Moving up the value chain

By Ang Yuen Yuen (China Daily)
Updated: 2010-06-08 07:46
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Financial crisis, rising cost of labor may spur consolidation and innovation among embattled Chinese manufacturers

'It's a dying business," said the owner of a garment factory in Zhuhai, a city in Guangdong province. Like many in his line of business, he is packing up. Lured by abundant cheap labor, investors flooded Zhuhai two decades ago. Gone, it seems, are the heydays of T-shirts, toys, plastic flowers, tiles, hooks, springs, and the like. Today, the costs of manufacturing such items are lower in countries like Bangladesh and Vietnam than in Guangdong.

As labor costs continue to climb, is China set to lose its coveted spot as the world's workshop?

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Rising labor costs are inevitable. The government introduced tough labor laws and a minimum wage in 2008. Recent policies to improve rural economic conditions have slowed the flow of migrants from the countryside. Workers are demanding higher compensation to match the fast-rising cost of living in cities, as manifested in the recent high-profile labor strike at a Honda plant based in Guangdong. Salary was the major point of contention.

Workers on strike demanded a raise in pay from the current 1,500 yuan ($234) to 2,000-2,500 yuan ($373) per month. Clearly, Chinese factories can no longer offer dirt-cheap prices.

Apparel production is a prime example of China's declining competitiveness in markets dependent on low-cost labor. According to a study by the US consulting firm Jassin O'Rourke, labor costs in China are higher than in seven other Asian countries. The average cost for a worker is $1.08 per hour in China's coastal provinces and $0.55-0.80 in the inland provinces. India was in seventh place, at $0.51 per hour. Bangladesh offers the lowest cost, only one-fifth the price of locations like Shanghai and Suzhou.

Adding to China's labor woes, the financial crisis during the last two years had a disastrous effect on foreign demand. In 2009, China's export value fell by 16 percent from 2008. Labor-intensive industries were especially hard hit. In the textiles industry, profits declined for the first time in 10 years in 2008. In March 2009, exports of electronics and IT products tumbled nearly 25 percent from the previous period.

Although Chinese exports have begun to recover in 2010, the impact of the financial crisis remains palpable. By January 2010, the value of exports had returned to its previous level in the same period of 2008. But many factories have already perished.

For Chinese manufacturers, a long-term trend of rising costs, coupled with a short-term export slump, were unprecedented challenges. But the government and entrepreneurs are not idly sitting by as competitiveness slips.

These adverse conditions have inadvertently propelled a long-delayed restructuring of China's labor-intensive industries. As costs surge, Chinese producers are seeking higher value, new niches, and more influence over policy-making.

Along China's dynamic coastal belt, local governments are drafting new economic blueprints to push their firms up the value-added chain.

Consider the case of a textiles manufacturing center in Jiangsu province, dubbed the "silk capital" of China. Three-quarters of the city's GDP had been coming from textiles production. Last year, however, exports fell by about 15 percent. For local planners, the export shock was a wake-up call for change.

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