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Foxconn workers  (Source: Kotaku)
A growing Chinese economy and a need to tend to manufacturing workers' needs has upped the cost of labor

Years ago, several U.S. manufacturers moved production plants to China in an effort to cut labor costs. However, the age of cheap labor in China is ending as annual wages for manufacturing workers continue to grow, and now, some of the larger plants in China are looking for a new home.

Originally, toys, footwear, and textiles were among the first to go to China decades ago. With 1.3 billion people, cheap labor in China seemed unlimited at the time. But in the last two decades, this began to change as a "frenzied" infrastructure and housing build-out caused a flourishing economy that has grown nearly 12 percent per year. In addition, the Chinese government raised the minimum wage 14 percent to 21 percent this year alone in the five largest manufacturing provinces. 

"We've seen our wage costs in China go up nearly 50 percent in the last two years alone," said Charles Hubbs of Guangzhou Fortunique, which is a medical supply company for some of the United States' largest health care companies. "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."

But where will plants go to next? Countries like India, Laos, Cambodia and Vietnam are a few options for cheap labor. Also, some companies like Wham-O, a toy company, are returning to the U.S. Last year, Wham-O moved 50 percent of its Frisbee and Hula Hoop production to the U.S. According to a study by the Boston Consulting Group (BCG), China's average wage rate was 36 percent of the United States' in 2000, and by the end of 2010, this "gap" shrunk to 48 percent. By 2015, BCG predicts it will be 69 percent. 

"So while the discussion in the short term favors China, the spread is getting down to a smaller and smaller number," said Hal Sirkin, leader of the study and senior partner at BCG. "Increasingly, what you're seeing [in corporate boardrooms] is a discussion not necessarily about closing production in China but about 'Where I will locate my next plant?'"

Production in China will not close entirely for most companies because even though labor costs have increased, they're still cheaper than most other places. Right now, the average manufacturing wage in China is about $3.10 an hour, while it is $22.30 in the United States. In the eastern part of China, it is about 50 percent more than the average $3.10 wage elsewhere. 

China sees this new shift as a good thing. After the Foxconn suicides and high-profile labor protests last year, wages were increased. Also, many multinational and Chinese companies have relocated or even expanded inland for cheap labor, meaning that people in Henan or Sichuan can find jobs closer to home and do not have to live in a company dormitory. Manufacturing workers, like 24-year-old Wu Dingli, say they prefer working closer to home, even if it means making a bit less money than jobs further away. 

"Life is much easier for me here because I'm closer to home," said Dingli, who left an electronics factory job in Dongguan for a electric cable supply job in Chongqing. "I much prefer this job to the old one."

In addition to making life easier for employees, rising wages will give more money to the people, which will in turn increase Chinese consumption. This will benefit Beijing's major trading partners, who can then decrease "drastic imbalances" in global trade. 

While exporters like Hubbs will feel the effect of higher wages, the bottom line is that China is becoming wealthier with a stronger currency, and the time of cheap labor is coming to an end.

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RE: Love it when the numbers don't add up
By killerroach on 6/20/2011 1:21:13 PM , Rating: 2
Where do the first numbers (48%) come from?

More than likely adjusting for productivity.

RE: Love it when the numbers don't add up
By Starcub on 6/20/2011 4:53:45 PM , Rating: 2
More than likely that $22/hr average figure was either drummed up to make it easy to pin the blame on unions (many of which are more representative of employers rather than employees), or it includes the wages made by salaried (non-unionized) factory workers from the junior product engineer to the plant manager.

About seven years ago I left a UAW hourly position in a manufacturing plant of one of the largest defense contractors in the US. The average hourly wage earner at the time was making roughly $12-13/hr. If the average (not median, but average) was over $20, then the relatively small number of salaried factory workers must have been making well north of $30/hr to account for the wage differential.

RE: Love it when the numbers don't add up
By killerroach on 6/20/2011 5:34:31 PM , Rating: 2
Except that doesn't work. $3.10 an hour is 48% of about $6.49, well short of the federal minimum wage.

By Starcub on 6/21/2011 8:43:47 PM , Rating: 2
Except that doesn't work. $3.10 an hour is 48% of about $6.49, well short of the federal minimum wage.

Which is why the figures aren't directly comparable. Note that the 36-48% figure doesn't have any qualifiers attached to it. However the hourly wage figures quoted are only for manufacturing positions. In China there exists a large pool of cheap workers that have no skills at all before entering the workforce. In the US just about everyone has a high school degree and can read a schematic and follow an instruction manual. Not so in China, so it makes more sense to have people doing the repetitive tasks that machines normally do in the US.

If you want to use comparable figures then you should compare wages for similar work levels. People in the US who have similar qualifications and do similar tasks (people who compete with illegal immigrants) only make minimum wage if they are lucky, in which case the figures start to make sense.

In any case, it seems to me that the $22/hr figure incorporates more than just hourly wage earners.

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