The SCMP shows that chasing cheap labor may be too expensive
A pair of recent articles in the South China Morning Post offer some more perspective on the much-predicted exodus of manufacturing from the Pearl River Delta and why, for the most part, it just ain’t gonna happen. (a paid subscription is required to access SCMP articles, but a 14-day free trial is available).
One article, Minimum wage rise doesn’t worry all China plants, is mainly about how minimum wage hikes don’t affect those who aren’t complying with the minimum wage law. It also also discusses the how two manufacturing groups well established in the PRD, garments and toys, are likely to react to rising labor costs.
First, according to the article, garment makers (40% labor content) gotta hit the highway…
Willy Lin Sun-mo, vice-chairman of the Hong Kong Textile Council, said: ‘Now, setting up a factory 500km from Hong Kong is okay, but several years ago, most Hong Kong factories were in a 100km radius from Hong Kong. The only way is to move further away. There is nothing much we can do. Rules are rules, so Hong Kong manufacturers have to pay.’
Hong Kong garment factories had difficulty paying ever increasing wages, as labour accounted for 40 per cent of the cost of a garment, he said. ‘If all garment factories have to raise salaries by double digits overnight, how can they compete?’
but toy makers (20% labor content) ain’t going nowhere…
A Hong Kong toy executive said he knew of a handful of toy factories that moved from Dongguan to more remote cities in Guangdong this year, namely Heyuan, Shaoguan and Qingyuan.
Toys are among Hong Kong’s biggest export industries and most toy factories are in Guangdong.
The impact of the minimum wage increase had not been too severe on Hong Kong’s toy industry, said the executive. Labour accounted for 20 per cent of the cost of making a toy, he estimated.
The toy industry was informed of the wage rise months ago, so they factored it into the cost of their products, said the executive. ‘We will raise the prices of our toys by about 5 per cent. Customers have to accept the higher prices because all toy factories in China are affected.’ [Note from DJL: I wonder how much of that 5% increase could be offset by gaining efficiencies in the manufacturing processes.]
The second article, Factories likely to stay in Pearl River Delta, shows why moving factories out of the PRD just to chase cheaper labor probably doesn’t make economic sense. Among the economists cited are Paul Krugman.
US economics Nobel Prize winner Paul Krugman, in his book Geography and Trade, says it is often uneconomical to move manufacturing from costly but established manufacturing coastal areas to lower-cost distant locations.
It is more profitable for manufacturers to keep factories in places like the Pearl River Delta than to relocate to cheaper but more remote places. The reason: convenient and cheap transport infrastructure, a large pool of migrant workers and a network of small to medium-sized manufacturers. Thus, the cost of setting up a new factory in Xinjiang is higher than keeping one in southern China.
It goes on to to quote Willy Lin Sun-mo, as did the previous article. This time, however, it quotes him to illustrate that even for labor intensive industries that need to move, moving out to chase cheap labor may incur hidden or at least less obvious costs:
Knitwear maker Willy Lin Sun-mo, chairman of the Textile Council of Hong Kong said: “A sophisticated supply chain takes decades to develop, just like the Pearl River Delta, which took some 25 years to come to what it is today.”
Lin set up a knitwear plant in Jiangxi province about 18 months ago to take advantage of the labour market but said he had managed to employ only half the 3,000 staff needed. “Labour shortage is not just a problem in Guangdong,” he said. “Insufficient labourers mean higher wages, a big threat to manufacturers.”
Danny Lau Tat-pong, chairman of the Hong Kong Small and Medium Enterprises Association, said relocation made sense theoretically but doubted that many firms would make such a costly move…
Yes, labor costs have increased, and it will mean readjustments for many factories. I’m still guessing, though, that relatively few will move from the PRD’s mature manufacturing infrastructure to “cheaper” places with questionable transportation facilities and without the extensive network of integrated parts, materials and service providers to which they are accustomed.
By the way, a related SinoFactory posts from the past may be of interest: Coming to China, but NOT for cheap labor!