China is also facing a demographic crisis
The era of cheap manufacturing in China is coming to an end.
Rising wages, coupled with China’s recently announced decision to allow its currency to rise in value, are hastening the eventual end of an era of low 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 wake-up call for the many foreign companies that depend on China’s low costs to compete overseas,gucci handbags from makers of Christmas trees to manufacturers of electronic gadgets like the iPad.
But while higher costs may signal higher prices for American consumers, there is also the hope of manufacturing jobs moving back to the United States.
Advertising
For evidence of the shift, look to Wham-O, the creator of the Hula Hoop and Slip ‘N Slide and a company that seems perfectly suited for low-cost Chinese manufacturing. The California-based company has decided to bring half of its Frisbee production and some production of its other products back to the United States.
Where low-tech factories and scant wages once were welcomed in a China eager to escape isolation and poverty, workers are now demanding a bigger share of the profits.
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.
A group of Taiwanese scholars charged Foxconn with using a “concentration-camp-styled controlling system” and blamed the stressful environment for a spate of suicides at its 400,000-worker Shenzhen complex.
Foxconn responded with pay increases that more than doubled basic monthly salaries to $290. Strike-stricken suppliers to Honda Motor Co. and Toyota Motor Corp., among many others, also have raised wages.
China is also facing a demographic crisis.
The China Daily, the state-run English-language newspaper, said the city of Dongguan, where most of the world’s toys are manufactured, was 1 million workers short of its usual population of 5 million migrants. State news media have reported that cities were offering better health benefits and housing subsidies to attract more workers.
Because of the nation’s one-child policy, the number of working-age adults is shrinking rapidly. By 2050, a third of China’s population will be 60 or older, compared with 26 percent by then in the United States.
Some companies are striving to stay profitable by shifting factories to cheaper areas farther inland or to other developing countries. A few are even resuming production in the West.
U.S. workers may be benefitting, with manufacturing being one of the few bright spots in the nation’s job market. The Labor Department reported a rise of 9,000 manufacturing jobs in June, bringing the total increase to 136,000 since December.
“China is going to go through a very dramatic period,” said Rick Goodwin, a China trade veteran of 22 years, whose company links foreign buyers with Chinese suppliers. “The big companies are starting to exit. We all see the writing on the wall.”
Beijing’s decision to stop tethering China’s yuan currency to the U.S. dollar, allowing it to appreciate and thus boosting costs in yuan, has multiplied the uncertainty for companies with already meager profit margins.
“This will be reflected in higher consumer prices in the U.S. for Chinese goods,” said Paul Tiffany, a senior lecturer at the Haas School of Business at the University of California, Berkeley.
The situation is affecting more than just inexpensive toys and trinkets.
At the other end of the scale, some companies in research-intensive sectors such as pharmaceuticals, biotechnology and life sciences are also reconsidering China for a range of reasons, including costs and incentives being offered in other countries.
Even with recent increases, wages for Chinese workers are still a fraction of those for Americans. But studies show the overall cost difference is shrinking.
Labor costs in China have been climbing about 15 percent a year since a 2008 labor contract law that made workers more aware of their rights. In addition, tax preferences for foreign companies ended in 2007, and land, water, energy and shipping costs are on the rise.
In its most recent survey, restructuring firm Alix Partners found that 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, said Mike Romeri, an executive at the Emptoris consulting firm.
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.
Chinese officials have little choice. Many of today’s factory workers have higher ambitions than did their parents, who generally saved their earnings from assembling toys and television sets for retirement in their rural hometowns.
Younger workers are also choosier about wages and working conditions.
“In the long run, we want a prosperous middle class in China,” said Stephen Levy, president of the Palo Alto, Calif.-based Center for Continuing Study of the California Economy.
“From the national policy point of view, we have been trying to get Chinese consumers to be less dependent on exports,” Levy said. “This is just the beginning. I don’t think the wage pressures will go away.”
