China’s rising labor costs: will it hurt their competitiveness?
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.
Hong Kong economic growth plunges
Not great news for one of my favorite cities; but, not particularly surprising either given the state of the global economy. I just finished reading an article on the WSJ which describes the current woes that Hong Kong is currently facing.
According to the article, Hong Kong’s economy plunged at its fastest rate in a decade. The economy shrank 7.8% compared with the same time last year and marked the largest decline since the 1998 Financial crisis. Reasons cited for the decline were a decrease in exports, the swine flu, and weak consumption.
From a 3PL perspective, the news it not all the surprising since exports out of Hong Kong have been down substantially. According to a report from the Hong Kong Port Authority, container throughput for the first 4 months of the year is down roughly 20 percent.
Hong Kong Ocean Terminals Video
Anyone importing from Hong Kong or South China knows of the massive operations that are conducted at the ports. This video shows a fairly good overview of the services provided at the port of Hong Kong.
China Ports: Overcapacity on the horizon?
February 24, 2009 by SwizStick
Filed under China, Seafreight
China has been on a seemingly non-ending construction boom in regards to its terminals and ports. As their economy has expanded at dizzying heights over the past decade and Chinese imports grew in volume and importance to the U.S. and European retail markets, demand for new and expanding port cargo capacity has been met with fast and furious expansion. However, with the recent economic downturn and significant drops in export volumes to the U.S. and Europe, China is now faced with the prospect of excess port capacity, a picture that only a few years ago would have seem implausible.
According to “China Container Ports Review 2009,” the excess supply of terminal capacity in China’s container ports is estimated to reach 35million TEU (twenty-equivalent units) by 2010. Of the top 12 container ports, the potential over-capacity is expected to be most severe in Xiamen and Dalian where total capacity in 2010 is 114 percent and 100 percent respectively of the demand in 2008.
“Both the Bohai Rim and the Pearl River Delta/Southeast coastal region could see a significant overcapacity challenge in 2010 as the excess capacity projected is three times more than the actual growth seen in the 2000-2008 period,” said analysts. “With growth slowing considerably for 2009, it is unlikely that demand would grow sufficiently to absorb the excess capacity within the next two years.”
While this is certainly bad news for the short and near-long term, once things pick up again China will be well equipped to deal with the subsequent growth in cargo. One of the advantages China has over some of its lower-cost production rivals (such as Vietnam) is a well developed system of coastal ports and terminal. China has vastly improved their ocean cargo infrastructure at a coastal level that gives them a competitive advantage over others. While they may want to put the breaks on expanding existing port facilities or delaying construction of new ones, they should feel comfortable about their capabilities when the world starts buying again.
