China’s Labour Complications

Business, China, Company Strategy, Economics, Indonesia, Polyolefins

ChinaDemogrpahicsCEQJune2012.jpg

Source: Wang Feng, director of the Brookings-Tsinghua Center for Public Policy in Beijing, from an article published in the China Economic Quarterly.

 

By John Richardson

ONE of the explanations for China’s disappointing petrochemicals demand growth during 2012 is that even where export-focused factories in southern and eastern China can find sufficient orders to run their plants at high operating rates, they are struggling to find enough workers.

Earlier this year, we were told that labour supply had gone beyond a tipping point when millions of migrant workers failed to return to from the countryside to China’s cities and towns after the Chinese New Year.

“We have been talking about this type of labour-supply problem for three years, but only now has it become really significant. Workers are remaining in their rural homes because of the success of government efforts to boost income levels in western China,” said a senior executive with a global polyolefins producer.

A further factor is the high cost of living in China first-tier cities.

The impact of China’s one-child policy is another reason for labour shortages in the south and the east.

And now a survey by the Chinese Manufacturers’ Association of Hong Kong, which was released earlier this month, reported that that 90 percent of respondents were struggling to hire workers. Fourteen percent also said that they were short of the number of staff they needed, compared with 11 percent in last year’s survey.

“One reason is the Guangdong government’s December (2011) decision to suspend a planned increase in the minimum wage,” wrote the Financial Times in a post on its Beyond Bricks blog.

“At the time, that decision was cheered by factory owners who were already struggling to cope with a 21.2 per cent rise in minimum wage imposed in 2010,” continued the post. 

“The flip side is that even fewer migrant workers now feel it’s worth their while to work in the province, where the cost of living is among the highest in the country.”

What is China’s loss in low-value manufacturing is often said to be the automatic gain of countries such as Indonesia and Vietnam.

But as Stephen Moore, director of the Singapore-based chemicals and plastics consultant Interdecent Asia, points out, “re-shoring” away from China is more complicated for manufacturers than it at first might seem.

“The plastic toy industry is, for instance, pretty much stuck in southern China because the design and manufacturing is also located there,” said Moore.

“Most of the design and manufacture of toys is located in Guangdong province, which means that the process of getting toys to market is highly integrated,” he added.

“This makes it more difficult to easily shut down production and move to a lower-cost country, even though it now costs $400 a month to employ a manual worker in China, compared with less than $200 in Indonesia. Five years ago, labour costs in China were also less than $200 a month.”

He said that many toy manufacturers were family-owned and their founders were reaching retirement age, and so they didn’t want the upheaval of relocating production.

“Also, many of their sons and daughters, who are probably wealthy enough never to have to work, are not interested in continuing in the family business, which is adding to the inertia,” he continued.

The footwear industry was very different, making it much easier to shift production to other countries such as Indonesia and Vietnam, he added.

“The reason is that when labour costs became too high to manufacture shoes in Taiwan and South Korea during the 1980s-1990s, production was shifted to China, but design remained in Taiwan and South Korea,” said Moore.

“As a result, in theory it is pretty easy for the Taiwanese and South Koreans to not renew a contract with a contract manufacturer in China or shut down their own plants there and shift production to, say, Indonesia or Vietnam.”

The footwear industry has been the subject of numerous media reports detailing the big shift in manufacturing away from China, but Moore said that it was important to keep the real extent of the manufacturing migration in context.

“In 2010, which is the latest figures we have available, 7.6bn pairs of rubber and plastic shoes alone were made in China (this includes training shoes),” he added.

“This compares with just 380m pairs in Vietnam, 5% of the total in China. Indonesia is the world’s second-largest exporter of training shoes, but it probably made around 10% of the total number of plastic and rubber shoes as China in 2010.”

The plastic toy and footwear industries in China are major consumers of domestically produced and imported chemicals and polymers.

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