The End of Cheap Labor in China

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Courtesy of TIME.

On May 25, U.S. businessman Charles Hubbs made the short trek to Hong Kong  from his office just outside Guangzhou, a city in Guangdong province in  southeastern China that is known for good reason as the manufacturing workshop  of the world. For the 64-year-old native of Louisiana, it was a trip that may  have marked the beginning of the end of his successful 22-year run as a  China-based exporter of medical supplies.

Hubbs was going to listen to a pitch from the American ambassador in  Cambodia, Carol Rodley, and the president of the American Chamber of Commerce in  Phnom Penh. Their aim was simple: to get foreign investors, particularly those  already with operations in China, to consider setting up shop in Cambodia. Hubbs  was all ears. To hear him tell it, the price of labor is on the brink of making  his firm, Guangzhou Fortunique, which supplies some of the U.S.’s biggest health  care companies, uncompetitive. “We’ve seen our wage costs in China go up nearly  50% in the last two years alone,” he says. “It’s harder to keep workers on now,  and it’s more expensive to attract new ones. It’s gotten to the point where I’m  actively looking for alternatives. I think I’ll be out of here entirely in a  couple of years.”(See “As China Economy Grows, So Does Labor  Unrest.”)

He is not alone. In what is supposed to be a land of unlimited cheap labor — a nation of 1.3 billion people, whose extraordinary 20-year economic rise has  been built first and foremost on the backs of low-priced workers — the game has  changed. In the past decade, according to Helen Qiao, chief economist for  Goldman Sachs in Hong Kong, real wages for manufacturing workers in China have  grown nearly 12% per year. That’s the result of an economy that’s been growing  by double digits annually for two decades, fueled domestically by a frenzied  infrastructure and housing build-out — one that, for now anyway, continues apace — combined with what was for a time an almost unquenchable thirst for Chinese  exports in the developed world. Add to that the fact that in the five largest  manufacturing provinces, the Chinese government — worried about an ever widening  gap between rich and poor — has raised the minimum wage 14% to 21% in the past  year. To Harley Seyedin, president of the American Chamber of Commerce in South  China, the conclusion is inescapable: “The era of cheap labor in China is  over.”

Mind you, that doesn’t mean that labor costs in China, even in the most  expensive parts of the country like Guangdong province, are higher than in most  other places, particularly in the developed world. They aren’t. The average  manufacturing wage in China is still only about $3.10 an hour, (compared with  $22.30 in the U.S.), though in the eastern part of the country, it’s up to 50%  more than that. The hourly cost advantage, while still significant, is shrinking  rapidly. For the vast majority of companies, whether small, medium-size or huge  multinationals, the decision about where to produce a product is always driven  by multiple factors, of which the cost of labor is but one. “For lots of  companies over the past two decades, the disparity was such that labor costs  often drove the decision,” says economist Daniel Rosen, the China director and  principal of the Rhodium Group, a a New York City–based consulting firm. “Now,  increasingly, that’s no longer the case.”(See portraits of Chinese workers.)

The ripple effects of this new reality are enormous, and they flow globally.  Start with China itself. The push for higher wages, constrained for so many  years, sparked a series of high-profile labor protests last year. (Worker  discontent was also reflected by 14 suicides at Foxconn, the large manufacturer  that produces goods like the iPad.) But higher wages have also improved things  in China’s western region, where the government has long tried to encourage  investment. In the past year, many multinational and Chinese companies have  expanded or relocated inland, where labor is still cheap.

From China’s perspective, that’s exactly the sort of trade-off it seeks. As  Andy Rothman, chief China macro strategist at CLSA Securities in Shanghai, says,  “People in Sichuan or Henan or wherever can stay closer to home and find a  good-paying job” instead of having to flood east each year to live in a company  dormitory far away from their families. “How is this a bad thing?”

Read more: http://www.time.com/time/magazine/article/0,9171,2078121,00.html#ixzz1PxkcIUQZ

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