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Cheap labour cannot last

China Daily

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 than China's.

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 bonuses.

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 localities.

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 low.

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 competitiveness.

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 costs.

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.

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