SHANGHAI — Factory workers demanding better wages and working
conditions are hastening the eventual end of an era of cheap costs that
helped make southern coastal China the world's factory floor.
A series of strikes over the past two months have been a rude wakeup
call for the many foreign companies that depend on China's low costs to
compete overseas, from makers of Christmas trees to manufacturers of
gadgets like the iPad.
Where once low-tech factories and scant wages were welcomed in a
China eager to escape isolation and poverty, workers are now demanding a
bigger share of the profits. The government, meanwhile, is pushing
foreign companies to make investments in areas it believes will create
greater wealth for China, like high technology.
Many companies are striving to stay profitable by shifting factories
to cheaper areas farther inland or to other developing countries, and a
few are even resuming production in the West.
"China is going to go through a very dramatic period. The big
companies are starting to exit. We all see the writing on the wall,"
said Rick Goodwin, a China trade veteran of 22 years, whose company
links foreign buyers with Chinese suppliers.
"I have 15 major clients. My job is to give the best advice I can
give. I tell it like it is. I tell them, put your helmet on, it's going
to get ugly," said Goodwin, who says dissatisfied workers and
hard-to-predict exchange rates are his top worries.
Beijing's decision to stop tethering the Chinese currency to the U.S.
dollar, allowing it to appreciate and thus boosting costs in yuan, has
multiplied the uncertainty for companies already struggling with meager
profit margins.
In an about-face mocked on
"The Daily Show with Jon Stewart," Wham-O, the company that created the
Hula-Hoop and Slip 'n Slide, decided to bring half of its Frisbee
production and some production of its other products back to the U.S.
At the other end of the scale, some in research-intensive sectors
such as pharmaceutical, biotech and other life sciences companies are
also reconsidering China for a range of reasons, including costs and
incentives being offered in other cou
ntries.
"Life sciences companies have shifted some production back to the
U.S. from China. In some cases, the U.S. was becoming cheaper," said
Sean Correll, director of consulting services for Burlington,
Mass.-based Emptoris.
That may soon become true for publishers, too. Printing a
9-by-9-inch, 334-page hardcover book in China costs about 44 to 45 cents
now, with another 3 cents for shipping, says Goodwin. The same book
costs 65 to 68 cents to make in the U.S.
"If costs go up by half, it's about the same price as in the U.S. And
you don't have 30 days on the water in shipping," he says.
Even with recent increases, wages for Chinese workers are still a
fraction of those for Americans. But studies do show China's overall
cost advantage is shrinking.
Labor costs have been climbing about 15 percent a year since a 2008
labor contract law that made workers more aware of their rights. Tax
preferences for foreign companies ended in 2007. Land, water, energy and
shipping costs are on the rise.
In its most recent survey, issued in February, restructuring firm
Alix Partners found that overall China was more expensive than Mexico,
India, Vietnam, Russia and Romania.
Mexico, in particular, has gained an edge thanks to the North
American Free Trade Agreement and fast, inexpensive trucking, says Mike
Romeri, an executive with Emptoris, the consulting firm.
Makers of toys and trinkets, Christmas trees and cheap shoes already
have folded by the thousands or moved away, some to Vietnam, Indonesia
or Cambodia. But those countries lack the huge work force,
infrastructure and markets China can offer, and most face the same labor
issues as China.
So far, the biggest impact appears to be in and around Shenzhen, a
former fishing village in Guangdong province, bordering Hong Kong, that
is home to thousands of export manufacturers.
That includes Taiwan-based Foxconn Technology, a supplier of iPhones
and iPads to Apple Inc. Foxconn responded to a spate of suicides at its
400,000-worker Shenzhen complex with pay hikes that more than doubled
basic monthly worker salaries to $290. Strike-stricken suppliers to
Honda Motor Co. and Toyota Motor Corp., among many others, also have
hiked wages.
Foxconn refused repeated requests for comment on plans to
move much of its manufacturing capacity to central China's impoverished
Henan province, where a local government website has advertised for tens
of thousands of workers on its behalf.
But among other projects farther inland, Foxconn is teaming up with
some of the biggest global computer makers to build what may be the
world's largest laptop production hub in Chongqing, a western China city
of 32 million where labor costs are estimated to be 20 to 40 percent
lower than in coastal cities.
Given the intricate supply chains and logistics systems that have
helped make southern China an export manufacturing powerhouse, such
changes won't be easy.
But for manufacturers looking to boost sales inside fast-growing
China, shifting production to the inland areas where many migrant
workers come from, and costs are lower, offers the most realistic
alternative.
"The new game is to find a way to do the domestic market," says
Goodwin.
Many factories in Foshan, another city in Guangdong that saw strikes
at auto parts plants supplying Japan's Honda, have left in the past few
months, mostly moving inland to Henan, Hunan and Jiangxi, said Lin
Liyuan, dean at the privately run Institute of Territorial Economics in
Guangzhou.
Massive investments in roads, railways and other infrastructure are
reducing the isolation of the inland cities, part of a decade-old
"Develop the West" strategy aimed at shrinking the huge, politically
volatile gap in wealth between city dwellers and the country's 600
million farmers.
Gambling that the unrest will not spill over from foreign-owned
factories, China's leaders are using the chance to push investment in
regions that have lagged the country's industrial boom.
They have little choice. Many of today's factory workers have higher
ambitions than their parents, who generally saved their earnings from
assembling toys and television sets for retirement in their rural
hometowns. They are also choosier about wages and working conditions.
"The conflicts are challenging the current set-up of low-wage, low-tech
manufacturing, and may catalyze the transformation of China's industrial
sector," said Yu Hai, a sociology professor at Shanghai's Fudan
University.
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