Manufacture sector outlook from soaring wage

Manufacture sector outlook from soaring wage

China is the world’s largest manufacturing power. The same as China machinery industry. Its output of televisions, smartphones, steel pipes and other things you can drop on your foot surpassed America’s in 2010. China now accounts for a fifth of global manufacturing. Its factories have made so much, so cheaply that they have curbed inflation in many of its trading partners. But the era of cheap China may be drawing to a close.
Costs are soaring, starting in the coastal provinces where factories have historically clustered (see map). Increases in land prices, environmental and safety regulations and taxes all play a part. The biggest factor, though, is labour.
On March 5th Standard Chartered, an investment bank, released a survey of over 200 Hong Kong-based manufacturers operating in the Pearl River Delta. It found that wages have already risen by 10% this year. Foxconn, a Taiwanese contract manufacturer that makes Apple’s iPads (and much more besides) in Shenzhen, put up salaries by 16-25% last month.
“It’s not cheap like it used to be,” laments Dale Weathington of Kolcraft, an American firm that uses contract manufacturers to make prams in southern China. Labour costs have surged by 20% a year for the past four years, he grumbles. China’s coastal provinces are losing their power to suck workers out of the hinterland. These migrant workers often go home during the Chinese New Year break. In previous years 95% of Mr Weathington’s staff returned. This year only 85% did.
Brian Noll of PPC, which makes connectors for televisions, says his firm seriously considered moving its operations to Vietnam. Labour was cheaper there, but Vietnam lacked reliable suppliers of services such as nickel plating, heat treatment and special stamping. In the end, PPC decided not to leave China. Instead, it is automating more processes in its factory near Shanghai, replacing some (but not all) workers with machines.
Labour costs are often 30% lower in countries other than China, says John Rice, GE’s vice chairman, but this is typically more than offset by other problems, especially the lack of a reliable supply chain. GE did open a new plant in Vietnam to make wind turbines, but Mr Rice insists that talent was the lure, not cheap labour. Thanks to a big government shipyard nearby, his plant was able to hire world-class welders. The manufacturer in China does offord to do so. Except in commodity businesses, “competence will always trump cost,” he says.