China’s rising labor costs and how this affects you.

What people are saying about Mulberry Fields
” I REALLY do enjoy your posts and find them informative and helpful.” – a Wal-Mart supplier

I had an email from a client this morning asking me about China’s rising labor costs. He simply wanted to know what I thought. I told him that I covered this in my Feb newsletter. So I am posting that here today.

One of China’s biggest challenges these days is how to spur more domestic demand for its goods and services. This is necessary as orders from overseas slowed dramatically following the Global Economic Crisis and have not yet recovered. It is also a long term goal of the Chinese Central Govt to build an economy that is driven more by domestic demand – a market driven economy – than by overseas demand – an export driven economy. To this end the Central Govt. has encouraged provincial governments to raise wages so that Chinese consumers will be able to afford more Chinese products. At the same time local governments have seen that rising wages will attract more migrant labor and this will keep their local economies healthy. For the above reasons minimum wages in China are rising at steady levels. From 2010 to 2015 minimum wages across China are expected to show an 84 % increase. This is why you often see headlines nowadays about overseas companies moving to other countries in Asia or even back to the US or Canada. Even some Chinese companies are beginning to outsource orders to offset rising costs.

In most cases suppliers try to offset rising wages with energy saving measures in their facilities but inevitably some of those higher costs are passed on to the customer. Those cost increases may or may not be substantial depending on where your vendor is located. Vendors in the well known coastal areas, Shenzhen, Xiamen, Shanghai etc. have to offer much more compensation to keep workers in place than vendors in, say, Henan or Anhui Provinces. Another thing to keep in mind that rising wages really have the biggest effect on low end/high volume manufacturing where the unit cost is low. A $ 0.25 cost increase per unit that your vendor passes on to you so that he can hire and retain skilled workers may make your project untenable if your target landed cost is just $ 2.00 to begin with. In short, rising wages in China and how this will impact your business there really depends on what product you are developing in China and, again, where you are developing it. Finally you have to remember that even with rising wages across the board in China the “China cost” in some areas of China is still well below what it would cost you to make your product in the US or other developing countries. In other words, don’t pay too much attention to the headlines about rising costs in China.

The real lesson here is to familiarize yourself with the province(s) where your products are going to be made. Do keyword searches for all your China provinces with terms like “rising wages, “migrant labor,” “labor practices,” “energy shortages” etc to anticipate what the potential hurdles would be were you to do an order with a vendor in that province.

Here are some other posts about changing conditions in China and how they affect you:
Job mobility in China
China’s newfound global status
Outsourcing within China
Rising raw materials costs

www.theeastasiaco.com

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