Taiwan firms face rising labor costs

Updated: 2010-06-22 22:53
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XIAMEN - Taiwan-funded firms on the Chinese mainland are likely to relocate from the mainland's coastal regions to its interior, or even to other Asian countries, in the wake of rising labor costs on the mainland, experts said here Tuesday.

Given the rising yuan and recent wage hikes, Taiwan companies operating on the mainland would have to either move to the central or western parts of the mainland or Southeast Asia, or focus less on labor-intensive industries and target the mainland's own market, said Tang Yonghong, deputy head of the economic research center of Xiamen University's Taiwan Research Institute.

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Wages in the Chinese mainland have been on the rise since earlier this year, with an economic recovery in full swing.

Since February, a dozen Chinese provinces and municipalities have increased their minimum wages. In the latest development, China's southernmost province of Hainan said on June 17 that beginning July 1 the minimum wage in the province would rise by 31.7 percent to 830 yuan.

Foreign manufactures also felt the pressure of wage hikes. On the same day Hainan announced its minimum wage increase, US fast-food chain KFC agreed to raise the minimum monthly wage of its 2,000 employees in the northeastern city of Shenyang by 200 yuan to 900 yuan per month, and promised an annual five percent pay increase following negotiations with a local trade union.

But the most dramatic rise has been at Taiwan-owned Foxconn, the world's topcontract cell phone manufacturer, which said it would raise salaries for assembly workers at its production base in Shenzhen by 66 percent to 2,000 yuan per month beginning October 1.

The rise followed a spate of suicides at Foxconn's Shenzhen plant, where 300,000 Chinese workers churn out iPhones, iPads, and other electronic products for corporations worldwide, including Apple and HP.

Beginning about two decades ago, the Chinese mainland emerged as a preferred location for Taiwan businesses in search of inexpensive land and labor.

Today, about 90,000 enterprises from the island operate on the mainland, employing a work force even greater than Taiwan' s entire population of 23 million.

But with labor costs steadily rising on the mainland, Taiwan entrepreneurs are likely to search for lower-wage alternatives, Tang Yonghong said.

Chen Chin-hsiung, general manager of Xiefeng Shoes Co Ltd, a contract shoe manufacturer for Nike, told Xinhua that Xiefeng's Taiwan-based parent company had already set up two factories in Vietnam, each doubling the size of Xiefeng.

"The company has also purchased 200 hectares of land in India to build new plants and are setting eyes on Bangladesh and South Africa," said Chen, who now employs nearly 7,000 mainland workers in his factory in Fujian's Putian.

Founded in 1989, Xiefeng now produces 4.5 million pairs of shoes each year and has a yearly output value of 600 million yuan. Workers at Xiefeng now have an average monthly income of 1,400 yuan, more than doubling Putian's minimum wage level, according to Chen.

"We gave our workers a 20 percent raise in wages last November, and have spent five million yuan to build a kindergarten for our employees," Chen said.

"Of course, the labor costs are higher here now," he said, "The cost for each pair of shoes made in Vietnam is five to six dollars less than here. So we are seriously considering moving to other countries, or to the mainland's interior regions."

Chen's company is by no means the only one wary of the mainland's wage hikes.

According to Taiwan's local media, Compal Electronics Inc chairman Hsu Sheng-hsiung also said, on June 18, that Compal, the world's largest contract laptop computer maker, would build a new plant in the central or western part of the Chinese mainland, adding that the final plan of the new plant would be completed in the latter half of this year.

"Like twenty years ago when Taiwan enterprises came to the Chinese mainland's coastal regions, now they are seeking even lower labor costs elsewhere," Tang Yonghong said.

But Tang warned that relocation for the sake of cheaper labor costs alone was "only a temporary solution."

Enterprises moving from the mainland's coastal areas to the interior might face similar problems in a few years as labor costs catch up, not to mention the cost of transportation from the inland to eastern ports, he said.

A better option for them was to transform into technology-intensive enterprises and target the mainland's domestic markets, he said.

"Taiwan-funded enterprises used to treat the mainland as just a production base," Tang said, "They ship raw materials, spare parts or half-finished products to the mainland for processing, then ship the finished products to Europe and the US for sale."

The "triangular trade" pattern relied heavily on cheap raw materials and labor, thus had to be changed now that the mainland's labor costs have risen, he said.

His view was echoed by Liu Bih Jane, vice president of the Taiwan-based Chung-hua Institution for Economic Research.

"It is high time that Taiwan firms on the Chinese mainland changed their development patterns, and the key in this process lies in taking advantage of the mainland's domestic market," she said.

She noted that the Economic Cooperation Framework Agreement, a yet-to-be-signed economic pact similar to a free trade agreement between the Chinese mainland and Taiwan, could help Taiwan firms being pressured on the mainland as they seek to move beyond their current difficulties.

Tang Yonghong also dismissed the notion that rising labor costs in mainland China would lead to the doom of Taiwan-funded businesses on the mainland, or that it would hurt the mainland's economy in the long run.

"Companies change their strategies in search of greater profits. That is just how economy grows," he said.

"As they (Taiwan enterprises) relocate to the mainland's interior, ... or conduct technology-intensive transformations, ... they would in turn bring in new investment to the mainland," he said.

Xifeng's general manager Chen Chin-hsiung also said it was perfectly normal for the mainland's labor costs to rise as its economy grew. "It is inevitable, just like Taiwan twenty years ago," he said.

Acknowledging that the Chinese mainland now boasted a larger pool of skilled workers comparing with Southeastern Asian countries, Chen said his company would not move out of the mainland in the near future.

"There is still room for our development here," he said.