FocusChina may lose 'world factory' status on wage pressures

09 June 2010 08:23  [Source: ICIS news]

By Nurluqman Suratman

SINGAPORE (ICIS news)--China's position as the "factory of the world" could be under threat as widespread calls to increase workers' wages in the face of rising inflationary pressures push factories to consider relocating outside the country, analysts said on Wednesday.

The direct impact on the petrochemicals sector was relatively minor, though calls of wage hikes from sectors such as the electronics and consumer goods that attract scores of migrant workers would compel manufacturers to relook their business models, they said.

A few cities in China have already begun to raise minimum wages, with many more cities and provinces to follow suit in the coming weeks, amid concerns that factory owners in China were underpaying their workers, analysts said.

In China’s southern manufacturing hub of Shenzhen, the local labour department announced on 9 June that it would raise minimum wages by 10-22% to yuan (CNY) 1,100 ($161) per month from 1 July, while the Beijing municipal government earlier this week announced a 20% rise in the minimum wage in the city to CNY960 a month.

“We expect the forthcoming wage increase to be around 20% in most provinces and cities,” said Jun Ma, chief economist of the greater China region at Deutsche Bank in Hong Kong.

An increase in wages may cause a big dent in the cost of doing business of downstream industries that are more labour intensive such as textiles and toy manufacturers, analysts said.

“Workers’ salaries in these smaller downstream factories make up 10-15% of their costs so any enforced increase could push them out to cheaper countries like Vietnam, Bangladesh, Sri Lanka and India,” said Danny Ho, a petrochemical analyst at brokerage firm Yuanta Securities.

A 10% wage increase in low-end, labour-intensive sectors – including apparel and electronic components – could push up China’s consumer price index (CPI) by 0.4% and reduce employment by 700,000 jobs, Ma of Deutsche Bank said.

“At the sector level, electronic components, apparel, furniture, and auto parts are most obvious victims of wage inflation,” he added.

Du Zhiqiang, an analyst with Shanghai-based Ping An Securities concurred that a hike in salaries would squeeze the profits of downstream sectors, adding that the petrochemicals sector would be more concerned about demand rather than an increase in labour costs.

The shift to higher wages could be best seen by Foxconn Technology’s decision on 6 June to double the salaries of its 800,000 workers in China to Y2,000 a month, starting in October, analysts said.

The company has already raised salaries of mainland employees by around 30% since June, they said.

Foxconn, which manufactures products for companies such as Apple and Dell, has been criticised over its labour practices after a number of suicides at two Foxconn facilities in southern China.

The company’s recent move to increase the wages of its workers came amid continuing signs of worker unrest in southern China.

Japanese car producer Honda on Tuesday said that workers at a joint-venture (JV) factory that supplies the company had gone on strike to demand for higher pay, following a successful protest at another Honda facility in nearby Foshan earlier this week, according to media reports.

Meanwhile, some factories in southern China's Guangdong and Guangxi provinces are hiring “cheaper” workers from Vietnam in a bid to reduce costs, analysts said.

Taiwan’s Formosa Chemicals and Fibre Corporation recently constructed new nylon chips and textile yarn lines in Vietnam to capitalise on the country’s lower labour costs, according to a company source.

Officials in China are very concerned about the social impact of the strikes and are placing pressure on low-end manufacturers to raise wages, Ma of Deutsche Bank said.

Recent comments from Premier Wen Jiabao on improving “social justice” would also imply that the government was looking at more aggressive measures to improve the wages of low-income workers in China, he said.

“The faster-than-expected labour cost increase has now become a political imperative,” Ma added.

Rising labour costs in China in the long term would help change the country’s manufacturing mix and upgrade its economy, analysts said, adding that it would also help reduce the income gap in the country.

“China should not always depend on its low labour cost advantage, and it should produce more value-added products,” said Wang Huiqin of TX Investment Consulting Co.

The increases in wages may not have a big impact on petrochemical industry as labour wages make up only a small percentage of their overall costs, Ho from Yuanta Securities said.

“The costs come up to only 2-3% of the overall production costs for most of these petrochemical and plastics producers and any increase in wages can be easily absorbed. It is not a big deal,” Ho said.

A hike in wages would not have a stark impact on petrochemical production in China as most of it is operated by state-run producers, said Wang Huiqin, an analyst from Shanghai-based TX Investment Consulting Co.

"For the petrochemical industry, the upstream chain is largely monopolised by the two majors - Sinopec and PetroChina - and their payrolls are relatively competitive. They, at least, in the near term, have no need to shift production to other countries," said Zhang Junfeng, an analyst at Shenzhen-based brokerage house China Merchant Securities. 

($1 = CNY6.83)

With additional reporting by Judith Wang, Fanny Zhang and Junie Lin.

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By: Nurluqman Suratman

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