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The era of cheap labor in China is coming to a close

As China has risen to become an economic and engineering powerhouse, the days of Western nations using Chinese peasants for cheap, disposable labor appear to be coming to a close.  The struggles of Taiwanese conglomerate Hon Hai Precision Industry Comp. Ltd. (TPE:2317) and its Chinese manufacturing subsidiary Foxconn -- and the woes they've caused the likes of Apple, Inc. (AAPL) and Sony Corp. (TYO:6758) (or some would argue the woes Apple, et al. have caused them) -- are well documented.

Now Microsoft Corp.'s (MSFTsoon-to-be-rebranded/renamed Nokia Devices unit has become the latest to experience these issues.  Workers accuse Microsoft of trying to force them to sign a new contract with worse terms after it took over Nokia Oyj.'s (HEX:NOK1V) phone unit.  Microsoft allegedly tried to fire some of the employees after they complained and refused to work until better terms were offered.  

But the firing attempts quickly backfired after virtually the entire workforce united in solidarity, going on strike.  This week picketers displayed signs, including one that read "If you want to change the marriage, you have to first offer compensation," according to Reuters.

China protest
Guards stand watch during a protest at Nokia's factory this week. [Image Source: Reuters]

An employee whose surname is Wang told Reuters, "They have no grounds for firing us.  We've already chosen this road to walk on, so we'll stick with it."

Nokia spokesperson Doug Dawson admitted that Nokia and Microsot terminated 59 employees who refused to work out of a workforce of approximately 5,000, but denied reports of mass firings.  He expressed hope that an agreement with the workers would be reached, stating, "[We met with workers this week] to explain the situation and dispel the many rumors and false statements."

Workers, though, said that statement was a lie, telling Reuters, "The company didn't send any representative to negotiate with us; the labour union isn't doing anything either."

The Nokia factory is located in southern China's Guangdong, a popular manufacturing location.  Nokia's factory is located in the city of Dongguan.  The city of Shenzhen -- where Apple's products are produced -- is just an hour away.

Source: Reuters

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By FITCamaro on 11/22/2013 1:49:40 PM , Rating: 5
More manufacturing will move to Indonesia and other places.

RE: Result?
By Motoman on 11/22/2013 2:03:13 PM , Rating: 4
This is correct. Ultimately there is always somewhere else where labor is cheap enough to justify the wholesale moving of a plant. Which is how manufacturing left the US in the first place, aided greatly by the unions.

One would like to think that at some point, prosperity would come to people everywhere to the point where there were no more poor peasant-folk to take advantage of. But one would likely be wrong.

RE: Result?
By ClownPuncher on 11/22/2013 2:19:29 PM , Rating: 2
You can move a plant somewhat easily. Moving supply chain, getting in backroom political deals, setting up infrastructure and training a workforce aren't quite as easy. Especially in places that are economically and politically unstable.

RE: Result?
By Motoman on 11/22/2013 2:43:41 PM , Rating: 2
All true. Which is why the disparity in labor cost has to be pretty big to make it worth the effort.

RE: Result?
By ritualm on 11/22/2013 2:51:53 PM , Rating: 3
That's fine, because many second- and third-world countries condone and sometimes outright encourage bribery to get something done.

An oppressive state is a prime waterfront business opportunity for corporations.

RE: Result?
By ClownPuncher on 11/22/2013 3:27:43 PM , Rating: 2
For short periods of time. In the long term, it's completely unsustainable

RE: Result?
By Solandri on 11/23/2013 5:41:06 AM , Rating: 4
Well the high profit margin is unsustainable. But the increased productivity is sustainable.

In fact that's how capitalism spreads and creates wealth, and raises the standard of living. It sees unproductive people as an inefficiency, and seeks to correct it by sending manufacturing jobs and dollars their way, which makes the people more productive and increases their efficiency and wealth.

Chinese labor is getting too expensive for mass production, but they now have the capability to create a flourishing self-perpetuating economy based on domestic production and consumption. They now have factories, utilities, and skilled workforce, and can make the equipment and infrastructure they need to pull themselves up into first world nation status. Just like happened in the past with Korea, Taiwan, and Japan. And just like will happen to Indonesia, Malaysia, Thailand, etc (and hopefully Africa at some point).

The lesson the U.S. needs to take to heart from all this is that this process can be short-circuited if the wealth is not spread to include the workers. That's a trap many Central and South American countries fell into, with most of the wealth concentrated into a small upper class, resulting in the national economy stalling just shy of first world status. Ford accidentally discovered this in the early 1900s. He was desperately short of workers, so he offered wages which were crazy high for the time. Rather than hurt his business, it actually helped. His workers could afford to buy the cars they were making for Ford, and as a result his sales exploded to become many times greater than if only the upper class had been able to buy his cars.

In other words, if you allow the wealth to concentrate in the upper class, they end up receiving a greater percentage of the country's overall income. But if you encourage a healthy and prosperous middle class, the upper class' raw income is greater even though it's a smaller percentage of the country's income. Not paying workers a salary commensurate with their productivity is an economic inefficiency.

RE: Result?
By FITCamaro on 11/25/2013 7:34:10 AM , Rating: 2
Yeah and capitalism is the best way to do that. America is for all real purposes, no longer a capitalist nation. There is no product on the shelves that doesn't have multiple government regulations mandating something about it. You can no longer build a product that people want to buy. You can only build the products the government lets you build that the people accept.

RE: Result?
By Paj on 11/25/2013 8:26:30 AM , Rating: 2
It certainly is a capitalist nation. Just because you have government regulating certain production and environmental concerns, this isn't the same thing as a planned economy.

RE: Result?
By purerice on 11/24/2013 12:57:52 PM , Rating: 2
An oppressive state is a prime waterfront business opportunity for corporations.

Oh yes, and North Korea is the Mecca of Capitalism™ right?

Corporations exist to serve a market. If the market of Walmart customers ever decided to pay 10% more to buy American-made goods, Walmart would switch in a heartbeat. The problem is that the typical Walmart customer is too greedy to spend 10% more to help out their fellow countryman get a job.

Of course YOU yourself are not one of those greedy penny pinching Walmart-shopping customers taking part in the oppression, right?

RE: Result?
By rountad on 11/26/2013 11:20:04 AM , Rating: 2
People making a different choice than you do are clearly wrong. You are right to castigate them for their failings.

RE: Result?
By JasonMick on 11/22/2013 3:44:15 PM , Rating: 2
True, but in practice the "next frontiers of cheap labor" -- a la Indonesia or Africa -- aren't necessarily as affordable as you might think.

While China's government is a bit oppressive, it maintains control of the population and does not tolerate abuse of foreign businesses.

Indonesia has growing terrorist problems:

It also has a much higher crime rate in China:

...and while Chinese medical care isn't great it's better than Indonesia's. All of this makes convincing Americans to work as management in Indonesia plants difficult.

The same thing goes for Africa where warlords regularly storm in and seize control of foreign assets.

There's a reason why U.S. business are reluctant to leave China, despite all these strikes, rising costs, and bad press. It's relatively safe -- safer than India even (and perhaps comparable with Brazil.

You're right in some sense. There are alternatives once India/Brazil/China become too expensive for assembly labor. But these alternatives are much less attractive.

It's going to significantly add to the costs as you will have to deal with much higher crime rates and pay employees more to risk their lives working in more dangerous regions.

Notice so far primarily low-cost product (e.g. clothes) are made in Indonesia. That's because businesses with premium product (e.g. electronics) don't want to risk that much capital on a much more volatile location.

U.S. enterprise learned from the examples Cuba and Venezuela showed us over the years that you can leverage such locations, but don't get surprised if after a sudden election/regime change your plants get seized by the new government.

RE: Result?
By ClownPuncher on 11/22/2013 3:50:03 PM , Rating: 2
The US is a great alternative once those big three become too expensive to import.

RE: Result?
By Nortel on 11/22/2013 3:57:08 PM , Rating: 2
Unless you want to pay at least 2x more for a phone assembled in the USA, it wont happen. Unions will always push the price up.

RE: Result?
By BladeVenom on 11/22/2013 4:44:56 PM , Rating: 2
Moto X is assembled in the USA. It doesn't cost that much more.

RE: Result?
By althaz on 11/24/2013 8:30:40 PM , Rating: 1
Considering it's really a lower-midrange phone, I would say it costs a hell of a lot more.

RE: Result?
By JasonMick on 11/22/2013 4:45:33 PM , Rating: 3
Unless you want to pay at least 2x more for a phone assembled in the USA, it wont happen. Unions will always push the price up.
You may be correct... unions do raise employee wages.

But the notion that higher wages for manufacturing employees is a "bad thing" is based on a couple o notions...

A) You value cheap consumption over better worker wages.
B) There's someone that will do the labor for cheaper.

For a long time now, it is true, many people believed in the U.S. believed both of these points, hence why so much manufacturing got shipped to China/India/Mexico/Brazil.

But the problem is that even if you don't care about the workers and would gladly pay them as little as possible to get the cheapest price possible, your plan is based on the belief that employees in other countries won't unionize and that the expected standard of living will stay low.

Both assumptions are now being seen to be flat out wrong.

Don't get me wrong... as bad as it might have been for some displaced U.S. workers, low-cost manufacturing has been a great thing for the Chinese working class (i.e. "peasants") as it allowed them to leave behind back-breaking, dangerous agriculture work for respectively safer and less physically taxing, albeit tedious assembly tasks. But it isn't like these are robots or something... as prosperity has risen, China's youth is increasingly gaining professional experience and the migrant class is in turn demanding higher wages as these professionals drive up the cost of wages.

American manufacturers don't want to give it to them... so the Chinese are looking to force their hands (as this story illustrates).

I'm reminded of the "locusts" quote from Independence Day... eventually you'll run out of worlds to suck dry.

RE: Result?
By Monkey's Uncle on 11/24/2013 7:30:35 PM , Rating: 2
There's plenty of third world, poverty-stricken countries out there for fortune 500 & larger corporations to exploit. As long as there is poverty and hunger in the world there will be fertile labor crops in which to plop down manufacturing companies. And the larger the labor field, the longer big business can exploit them. China is a very large labor fields numbering in the billions of warm bodies to exploit. Thus they have been on the forefront of cheap manufacturing services for large corporations. That cheap labor pool is shrinking as the Chinese grow in their technical knowledge and are thus becoming less attractive for cheap manufacturing. It won't be long before places with high poverty like Africa starts becoming popular.

There are a couple of ways to look at this. The less humane view is that the poor in these places are used no better than slave labor. However as appalling the working conditions are, these people ARE eating, being clothed, being housed and receiving at the minimum rudimentary education.

The more practical view, and one I have seen several times over the last 5 decades is that these previously poverty stricken countries start getting an in-surge of money as these corporations open or spin off new industries. New industries are opened and yes, while they mercilessly exploit the populace, the living conditions does rise in comparison to utter utter poverty, homelessness and starvation that existed before the industrialization appeared. After a few decades this rise in living conditions continues as the populace becomes better educated, housed and fed until it comes to the point where they become an major economic player in their own right.

This has happened before: Look at post-war Japan, Korea, Taiwan and yes, China were all dirt poor and downbeaten until they went through this industrialization cycle. Now look at them. All of these countries are today major players in the world economy and carry huge amounts of weight.

RE: Result?
By ClownPuncher on 11/22/2013 6:57:24 PM , Rating: 2
Assembly work is mostly non union for electronics. Also, even if it were union labor, it's nowhere near 2x the cost. 5-10% tops.

Unfortunately, many Americans believe that propaganda you posted.

RE: Result?
RE: Result?
By Murloc on 11/22/2013 4:04:16 PM , Rating: 2
yeah European companies mostly delocalize to eastern Europe.
It's a middle ground. It's too pricey to make clothes and bricks of course, but for cars and industrial machines it's fine.

RE: Result?
By StormyKnight on 11/22/13, Rating: 0
RE: Result?
By Belegost on 11/22/2013 2:11:32 PM , Rating: 2
Also, more automation, the capital costs of automating a plant become less of a barrier when strikes threaten supply chains.

RE: Result?
By ClownPuncher on 11/22/2013 2:16:51 PM , Rating: 5
Some will. Infrastructure is still needed and expensive to build up. In the end, the US still has some of the best manufacturing infrastructure out there.

RE: Result?
By nafhan on 11/22/2013 3:21:58 PM , Rating: 2
Yep. And as automation becomes more widespread, labor costs become less of a concern.

I think we're near the end of the cycle of manufacturing moving to places with cheap labor. Once we reach the point where it's clear that robots are cheaper than people (any people), that cycle will definitely be broken.

RE: Result?
By Flunk on 11/22/2013 2:40:52 PM , Rating: 2
And after that they'll automate all the simple labour jobs and run factories that only need 1/20th the employees.

RE: Result?
By Monkey's Uncle on 11/24/2013 11:11:11 AM , Rating: 1
No, they won't. Labor is way cheaper to run than machines.

RE: Result?
By Monkey's Uncle on 11/24/2013 11:09:31 AM , Rating: 2
Exactly what I would have said but you said it first.

Never underestimate corporate ingenuity when it comes to finding cheap slave labor. And there are plenty of companies out there more than happy to supply it.

I'm just surprised some of these guys haven't set up shop in some of these African countries where everybody is starving.

By Argon18 on 11/22/2013 4:12:37 PM , Rating: 1
"the days of Western nations using Chinese peasants for cheap, disposable labor"

What is this load of crap? "Western nations" do not use Chinese people (or "peasants") for cheap labor. Chinese companies do. Western companies look to Chinese companies to manufacture the products. It is the Chinese companies who are taking advantage of their own people. Or more accurately, it is the Chinese government, as China is a Communist nation.

If anything, this is a shining example of why Communism sucks and it doesn't work. People slaving for long hours and little pay is a common theme in any Communist nation. Trying to twist the evils of Communism into anti-western propaganda is dishonest and disgusting.

RE: nonsense
By Penti on 11/22/2013 6:47:52 PM , Rating: 2
Actually they do, just hear what companies which own their own plants has to say about hiring people. They wouldn't know how to hire people if they had to do more than print an ad in a rural paper. Nokia's plant fall into that category, which now becomes Microsoft's plant. It's also pretty much where the only engineers is based in that organization today. So if they don't treat them okay then they will end up with nothing like most of Microsoft's acquisitions. It's often western or foreign companies that set up dormitories for peasant and other migrant workers rather than real housing.

Plus companies like Foxconn/Hon Hai, Pegatron, Compal, Quanta, Inventec, Wistron and others are Taiwanese and directly responsible for hiring and employing millions in mainland China. Just as the other contract manufacturers are mainly international companies based outside China.

The owners are responsible. Many plants run entirely without local partners. They pay far less then reasonable wages when they set up shop in Eastern Europe too, and the parts of Europe which doesn't belong to the EU often has far less wages than what is payed in China.

RE: nonsense
By 1prophet on 11/22/2013 7:43:25 PM , Rating: 2
Yeah I guess in your world the pimp is responsible for the prostitute and her situation not the John.

RE: nonsense
By Strunf on 11/25/2013 7:55:29 AM , Rating: 2
If anything, this is a shining example of why Communism sucks and it doesn't work. People slaving for long hours and little pay is a common theme in any Communist nation.

The same can be said about Capitalism... the person with the lowest salary in company probably doesn't make 1/1000 of the one with the highest salary.

About damn time
By coburn_c on 11/22/2013 2:20:29 PM , Rating: 2
Good for China, it's about time we outsource our labour practices to them as well.

RE: About damn time
By StormyKnight on 11/22/2013 10:34:11 PM , Rating: 3
We should outsource the SEIU, UAW and the Teamsters too...

By piroroadkill on 11/22/2013 3:42:38 PM , Rating: 2
Good for them. I'm fed up with the low prices of goods from China, and the terrible labour practices.

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