Slower Growth Based on a Consumption Economy
As a new generation of Chinese leaders begin to tackle the coming economic challenges China faces, one of the most important problems Chinese leaders must address is how to transition from an export-based economy with high levels of infrastructure investment to a consumption-based economy with consumer spending and service businesses
providing more sustainable growth for the future.
Urban China is changing. Beijing and Shanghai’s real estate is now as expensive as London or New York. The Chinese government’s historical strategy of large infrastructure investment sustaining economic growth and providing employment is winding down as additional investment in roads, highways, trains, and airports will only yield minimal gains in greater economic growth and productivity.
People are richer. As labor costs in China rise, multinational companies are looking to other areas where labor costs are cheaper. In the first half of 2012, nearly 80% of Chinese administrative governments enacted some form of labor initiatives and 16 provinces increased the minimum wage by 19.7%.
Rural China is also changing.The Chinese governments efforts to modernize the agricultural industry via tax policy and investment has helped to narrow the wage gaps between urban export centers and rural areas. China’s population is also aging. More workers want to stay closer to their hometowns and families. Thus, many migrant workers from poorer regions of China are no longer moving to Shanghai and Guangzhou looking for work.
This has raised the costs of labor in these areas also as factories compete over dwindling labor pool in more developed cities.
Shifting Labor in China
In Dongguan and Guangzhou, labor costs increased more than 10% from 2011 to 2012. These wage increases have forced companies to look at new sourcing areas for labor-intensive, low-value add products. Areas such as Sichuan, Henan, and Hubei are increasingly attractive investment spots for textiles as labor in China in these areas is much cheaper. Guangzhou, in particular, is experiencing a major shortage of workers and companies are reacting by investing in new, inland areas in China:
“Foxconn, one of the world’s largest electronics manufacturers, plans to increase its investment in Central China’s Henan province
after moving factories to Henan and Southwest China’s Sichuan province last year.
Foxconn plans to invest in 19 new projects in Henan, including factories that will produce camera lenses and LED lighting rigs, as well as more branches of Foxconn’s retail chain Cybermart…”
In Guangzhou, entrepreneurs and businesses in these high-cost labor areas are investing in greater productivity tools, more skilled workers, and more capital equipment. Historically, Chinese workers rank extremely low in terms of productivity.
China is not featured here, but ranks 82nd with a labor productivity of US$11,612. Compare this to S. Korea with US$60,489 and you can see the difference.
Table 1: Monthly Minimum Wages
|City||2010||2011||2012||2012 vs. 2010 % Increase|
(Source: China Statistical Bureau)
How do these changes in labor in China affect your sourcing strategy?
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