Rising wages keep China manufacturing moving
With mainland workers getting too expensive to employ, manufacturers of low value goods are making difficult choices.
China’s wages are expected to increase by 10 percent or more this year, continuing a steadily rising trend that has seen workers’ earnings grow by almost 50 percent in the last three years.
The impact of the growing payroll is being felt most acutely in the manufacturing heartland in the Pearl River Delta area of Guangdong Province. Home to tens of thousands of factories, many owned by Hong Kong companies, the manufacturers have been battling rising costs that have driven thousands out of business.
China never became the “factory of the world” by charging high prices, but the traditionally thin margins are being squeezed even further by wage increases. Shenzhen’s minimum wage almost doubled early last year, increasing by 13 percent rise to 1,808 yuan a month (US$300). This was on top of a 14 percent rise in 2012 and a 12.3 percent increase in 2011. Last week it went up by another 13 percent.
Beijing is behind the minimum wage hikes as it tries to boost earnings and improve domestic consumption, but the government has also been forcing high polluting heavy industry to move away from the coast in its Go West programme.
A large portion of this low-end manufacturing has moved to the central cities of Chongqing and Chengdu, but a growing number of companies are shifting their manufacturing plants out of China to countries in Southeast Asia. As wages continue to grow, the number of factories moving out will accelerate.
It is not only the high wages that make mainland manufacturers head for the business visa office. Manufacturing sectors are set up in clusters surrounded by suppliers where all the raw materials can be sourced from nearby. For many factories it is easier moving to the established manufacturing areas of Vietnam or Sri Lanka or Bangladesh than to load up the wagons and head west.
It is a chicken-egg situation. Factories can’t move until the suppliers are in place, and suppliers won’t move until there are factories to supply.
And you can’t talk about exports without dealing with exchange rates. The rising value of China’s currency has taken the RMB close to the US$6 mark, shrinking already thin export profit margins and foretelling a gloomy start to the Year of the Horse.
Manufacturing moving up the value chain is an inevitable consequence of improving incomes in an emerging economy, except in China the effect is exaggerated by an aggressive push by Beijing to clean up its act.
It is good in the long run but there will be considerable short-term pain for the hundreds of millions of low skilled migrant labourers who depend on factory wages for survival, no matter how meagre the payroll.