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Closing the gap

Published on Friday, 27 Dec 2013
A worker at an empty shoe factory in Wenzhou, in Zhejiang province, points to China’s declining manufacturing edge amid tough competition with neighbouring low-cost labour markets.
Photo: Reuters
Bert Colijn (left) and Gad Levanon
Photo: KY Cheng

Rising mainland pay is forcing many firms to look elsewhere

As China continues to experience wage increases of around 20 per cent year on year, its reputation as the “world’s factory” for providing low-cost manufacturing for companies across the globe is at risk.

“In China, labour markets remain tight, and that’s something that is happening even with GDP growth slowing,” says Gad Levanon, director of macroeconomic research for think tank The Conference Board. “We expect compensation growth to continue very rapidly.”

On the demand side, while China’s economic growth is expected to slow significantly in the medium term, the sheer size of its economy will mean labour will be in short supply for years to come, Levanon adds.

Meanwhile, the working population will continue to shrink as more people reach retirement age and as a result of the country’s one-child policy. Although the Chinese government said in November that families would soon be allowed to have two children if one parent is an only child, the talent shortage is likely to remain for the foreseeable future.

“If they change the one-child policy, in 20 years, the situation will reverse itself,” Levanon says.

Carlos Lo Wing-hung, professor and head of Polytechnic University’s department of management and marketing, says that because wages are expected to continue to rise in China, many companies that have manufacturing operations there – or are sourcing their products from the mainland – are reviewing their available options in the region.

“There’s also a disparity in labour costs throughout China. Inland towns and cities are still considered affordable compared with Southeast Asia. The problem for many companies choosing to stay in China is whether they’ll have to deal with the same problem again a few years down the road,” Lo says.

The results of a study by HR consultancy HRBS found that in the past five years, rising wages and a strengthening yuan have narrowed the cost gap between China and other developing Asian economies.

The salaries of experienced semi-skilled workers in China have risen faster than those of their counterparts in Southeast Asia. The cost for experienced semi-skilled workers in China’s first-tier cities – such as Beijing, Shanghai, Guangzhou and Shenzhen – was ranked sixth in Asia. This has driven low-cost manufacturing to the country’s third-tier cities – such as Changshu and Foshan – and to neighbouring countries.

Elaine Ng, managing principal at HRBS, says that multinational corporations are increasingly sourcing from lower-cost countries such as Bangladesh, India, Cambodia and Vietnam. Manufacturers are also exploring the Philippines, Indonesia, Thailand and even Malaysia.

Besides lowering costs, companies are seeking to spread their risks across the region. Ng notes that Japanese companies have been particularly keen on spreading operations around Asia, citing sporadic political tensions between Japan and China.

She adds that, of industries that are moving out of China, garment firms favour Bangladesh, India, Cambodia and Vietnam to take advantage of still comparatively lower wages. Electronics manufacturing has tended to move to the Philippines and Malaysia, while carmakers go for Thailand.

For China, Ng says, the only way is to move up the manufacturing value chain by producing higher-quality products and upgrading production technology. This is a trend which will be facilitated by rising education standards.

Mainland industries expected to benefit from this trend include technology, pharmaceuticals, medical devices, chemicals, aviation and automobiles, Ng says.

She adds that as factories continue their evolution away from labour-intensive processes and head towards higher levels of automation, demand for blue-collar workers will shift from those with assembly work experience towards those with technical skills involving manufacturing machinery and processes.

Bosses in the manufacturing sector will also face competition for workers from the services industry, which is rapidly expanding across major cities in China, Ng says.

“We are seeing many retail stores – especially for luxury branded goods – which have sprung up not just in major cities, but are also spreading into the second- and third-tier cities. Because the service industry is competing with manufacturers for workers, manufacturers in China who want to stay in the supply chain network are moving from east to west and from south to north,” she says.

Elsewhere in Asia, wages are also expected to rise more rapidly than those in advanced markets such as the EU and the US, Levanon says, although at different paces and driven by different factors. Inflation, which is relatively under control in China thanks to its strict capital controls, will be a major driver in countries such as India and Indonesia. These countries have seen drastic depreciations in the value of their currencies following the global financial crisis.

There are no shortages of workers in countries such as India, Indonesia, Pakistan, Bangladesh, Vietnam and Malaysia. Amid steady population growth, the influx of new generations of workers entering the job market are expected to outstrip those exiting. But even in these countries, there will still be a shortage of talent, due to a lack of workers with the right skills and education, Levanon says.

“Even in countries such as Myanmar, where demand for talent is relatively low, they are still struggling with finding the right people, because the skill base is just not large enough,” he says.

In contrast, he adds, the size of Japan’s workforce is shrinking fast. A similar situation is expected to face Hong Kong, Singapore and even Thailand in coming years.

Bert Colijn, a labour market economist at The Conference Board, says that as manufacturing moves away from China to lower-cost countries, companies need to be aware of the labour regulations in their new host countries.

He cites Bangladesh as an example, where worker welfare in its low-cost textile manufacturing industry has been a hot issue.

“We are seeing huge differences among countries in Asia that make it difficult to characterise labour regulations in general,” Colijn says. “Therefore, for companies, it’s important to keep in mind which country you are operating in.”

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