China, the 'world's factory', is losing its shine. And to a great extent this has been the result of the rise in workers' wages in most major cities. How has this happened?
Rising, rising, and rising
Although the international financial crisis saw a minimal increase in the basic wage in 2009 in China, a wave of big wage increases nevertheless materialized in 2010. The 12th Five-Year Plan emphasized that residents' income should grow commensurately with economic development and that labor wages should grow commensurately with labor productivity. As a result, many provinces raised the minimum wage for workers. According to basic salary statistics issued by China Labor Consult, 16 provinces raised their minimum wage in the first six months of this year alone, and most of the increases were of over 20%. According to the table on the right-hand side comparing the 16 cities, Sichuan saw the highest raise, of 38%, a heart-breaking figure for employers, while Shenzhen had the highest basic salary of RMB$1,500 per month, a frightening figure for factory owners.
Wage increases are now very much on the corporate agenda as a result of fierce competition for labor. The situation is particular severe in coastal regions where the cost of living is much higher than in inland cities. Workers are now less willing to travel a long way to earn what is only enough for their daily necessities. The new industrial regions of the inland cities now also engage in inter-provincial competition for labor, while factories along the coastal strip have been lowering their admission standards for workers simply to recruit more labor. Higher wages of course are another important factor. For example, one Shenzhen company announced it would raise the basic wage by as much as 20%. Some industry experts forecast that wages will increase by 20% or even 30% annually over the next five years.
The increases in basic wage have had a major impact on China's manufacturing sector. According to a study conducted by the China Samsung Economic Research Institute in 2010, for every 20% rise in wages, labor-intensive industries, including stationery, apparel and footwear, fur, tobacco, furniture and arts and crafts, are being seriously impacted by total production costs rising by more than 1.5%. For capital intensive manufacturing, such as paper, chemical materials and chemical fibers, etc., as well as technology-intensive manufacturing industries, such as transportation, electrical machinery, communications equipment, and so on, the impact is not quite so great, with total production costs rising by around 1% on average.
The Fading of the 'Made in China' Label
Quoting statistics from the Japan External Trade Organization (JETRO), workers' wages in 2011 in Burma, Cambodia and Vietnam were far lower than in China – with average wage levels in Vietnam and Cambodia merely half that in China, while wages in Burma are one-fifth of China's! This is definitely a very strong pull factor encouraging manufacturers to leave their darling China.
In this situation, more and more manufacturers are looking towards Southeast Asia, where labor costs are so low that the break-even point after paying new set-up costs can be easily achieved over the long term. China's 'world factory' honor is gradually fading away, and the "Made in China" label is facing unprecedented challenges.
Apparel and footwear are labor-intensive industries, and the labor-cost increases in the garment sector have had an adverse effect on the industry's production distribution. Yue Yuen Group is the world's largest manufacturer of sports shoes for Nike, Adidas, and other brands and has 50% of its products manufactured in China. The Group abandoned one of its production centers in Dongguan, Guangdong, last year, in line with several other shoe-makers who shared the glory and profits in this region a decade ago.
Small and medium-size factories have suffered most from the flood of wage increases, and there have been many reports of factories closing in the Pearl River Delta region. Some apparel manufacturers in the region told local newspapers that as many as 30% of these factories had been driven out of business by high labor costs and exceptionally low profit margins in 2011. This compares with their profit margin of over 20% during the 1990s.
The same situation applies to the sourcing and production departments of retailers. Coach has announced it would reduce the ratio of its China-made products from 85% to below 50% within five years by moving production lines to
Vietnam and India to offset high labor costs, according to Lew Frankfort, Chairman and CEO of Coach, in an interview early last year.
TSI Holding's Tokyo STYLE has been investing close to US$1.3 million to build new factories in Vietnam since August 2011. Also lady-brand Honeys' new factory in Burma will start production this fall.
The Return of "Made in Europe" and "Made in the USA"
The German Toy Industry Association noted recently that some German toy manufacturers had begun to relocate their production back to Germany or other European countries in recent years. The reason is simply the labor shortages and higher wages, as well as increased raw material costs and energy prices, in China. The Steiff Company, well known for its classical teddy bears, started its factories in China in 2004, but withdrew back to Germany in 2009. Marklin, a famous model-train brand, has already moved its production lines to Eastern Europe to save on transportation costs and to counter the labor shortage in China.
In 2011, the Boston Consulting Group even forecast that, over the next five years, with the gradually closing wage gap between the US and China, offshoring would become a less attractive option and more goods tagged "Made in the USA" would probably be seen in North American stores.
While further wage hikes look inevitable, what are buyers going to do with their production plants or suppliers in China? They had better start working on their calculators and world maps before the next wave of wage rises surges in. Or will China devise some means of remaining attractive compared with her new international competitors?