China’s rising labor costs: will it hurt their competitiveness?

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Patrick Chovanec is a professor at Tsinghua University’s School of Economics and Management in Beijing. I first stumbled upon him when I found a very interesting post of his on what he called “The Nine Nations of China” which broke down China into 9 distinct regions, which I highly recommend you check out. Since then I have checked in with his blog regularly, as well as occasional other articles he does for other publications.

He has an interesting article in China Economic Review regarding the current labor situation in China and the trend to value-added manufacturing vs. simple low-cost manufacturing which I tend to agree with:

The crunch is concentrated almost entirely in the market for more skilled, experienced workers – and it is becoming more acute as manufacturers try to move up the value chain. Virtually all of the high-profile cases where Chinese workers have successfully pressed their demands have involved activities – like automotive or electronics manufacturing – whose skill requirements make qualified employees hard to recruit, expensive to train, and difficult to replace.

That sounds like bad news for Chinese manufacturers; it doesn’t have to be. The day after Hon Hai announced its planned wage increase, the company’s stock price dropped by 5% on fears that it wouldn’t be able to pass those higher costs onto customers. But if investors looked closer, they would see that the company’s success is largely based on an ability to deliver quality and reliability, while ensuring protection of its customers’ proprietary designs and technologies.

Even in simple, comparatively lower cost product categories I have seen examples where companies stuck with, or returned, to Chinese manufacturers whose labor and/or other costs had recently risen. Why? Because while those Chinese manufacturers may have raised prices, their quality, consistency, reliability, and ease of doing business added value to the transaction that outweighed the increase in price. Similarly I’ve seen examples where Chinese factories raised prices simply because they thought they could based on the market conditions widely reported – but failed to improve or even maintain current levels of product quality, etc.

While China still has a large basis of low-value manufacturing, they continue to take a climb up the value ladder. Even in lower value manufacturing, those Chinese factories with a long-term view who cultivate strong working relationships with their clients, adding value and consistency to their product, should continue to enjoy success.

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