“Made in China” is Cheap No More
March 16th, 2008
Submitted By: Simone Michel
South China was once known as the world’s factory floor. Plants used to spring up like mushrooms and seas of workers would wait in front of the gates in hope of being the lucky one to get a job. Lately, this picture has started to change. Many of the big gates remain closed due to rising costs and shifts in Chinese government policy, knocking hundreds of smaller factories out of business. Some of the factories that are still in Guangdong province, watching how their profit margins disappear, are considering moving to lower-cost countries such as Vietnam. According to this 1,000 shoe factories closed in 2007.
Many reasons come together: Companies are losing money because of the rising value of China’s currency, making it more expensive compared to the US Dollar. Furthermore, raw material prices ballooned and not the full percentage of this price increase could be passed on to customers. Tax shields for foreign companies were abolished. Inflation returned to China last year as well, letting cost of labor rise faster than productivity. As a rule of thumb, foreign managers in Shanghai have to raise wages by 10 percent every year, otherwise their employees give notice.
But rising cost is not the only reason factories have gone bankrupt. On one hand, workers can now find more jobs elsewhere than ever before and South China is experiencing a labor shortage. Furthermore, the workers that can be found are unskilled. On the other hand, China’s government is making it harder on these factories. After encouraging cheap manufacturing for more than a decade, the regime wants to push investment toward high-tech. The goal is to have more sophisticated factories with higher-wage jobs. China is following Japan and Taiwan, countries who have both started out at the low-end and climbed up the manufacturing ladder to the high-tech end.
Furthermore, the government changed labor policies at the beginning of this year. Chinese workers are starting to get aware of the working conditions and are now demanding higher wages, overtime pay and improved safety. The second broadcast of NPR’s China series highlights nicely how the new law is requiring businesses to give workers written contracts and pay compensation if they’re fired.
With more and more workers pressing their rights against their employers, a supplier’s market of labor and rising costs, the factories are forced to come up with new ideas. Do you think the factories in Guangdong province have to shut down because of all these external influences or do you think it’s their own responsibility because the concept of lean production has never played a role in China’s past?
Entry Filed under: Pre-Departure, Shenzhen, China, Guangzhou, Hong Kong
6 Comments Add your own
1. Sin-Yaw Wang | March 16th, 2008 at 8:53 pm
All those factors are true, but it is still early to predict the demise of China’s manufacturing dynasty.
They have at least 13 billions people and many of them live on the west region where labors are abundant and cheap. Just like manufacturing moved from US to Japan to Taiwan and Hong Kong. We will see a wave of migration inland, following the massive transportation build-up. In the next decade, China’s west region will replace GuangDong and ShangHai regions. Let’s wait for Africa’s turn later.
2. Nicholas Dominguez | March 17th, 2008 at 2:28 pm
It is strange to think that China is running out of labor. I think Sin-Yaw is right the natural progression will be to move inland. But at the same time the wave of factories that will push west will bring with it a ripple of labor rights and high-technology jobs. With the east coast of China leading the trend it appears that China doesn’t want to take all the manufacturing jobs away from the rest of the world, contrary to many American perceptions. It is a natural sequence of stages to go from manufacturing to service to high-tech jobs. But the world has never seen this kind of pace before. China is showing tremendous strength to be able to cope with change this fast.
3. Chris Carr | March 17th, 2008 at 4:13 pm
When in China a few weeks ago, one of the factory owners I met with agreed that some factories (inefficient ones) in southern China were going belly up. But he went on to note that the vast majority will be fine and said work is unlikely to move inland because of the developed infrastructure that southern China offers. He also noted that 2, 3 and 4 years ago, there was a labor shortage, but now, he has a line of people outside his door trying to get hired and that he is seeing a labor surplus.
4. Glenn Hughes | March 17th, 2008 at 9:42 pm
This is another one of the interesting contradictions we tend to see with regards to China. 1000 factories closing sounds like a huge number, however some factories are experiencing huge labor surpluses. Could it be that China needs to reach an equilibrium by building factories where the work is as opposed to building where its cheap and others have had success in the past? I’m interested to see the effect these new laws will have on the employment situation overseas now that China is producing more law students and expanding its legal system.
5. william jencks | March 18th, 2008 at 12:49 am
This seems like the natural competition backlash to a manufacturing “balloon” in this part of China. Just as every other economic boom of prosperity around the world is followed by a trough of natural selection, China will go through its natural business cycles. These cycles are part of economic nature - while they may force some companies or factories out of business, the ones that remain will have more efficient and usually all-around better situations in the long run. Of course the other effect of this backlash will likely be a migration of truly low cost production to less expensive areas, which will cause more booms followed by dips of local economic prosperity. It’s all a cycle. Every closed door inevitably leads to new opportunity… where is the next one?
6. Chris Kirk | March 18th, 2008 at 3:56 pm
The stand that workers are taking against their employers seems to be following at least in some capacity the history of any industrialized country. As time goes on workers eventually reach the point where they are in a position of demanding better wages better working hours and better treatment from employers. The concept of lean manufacturing making the move into China seems like a reasonable one considering the changes that have occurred here in the United States. The conflicting accounts about labor surplus or shortage make it hard to comment on how this is effecting the trend of factory closures. I really have though from the beginning that the stand for human rights in China would begin at the factory worker level. I am interested in seeing how this plays out in the long run and the ramifications that it has for the future if human right s throughout the country.
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