The End of Cheap Labor in China

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Chinese government — worried about an ever widening gap between rich and poor — has raised the minimum wage 14% to 21% in the past year. To Harley Seyedin, president of the American Chamber of Commerce in South China, the conclusion is inescapable: "The era of cheap labor in China is over."
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The changing economics of Made in China will benefit both the rich and poor world. Countries like Cambodia, Laos, India and Vietnam are picking up some of the cheapest labor manufacturing left by the Chinese. And according to a recent study by the Boston Consulting Group (BCG), there is already evidence of at least the beginning of a shift in manufacturing operations returning to the U.S. Last year, Wham-O, the company that makes inexpensive, albeit iconic, toys, announced it was moving 50% of its Frisbee and Hula Hoop production back to the U.S. from China and Mexico, a move that created hundreds of new American jobs.
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According to the BCG study, in 2000, China's average wage rate was 36% of the U.S.'s, adjusted for productivity. By the end of 2010, that gap had shrunk to 48%, and BCG estimates that it will be 69% in 2015. "So while the discussion in the short term favors China," says Hal Sirkin, senior partner at BCG and the author of the recent study, "the spread is getting down to a smaller and smaller number. Increasingly what you're seeing [in corporate boardrooms] is a discussion not necessarily about closing production in China but about 'Where I will locate my next plant?'"

Wages have increased dramatically in China over the past 20 years and now that the productivity wage gap between the United States and China is closing many businesses and manufacturers there are making the choice to relocate elsewhere. Of course China will fight to keep these jobs within its border, offering these companies enticing cheap labor further inland, but they will also begin to experience what happens when large corporations no longer can find dirt cheap labor in a region... they run.

So the Chinese of the eastern regions better be prepared for that. By the end of this decade the ability to just get a job somewhere else will vanish as jobs become more scarce than in 2010. They will be losing their jobs to Cambodia, Vietnam, Thailand, and India. As the Chinese become overall more wealthy and expect higher salaries and more lucrative benefits the companies will be less likely to supply that so overseas they go.

Of course China will continue to increase their standard of living even as manufacturing slows down but just as happened to America since the 1970s they will begin to notice that their economic will transition from manufacturing to consumption. This same event happened in Japan during the early 1990s. Japan was expected to overtake the United States as the world's largest economy soon but that ended as the Japanese economy became more developed as consumption and wages grew and the factories moved to China.

The end of cheap labor in China isn't over....... As long as the CCP keeps the RMB artificially devalued it will still be considered cheap labor to any corporation. And to my knowledge corporations have been sending jobs to: Cambodia, Vietnam, Thailand, and India for years now. That is nothing new.

In the course of my work I've talked with several people involved in off shoring various things from manufacturing, IT, call centers etc. One thing I've learned is that people are pretty much people all over the world and will eventually want to be rewarded for their efforts. Race, religion, culture, really doesn't matter too much in this - it seems to be a basic human trait.

Usually it goes like this -

CEO of MegaCorp - "Hey, those guys in Mudvania will work all day for a penny. Lets fire everyone in the US and move there!!"

MegaCorp Executives - "Great idea sir!!"

So - a huge new plant is built is Mudvainia and 1000's of locals get jobs while 1000's of people someplace else get fired. The citizens of Mudvainia are really happy to have a job that pays a penny a day and the CEO and executives of MegaCorp are really happy with all the fat loot they are making because of reduced costs.

A few years pass and the citizens of Mudviania have become good at their jobs, they know what they are doing and do it well. So, they go to their boss and say...

Mudvainia Workers - "Hey boss man! I've leaned a lot and I do a good job! How about a raise?!"

CEO of MegaCorp - "But, but, but, - if we give you a raise you won't be cheap anymore!! No!!'

So, the Mudvainia worker is now trained and he leaves the US owned firm and joins (or starts) a local company where he gets better wages and a chance at advancement. The economy of Mudvainia begins to boom as workers leave the US owned companies and take jobs at locally owned companies.

CEO of MegaCorp - "Those @#$ ungrateful Mudvainia guys!!! How dare they not work for a penny anymore!! Don't they know they need to support me in the manner I've become accustomed??! What godforsaken hellhole can we relocate to where the populace will be happy to get a penny a day?!?!"

MegaCorp Executives - "Hmmm.. lets look at the map. Hey - here is Swamptopia. Currently their biggest export is...Malaria."

CEO of MegaCorp - Perfect!! Start firing people in Mudvainia and start building there! Oh, and expand our advertising in Mudvainia. They can afford to buy our junk now."

Honestly, that's pretty much its went (or is going) with China, India, etc. Companies are just moving from country to country until they run of out of cheap labor and then wind up back where they started.

reply to post by Frogs

If that was true, why do corporations choose to manufacture in China? There are countries with lower wage rates than China's. Or why do corporations from, Asia and Europe still outsource jobs to the U.S if the U.S has some of the highest wages in the world? If it was really all about wage rates, how did U.S companies in the 50's, 60's, 70's and 80's make the lowest-costing, highest-quality goods and still pay the highest wages?

I don't know how, or even if, small business works in China, but if it at all resembles anything like in the U.S., raising the minimum wage will kill them. One of the reasons mega-corps go overseas is to get around minimum wage laws in the U.S. They then can lower prices and kill small, local business, who are the backbone of any free nation. Break their back, and then kill them. Quite expedient.

/TOA

Once Chinese wages reach near parity with other developed countries, there will be no incentive to outsource work there. In fact, when cartage costs are factored in, their products wind up being MORE expensive!

Originally posted by Rockdisjoint
reply to post by Frogs

 

If that was true, why do corporations choose to manufacture in China? There are countries with lower wage rates than China's. Or why do corporations from, Asia and Europe still outsource jobs to the U.S if the U.S has some of the highest wages in the world?

edit on 27-6-2011 by Rockdisjoint because: (no reason given)

It wasn't possible, that's why these "businesses" all closed their doors in America and moved overseas. DUH!
The American Wage was apparently putting a real monkey wrench in them getting that 700 million a year salary. I don't have to source anything, just look at Detroit.

reply to post by ldyserenity

It wasn't possible, that's why these "businesses" all closed their doors in America and moved overseas. DUH

It is possible and it was possible for many, many years. It only really started to change in the 70's. You can roll your eyes all you want, but you still are denying the fact that corporations from other countries still outsource jobs to certain parts of the U.S.

The American Wage was apparently putting a real monkey wrench in them getting that 700 million a year salary. I don't have to source anything, just look at Detroit.

I've looked at Detroit and I don't see how you can blame govt failure on a CEO's salary.

Only defense for this practice is cheaper goods for the populance. While there may be some truth to this benefit, the reality is that there is a huge hidden costs.

Due to the increased need for transporting goods across the globe, we use considerably more oil than we would otherwise. As a result the price is higher at the pump. so while you may save a few pennies on wal mart purchases, all that savings evaporates when you go to fill your car.

reply to post by kozmo

Once Chinese wages reach near parity with other developed countries, there will be no incentive to outsource work there. In fact, when cartage costs are factored in, their products wind up being MORE expensive!

That is a negative, Chinese wages can increase all they want, but as long as the CCP keeps the RMB artificially under-valued they will still be considered cheap labor and on top of that there are many other incentives that keep businesses coming to China.

Originally posted by Rockdisjoint
........... on top of that there are many other incentives that keep businesses coming to China.

edit on 27-6-2011 by Rockdisjoint because: (no reason given)

This is what I left out of my example in order to keep it simple. Labor rates / job loss are something that typically most wage earners are most familiar with (and concerned with). Obviously there are other factors. Incentives such as cheap loan, cheap land, reduced (or no) regulations all play a part. As you say, these incentives are one that keep companies coming to China even as labor rates rise.

Of course, these can also change. In an ironic twist a Chinese steel company is relocating from China to Indonesia because China is stepping up pollution regulations. Naturally, Indonesia is happy to provide incentives to accommodate the Chinese company. So, the cycle continues - this time with a Chinese company.

Chinese Steel to Relocate to Indonesia

reply to post by Rockdisjoint


Well I certainly like the minimum wage laws I am not stating anything against them. I am saying the CEO's are greedy and they don't want to pay a living wage much less a minimum wage, Not really directly blaming the government, blaming greed. I guess I didn't make myself to clear about that. Also they outsource (other countries) to America because our cash is worth more than there's er, well it used to be, maybe still is a tad bit, so they're paying more for workers but they're also bringing in more money and in their country would be a lot more money than what it would be making there because of the dollar to whatever foriegn currency conversion.

In reality they all outsource insource relocate to chase the almighty dollar, wherever they think they can get the most earnings with the least overhead. This is coming straight from business classes.

reply to post by ldyserenity

I'm sorry, but can you please clarify your post. I don't really understand what you mean. Are you saying that companies shouldn't have CEO's and that CEO'S choose to come here because it costs them more to produce here?



I'm confused.

there is more to outsourcing that wages there are alot of elements that push business out of this country among them are:

1:taxes
2. human resources which entails education and people so starved they will do anything to make a buck
3. unions
4, workmans compensation
5. regulations that tell business how to do business who they an hire etc.
6. lawyers

etc the list goes on wages are just a piece of it but not the whole deal.

costs continue to rise regulations increase wages increase taxes increase market share decreases and the value of the dollar decreases and so forth.

any "capitalist" country knows these all to well the bottom line is their bottom line and they will do what you and i and everyone else will do when it comes to their job or your job its called self preservation.

nothing lasts forever and china is getting a taste of what they have done to others just like we got a taste of what we have done to others.

the biggest obstacle to jobs in america is the government of this country they just cant get it into their heads to get the hell out of the way.

a lesson china needs to learn as well chinas economy is not self sustaining and that is the inherit danger of the pushers of globalization one goes down that effects everyone else.

china loses jobs consumer goods will go up thats a fact.

WOW!

India's turn is coming faster than I thought or has been projected.

The Chinese have to raise the rate. PERIOD. There is simply no way around it. They already have had riots in certain locals where the food prices jumped while wages stayed the same. It was inevitable.

But this soon?

reply to post by neo96

nothing lasts forever and china is getting a taste of what they have done to others just like we got a taste of what we have done to others.

What has China done to us, besides subsidize American consumers for the past 20+ years?

From a blog from a toy car collector in Switzerland with info coming from a Hong Kong based model car dealer :

The long Chinese New Year Holidays are now over and the workers are gradually coming back to the factories from their home towns. By now, their wages have increased another 20% under the new minimum wages requirements announced by the Chinese Government in February.

A decade ago, the average basic worker would receive a lump sum salary of 400 ~ 500 RMB Yuan per month. The exchange rate at that time was around 8.9 Yuan to the US Dollar, so this was equivalent to $50 ~ 60 US Dollars per month. This salary was based on an average of 60 hours per week, Monday to Saturday, working about 10 hours per day. This was the norm for the industry in China.

Since then, the minimum wages, China’s development, and China’s living standards have been advancing at an enormous rate. The cost of living in China has become much more expensive compared to only ten years ago, particularly in the housing market. Because of this, the government needed to act accordingly in order to offset the ever increasing living cost. This is when the government enforced the Labor Law in 2007 which was largely ignored previously by the industry. Under the law, the national weekly hours worked is 40 hours per week. Any overtime hours would be paid at a rate of 1.5 times on weekdays and double on weekends. Also, all of the retirement and social benefits would need to be added on top of their income. When all of these changes are applied, the average income for the basic worker increased drastically to around 1200 RMB Yuan per month. These drastic changes forced thousands of factories making products at low profits and were labor intensive to close down.

The global financial crisis erupted in late 2008, but China was able to recover quickly. By the end of 2009, everything was pretty much back to pre-crisis levels and in 2010, China’s economy continued to progress at a very quick pace. Housing prices went up at a staggering rate and food became more and more expensive. Workers earning the basic salaries could hardly keep up with supporting their basic needs. So, the wages needed to be adjusted again and again or else the workers would leave the factories and look for work elsewhere for higher paying jobs. Workers now do not want to work at a factory that will not guarantee 60 hours per week. They need the all the possible extra income generated by the overtime pay. It is not easy for factories today to utilize all the workers for 60 hours per week, especially during weekends. But since they now have no choice, it is making the cost of production much higher for factories in China.

As of today, the basic worker earns a lump sum of about 2,000 RMB Yuan per month. With the RMB Yuan exchange rate under enormous pressure form the USA and Europe, it is forced to appreciate gradually from 8.3 to 6.6 against the US Dollar. The average minimum wage now stands at around $300US Dollars per month. This means that the basic salary in US Dollars has increased almost 500% in the last ten years.

A high end die cast model car brand like Autoart is particularly hard hit when the labor cost increases. The proportion between the material cost and the labor cost is approximately 1:4 due to the hundreds of workers needed to manufacture each and every model car on the production line.

The licensing fees for the model cars are also getting higher every year. Back in the 1990’s, no car makers really paid any attention to their intellectual property and only demanded a symbolic fee when a model maker was willing to produce a model to promote their brand. When the profits from car sales became slimmer due to competition, the car makers looked at other alternatives to yield extra income and the licensing of brands became a very good source of revenue for the car makers. Licensing has become such a money maker that race organizers, oil companies, tire companies, etc, are all jumping in to get their share. Today, if a model maker decides to make a race car using a special color such as the Gulf Oil’s blue and orange, they would have to pay a fee to Gulf because of their patented color combination. Some models today can have double, triple or even quadruple licenses and the combined licensing fees can be more then 20% the ex-work price. Because of this, there are much less racing model cars being launched by model makers. It has become too expensive to make and fewer buyers would be willing to pay that price.

It was more profitable for Autoart to sell the model cars back in the early 2000’s with models retailing at around $50US then it is today with model prices retailing at triple the price. Both the model makers and the buyers were happier ten years ago when the material and energy cost were much lower and the factory workers were quite happy with earning only a fraction of today’s wages because life was much simpler and also cheaper then. Even with an increase of almost 500% in the minimum wages in such a small amount of time, the factory workers are still unhappy and will quit their jobs easily to look for work elsewhere to find higher wages.

Despite increasing the selling prices over and over again, it is still impossible to catch up with the ever increasing production cost. When prices increase, the number of collectors buying the model decreases thus reducing the quantity of models sold. This directly affects the amortization of the investment made by the model makers and it drives up the cost of production even further. Most die cast model makers, especially the high-end model makers suffer badly due to the lack of sales and the ever increasing cost of production.

To lower the production cost, it may be possible to move the production facility to another country that still offers low labor cost. However, no other countries can match the quality of workmanship done by Chinese workers. The detailing work and precise manipulation of such small parts with their fingertips is unmatched in the world. It is very difficult for other developing countries to emulate China on anything related to arts and crafts.

Even though the labor cost in China has increased so much in only a decade, China is still considered to be a low cost labor country with a current hourly rate of around $1.20US per hour. Until the mid 2000’s when the hourly rate was around $0.30US per hour, collectors were mostly spoiled with the low price models and now with such a fast increase in production cost, many collectors do not understand why the models are now at such a price.

An average 1/18 scale Autoart model car is now retailing at around $120 ~ 150US. The price is still considered to be very reasonable considering the amount of time and investment put in each model that is released. Each model consists of hundreds of parts takes about one year to develop and the production of each and every model involves hundreds of workers in the production line. Many products such as watches which also have hundreds of parts and are as complex to make demand much higher selling prices.The price of a high end model car will continue to increase as the labor cost and living standards improve in China. There will be fewer people buying model cars as prices increase, but the collectors who understand what is involved in making a high end diecast model will continue to appreciate the reasonable prices and quality being offered. They will understand that there are no other countries able to offer the same in terms of price and quality and that these are not just model cars but a work of arts.

reply to post by Rockdisjoint


chinas rise to power is the result of government incompetence on our part and on their part the theft of techonology

that has put them where they are in the world.

if you dont get that simplest terms china stole jobs and tech from the us and others.

reply to post by neo96




How did China steal jobs?

Did they sneak in and steal them? And I thought they just copied the tech, that isn't the same thing as theft. The Chinese got nothing from this deal, Americans got every benefit from it though. Americans don't realize how lucky they are getting free stuff from the Chinese, but to complain about it is just retarded.

Originally posted by Rockdisjoint
reply to post by neo96

 

I thought they just copied the tech, that isn't the same thing as theft. The Chinese got nothing from this deal.....

but to complain about it is just retarded.

It's all about greed and profit.

A few short years later their then floundering space program was able to do a quick turn around and then orbit a man..
Clinton and Chinese Missiles

Charles R. Smith Tuesday, Jan. 14, 2003
A newly released document from the U.S. State Department reveals that the most successful Chinese espionage operation in recent history occurred during the Clinton administration.

The document accuses Hughes Space and Communications Company of violating U.S. national security 123 times by knowingly sending detailed missile and space technology directly to the Chinese army.

According to the State Department, the most serious violations occurred when Hughes gave the Chinese army information that supported its analyses of the investigation of the January 1995 failure of the launch of a China Long March 2E (LM-2E) rocket carrying the Hughes-manufactured ASTAR II commercial communications satellite.

Chinese General Shen Rongjun led the penetration of U.S. missile and space technology during the Clinton administration. The 2002 State Department letter makes it clear that they believe Gen. Shen led the successful penetration of the Clinton administration and Hughes.

In 1994, Gen. Shen was second in command of a Chinese army unit known as COSTIND, or the Commission On Science, Technology and Industry for National Defense. Shen, and his COSTIND operatives in front companies, secured a wide range of advanced missile and space technology from Hughes after a 1994 meeting with Commerce Secretary Ron Brown.