard. The study found that, all in all, conditions in Lever Style factories are good, spared the egregious abuses that go on elsewhere in the Asian garment industry. In fact, on an A-B-C, best to worst scale, the Lever Style factories would rate an A.

So what's the problem at Lever Style? …

In the words of the study: "…even when employed by one of the most sophisticated employers in the industry, workers are still unable to receive a wage that allows them to advance their place in society."

From a business standpoint, that's the fundamental conflict. It's how you go from huge guaranteed margins to just breaking even in a ten short years. In fact, if Lever Style wants to continue to manufacture in China, to stay competitive and do right by its workers, it's going to have to pay workers even more than it does now.

The Home of the Brave

What do rising wages in China mean for the United States?

It's simple. If Chinese workers have their hearts set on American-style working conditions, it's not unreasonable to assume that, maybe, patriotic or civic-minded American brands might think about bringing those jobs back to the America.

The good news is there are already some encouraging signs in that regard. The Boston Consulting Group did a survey of executives of 106 manufacturing companies, each with over $1 billion in sales. Fully 37% of respondents that they were "actively considering" bringing manufacturing jobs back to American shores.

Boston Consulting Group senior partner Harold Sirkin shed some light on the issue, saying that, while Chinese labor is still cheap at an average of $6 per hour, compared with a $26 hourly wage for Americans, American productivity is close to 3.4 times higher than the Chinese. A manufacturer looking for a favorable bang:buck ratio should take note since that $26 American worker starts to look a lot more competitive with the $6 worker from China.

In a welcome, bizarre, case of Americans "stealing" Chinese jobs Beijing-based computer maker Lenovo Group Limited (ADR) (OTC:LNVGY) is hanging up its shingle in Whitsett, NC. Lenovo will build a manufacturing line there, reports The Washington Post. And in this case wages are only a small part of the equation. Lenovo is looking enter the American market while shortening its logistics chain. Rising energy, and therefore transport, costs have had an influence as well.

So What's Next?

Of course, it's just as likely that at least some manufacturers will move just around the corner from China, to markets like Laos, Cambodia, Vietnam, and India. These countries have something of a manufacturing base already, especially in the case of Vietnam, and most would be only too happy for the business. But even these countries are seeing wage increases.

The end result will probably involve at least slightly higher consumer prices for manufactured goods. But that's not where the possibilities end-not by a long shot.

Even further down the line, higher wages could lead to a new kind revolution in China, as Communist dictatorship yields to middle class pressures for democratic reform.

We've seen what a middle class – even the memory of one – can help do in Communist countries; it's one of the reasons why Poland, for example, is a success story while Kyrgyzstan isn't.

Longer term, just don't be surprised if the United States enjoys a renaissance in manufacturing, once again claiming her position as workshop to the world.

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  1. Ed the Grocer | May 8, 2013

    Shhh! Do you know where the next low cost manufacturer will be? In North America. Canada, USA, and Mexico. Highly automated plants, using quality material, and responding quickly to the market with culturally accurate service can beat anything on the planet when serving its own market. Its already happening.

  2. VO | May 8, 2013

    If you take away the subsidies and level the playing field you end up with aa different ball game and outcome. Sounds like a win, win situation for the home team!

  3. Jeff Pluim | May 8, 2013

    One of the major reasons that the unemployment level went up and has not yet recovered is that as companies laid off workers here in North America, they automated. Robotics are capable of doing almost anything now, from surgury to warehouse work. And robots don't ask for pay raises or join power hungry labour unions, or call in sick when the weather is inclement. Manufacturers and any company that is labour intensive, has improved their bottom line by automating. That is one of the main reasons that earnings have increased even though revenues have been relatively flat. This is bound to adversely affect China in the long run, since they are so dependent on cheap labour. Even cheap labour is not as cheap as robots.

  4. drdos7 | May 11, 2013

    Companies will just move on to the next cheap labor market (probably African countries or coubtries like Bangledesh).

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