Cheap labour cannot last
As Chinese labour costs keep
rising, some foreign investors and manufacturers have begun to look elsewhere
for more profitable business opportunities.
Nike, for example, has expanded four production lines in Viet Nam and
invested US$16 million in new facilities there, giving the cold shoulder to
Taifeng Corp, a Guangdong-based firm that made shoes for the firm in the past.
This seems to be down to one factor Viet Nam's labour prices are much lower
India also boasts much lower labour costs. The average Chinese worker earns
US$500 more a year than an Indian counterpart for doing the same work. As a
result, India has become more and more attractive to large international
companies, at least in terms of workers' wages.
This is not only true of blue-collar workers. Managerial staff in China also
enjoy higher pay.
A Chinese manager working for a German machinery manufacturer received a
monthly salary of 5,000 yuan (US$617) before the year 2000. But now he or she is
paid more than 15,000 yuan (US$1,850) a month at least, not including annual
There was a time when very low labour costs were China's greatest asset for
luring overseas investment. But this edge is disappearing in some sectors and
Despite this, it would be premature to draw the conclusion that China has
lost its low labour cost advantages.
First, there are 150 million surplus labourers nationwide; and they could
enter the labour market at any moment.
Second, 80 per cent of younger generation workers are better trained than
their predecessors, though the average skill level of Chinese workers remains
Third, multinationals that outsource divisions of their manufacturing
activities to less developed areas cannot simply bring their use of local labour
resources to a sudden halt, because of manufacturing inertia.
Fourth, Chinese labour costs are still very low compared to developed
countries. The average German worker, for example, earns 15 euros (US$17.55) an
hour 20 times more than a Chinese.
Tang Kuang, a professor at Renmin University of China, who specializes in
labour affairs, says rises in labour costs have different effects under
different conditions. If higher pay helps bring about higher productivity, an
enterprise will become more competitive and, in turn, will see more handsome
profits, according to Tang.
But on the other hand, if higher pay fails to bring about higher
productivity, the greater wages outlay will lead to a decline in
Of course, higher labour costs will have a negative impact on
labour-intensive enterprises one way or another. Nike shifting its investment
focus to Viet Nam is a good example of this.
But generally speaking, multinationals will weigh up the overall situation
very carefully before deciding on where to pump in investment; taking into
account labour costs, productivity, infrastructure, the quality of the local
workforce and research and development capabilities.
China is still competitive among Asian countries in terms of absorbing
foreign investment, despite increasing labour costs.
Moreover, the "cost performance" of the Chinese workforce is higher than that
of its neighbours, which means that China, as an investment locality, still
appeals strongly to potential investors.
China has other advantages the rich supply of labour, huge numbers of
equipment suppliers and the great potential of the domestic market.
A survey conducted by the Republic of Korea's Institute of Global Economics
showed that 52 per cent of Korean entrepreneurs invest in China because of the
huge market. Only 32 per cent said they came to China because of low labour
Many researchers and entrepreneurs have come to agree that the rise in labour
costs is normal for a country developing economically.
In China, labour costs have been increasing by nearly 10 per cent each year
over the last two decades or so. It seems likely the rises will continue as the
economy forges ahead, experts forecast.
At the same time the workforce's skills will be enhanced and productivity
should therefore increase.
In the meantime, regulations and rules governing the labour resources market
will become more standardized a blessing for outside investors.
China simply cannot maintain its development momentum by relying exclusively
on low labour costs, experts say.
The economic development drive will run out of steam with excessive reliance
on small wage bills, thus failing to increase investment in research and
development, optimize the industrial structure, raise productivity and make
manufactured commodities more technology-intensive.
The way out for Chinese enterprises is competitiveness supported by core
technology a capability that cannot be copied or imitated in a short period of
time. In other words, Chinese enterprises should shift their focus from
modelling their products on others' to developing their own.
To achieve this goal, the government must first work out a strategy for
increasing the number of skilled workers and top-notch managerial personnel,
which are in chronic short supply.
Chinese enterprises should try to close the gap between them and their
counterparts in developed countries in terms of core technologies, energy saving
and managerial efficiency.
They should also improve cost efficiency by all means possible.
Low labour costs, while helping make Chinese manufactured goods competitive
on the international market, have also had some negative effects.
For example, low wages hinder the upgrading of the country's industrial
structure and create drag on technical progress. Workers' low levels of income
are largely responsible for a weak market in the long term.
This story is based on an article in Global Times.