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
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
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
A 10% wage increase in low-end, labour-intensive sectors – including apparel and electronic components – could push up
“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
The company has already raised salaries of mainland employees by around 30% since June, they said.
The company’s recent move to increase the wages of its workers came amid continuing signs of worker unrest in southern
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
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.
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
“The faster-than-expected labour cost increase has now become a political imperative,” Ma added.
Rising labour costs in
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
"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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