PRD Labor Costs Rising: Run Away, Run Away!!! Not so fast.

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PRD Labor Costs Rising: Run Away, Run Away!!! Not so fast.

Once again, the sky in the PRD seems to be falling.  The breathless reporting about labor issues in China  once again lays bare the western media’s propensity for myopia and mis-focus when it comes to reporting on China.  But this time I can’t just blame the media… lots of people who actually manage facilities here are bitching and moaning about rising labor costs and worker empowerment, describing it as an an existential threat, which for most of us, it is not.

OK, for some at the very low-end of manufacturing in the Pearl River Delta, maybe it will force a change in strategy or location, but not for all.  Actually, not for most.  Sure, if labor accounts for a large portion of your overall manufacturing costs and if there are places (like Vietnam) where manufacturing the same products are done much cheaper, then you are probably in the wrong business and/or the wrong industrial environment.  But for most in this situation, the writing has been on the wall for a long time, and the recent labor cost increases are no shock.   In fact, if you run one of of those facilities, you are probably already operating outside of the Pearl River Delta, or are planning to move.

But for those of us who have not packed up and gone home (or elsewhere) the Pearl River Delta’s shifting  away from ultra-cheap labor– a shift away from the unsustainable, which has been going on for some years now– may be less damaging than conventional wisdom holds,  and may actually be, in some ways, beneficial for our bottom lines.

Some reality checks:

Reality check #1: Rising labor costs may not be that significant to your  business.  You need to asks what percentage of your manufacturing costs are direct labor.  If it’s 10%, and your direct labor costs increase 20%, your overall cost increase is only 2%.  If you were to pass this on, in it’s entirety, to your customer, he would suffer a price  increase of UNDER 2% (since your margin is not included in the calculation).  Seems elementary, but then again, I’ve been talking to lots of people who seem surprised at this type of analysis.

Reality check #2: Whatever the cost increase, you can probably offset this increase, in whole or in part, by reducing waste and  thereby adding value to your products and/or processes.

Reality check #3: If your labor costs are rising, your competitors’ labor costs are rising at the same time.  Assuming that  China is still the only game in town (for most of us it still is– see Reality check #4)  market forces should help to ensure that rising labor costs do not squeeze profits unduly in the long run.  The sky is not falling on you, it’s lowering on everyone.

Reality check #4: Yes, Vietnam (the only serious competition to China) has lower labor costs than China and for some, manufacturing in Vietnam will be more competitive than in China.  But not for everyone .   There are other costs incurred in Vietnam that offset low labor rates, such as lower productivity and the costs associated with a relative lack of infrastructure and maturity in the supply chain.

Reality check #5: Again, with regards to Vietnam.  What will likely happen when so many manufacturers  from Taiwan, Korea, Japan and China make the move to Vietnam and start “consuming” the finite labor supply?  Won’t market forces likely increase the labor rates there?

And the following leaps of faith:

Leap of faith #1: Better compensated workers will be more stable, and more willing to contribute to the company’s bottom line.  These workers will be more likely to see a future in your facility, and will be more likely to learn how to create more value for the company in order to advance themselves.

Leap of faith #2: A better compensated workforce may become more integrated into the local community, having finally shed itself of “migrant” status (a process which has already started).   It is likely that more of  these workers will be renting their own off-site apartments, eating their own food, and enjoying entertainment of their own choosing.  If this happens manufacturers could  spend less on “lifestyle” and concentrate more on improving worker compensation, working environment, and efficient operations.

Leap of faith #3: As workers become more a part of their community, the industrial districts in which they work may see an improvement in their overall environments.  People are less likely to litter where they live, and are more likely to ensure that local governments ensure security in the areas where they live and have put down roots, especially those whose children live there also.  That will improve the working conditions for everyone.

I’m not saying that China will stay the manufacturing king-of-the-hill in perpetuity.  Of course everything changes, in ways both predictable and surprising.  I’m just saying that the there is more— a lot more– to competitive manufacturing than “cheap labor”.

For some more background and commentary, please check out this post on China Law Blog.

For a contrary view (one example of many) check this out.

Comments

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