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How Rising Wages Are Changing The Game In China A labor shortage has pay soaring. That is sure to send ripples around the globe.

For years, Yongjin Group has earned a decent profit selling lamps and furniture to the likes of Wal-Mart (WMT), Home Depot (HD ), Target (TGT ), and Pottery Barn. But lately the company has seen its margins shrink to 5% -- half what Yongjin made when it opened its factory in the steamy southern Chinese city of Dongguan 14 years ago. Why? Labor shortages are forcing the company to boost wages. Last year salaries surged 40%, to an average of $160 a month, and Yongjin still can't find enough workers. "This business needs a lot of labor," says President Sam Lin. "This is a very tough challenge."

Some 1,500 miles northeast, in the city of Suzhou, Emerson Climate Technologies Co. is facing similar woes. The maker of air conditioner compressors has seen turnover for some jobs hit 20% annually, and Emerson General Manager David Warth says it's all he can do to keep his 800 employees from jumping ship to Samsung, Siemens (SI ), Nokia (NOK ), and other multinationals that are now operating in the tech manufacturing hub. "It has gotten to the point that we are just swapping folks and raising salaries," says Warth.

Wait a minute. Doesn't China have an inexhaustible supply of cheap labor? Not any longer. From the textile and toy factories of the south to the corporate headquarters and research labs in Beijing and Shanghai, the No. 1 challenge today is finding and keeping good workers. Turnover in some low-tech industries approaches 50%, according to the Institute of Contemporary Observation, a Shenzhen labor research group. Guangdong Province says it has 2.5 million jobs that remain unfilled, while Jiangsu, Zhejiang, and Shandong provinces say they, too, face shortages of qualified workers. "Before, people talked about China's unlimited labor supply," says Zhang Juwei, deputy director of the Institute of Population & Labor Economics at the Chinese Academy of Social Sciences in Beijing. "We should revise that: China is facing a limited supply of labor."

Reports of labor shortages first cropped up in late 2004, but companies thought the phenomenon was temporary. Now a surge in both turnover and wage costs is convincing multinationals and their suppliers that the China game is changing permanently.

With the gap between wages in China and those elsewhere gradually closing, the pressure to pass price increases on to consumers in the U.S. and other markets will start to build. As Citigroup (C ) noted in a February report: "The continuous growth of labor costs in China, even at a moderate pace...is likely to have implications for inflation worldwide." These factors eventually will force the Chinese to upgrade their entire industrial base to make higher-margin goods. And those bigger paychecks are building a consumer class in China that multinationals want to target.

"THERE IS A BREAK POINT"
The wage issue has started to affect how companies operate in China. U.S. corporations and their suppliers are starting to rethink where to locate facilities, whether deeper into the interior (where salaries and land values are smaller), or even farther afield, to lower-cost countries such as Vietnam or Indonesia. Already, higher labor costs are beginning to price some manufacturers out of more developed Chinese cities such as Shanghai and Suzhou. "There is a break point where people will say this is too expensive," says Michael Barbalas, general manager at the Suzhou plant of Andrew Corp. (ANDW ), a Westchester (Ill.) maker of wireless networking gear. At his factory, he says, wages have been rising by 10% annually.
The pressure has as much to do with skills as it does with numbers. Although the total labor force is about 800 million, relatively few people have the qualifications employers want. For most textile, toy, and tech-assembly jobs, for example, export-oriented manufacturers prefer women from 18 to 25 years old or people with experience operating machinery. "The skills base does not meet the demands of a rapidly growing market," says C.P. Lee, Asia-Pacific human resources chief at Motorola Inc. (MOT ), which has 9,000 employees in China.

As a result, companies across the board are feeling the squeeze. Last year turnover at multinationals in China averaged 14%, up from 11.3% in 2004 and 8.3% in 2001. Salaries jumped by 8.4%, …That means managers can no longer simply provide eight-to-a-room dorms and expect laborers to toil 12 hours a day, seven days a week. When 30-year-old He Maofang first arrived in Dongguan in 2000, for instance, "work was hard to find." But now "there are plenty of choices," says He, who started at Yongjin last June. In addition to boosting salaries, Yongjin has upgraded its dormitories and improved the food in the company cafeteria. Despite those efforts, its five factories remain about 10% shy of the 6,000 employees they need.

Many companies are compensating for the shortages by penetrating deeper into China's vast heartland, where wages can be half what they are on the coast. General Motors (GM ), Honda (HMC ), Motorola, and Intel (INTC ), for instance, have all shifted some manufacturing or research to inland locations in recent years, both to tap lower costs and to open up new markets. But a two-year-old effort by the Chinese government to lift rural incomes through tax cuts is keeping some potential factory workers on the farm. So with investment growing in the interior, labor shortages are popping up there, too. "More and more multinationals are looking for opportunities in second-tier cities," boosting salaries there faster than in the traditional manufacturing strongholds farther east, says Jean Lin, head of the compensation practice at Hewitt.


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Added: Nov-4-2010 Occurred On: Nov-4-2010
By: Fine_Just_Fine
In:
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Tags: China, labor, world economy
Views: 7611 | Comments: 16 | Votes: 0 | Favorites: 1 | Shared: 0 | Updates: 0 | Times used in channels: 1
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  • Comment of user 'rclark951' has been deleted by author (after account deletion)!
  • In a free market, cheap labor doesn't stay cheap forever.

    Posted Nov-4-2010 By 

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  • Their Christmas bonus this year is they get to keep their kidneys.

    Posted Nov-4-2010 By 

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  • Good old capitalism brings prosperity to yet another country. Three cheers!!!

    Posted Nov-4-2010 By 

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  • Can't wait till they all unionize. LOL

    Posted Nov-4-2010 By 

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  • Comment of user 'Zardoz003' has been deleted by author (after account deletion)!
    • You don't get it, Zardoz. The point of this article is that wages are RISING in China, as they will in other third world countries as they rise economically.

      A return to tariffs would just plunge us into depression...we've tried that before...

      Posted Nov-4-2010 By 

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    • There is no need for that even if that was effective. If you realy wish to mess up with the chinese then encourage them to pay proper pay for their workers (witch is now happening). This will make US workers (and any western worker also) more competetive with Chinese ones and more jobs will flow back from the China.

      Posted Nov-5-2010 By 

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    • Comment of user 'Zardoz003' has been deleted by author (after account deletion)!
  • I make things in China and India and import them to the US. I haven't had any price increases in the past two years, but I'm already contacting factories in Bangladesh. When China advances itself to the pint that the workers have the opportunity to earn higher wages, there's a few billion more people in other countries waiting for the opportunity to take their place on the production lines.

    Posted Nov-4-2010 By 

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    • Comment of user 'Eva_Destruction' has been deleted by author (after account deletion)!
    • Why don't you tell us what you import so we can be sure not to buy you pos.

      Posted Nov-5-2010 By 

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    • Because all of my competitors make their products overseas. The customers demand low prices and for commodity products, there is no other way to compete.

      The reality of the world is that if something is a commodity product, it's going to be made overseas until the shipping and import expenses even out the cheaper labor costs.

      Next time you buy as pair of sneakers for $10, be thankful for people like me.

      Posted Nov-5-2010 By 

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    • I make medical products and I hope you never need any of them.

      Posted Nov-5-2010 By 

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    • Many people don't understand the cost of doing business in North America. It's more than just a few dollars more. I'm in the service industry and can't relocate. At least I don't have to pay more than minimum wage. Although the government has cranked minimum wage to $10.25/hr. The payroll taxes are brutal and so are the corporate taxes. Electricity and land taxes in Ontario are insane and so is insurance. If I could relocate to China, I would.

      Posted Nov-5-2010 By 

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  • send them a few million mexicans

    Posted Nov-7-2010 By 

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