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Do Your Exports Really Have a Cost Disadvantage from Chinese Labor?

Posted July 21, 2011 8:00 AM by geanorm

Editor's Note: CR4 would like to thank Bruce Martin of GEA Consulting for contributing this blog entry.

When one views the many foreign companies venturing to China over the years, it can be seen that the due diligence undertaken when relocating a factory across town is frequently more diligent than the move to China.

Recently, a Fortune 500 company that supplies parts to the HVAC industry acquired a Chinese company recently listed on the HK stock exchange. After the acquisition, it was discovered that wages had been reduced by 30% before the IPO in order to make the financial situation look better. The workers had been told that after the IPO their wages would be increased perhaps even higher than before. But then when the Fortune 500 multinational acquired the company it became the expectation, fueled by pre-acquisition management, that the workers' wages would be significantly increased above pre-IPO levels since they would now be working for foreigners.

If a company complying with IPO scrutiny and regulations and passing muster with a Fortune 500 company for whom acquisitions are their bread and butter has such a hidden factor; then what hidden factors may not-so-diligent diligence fail to uncover?

Consider, for example:

  • In a modernized joint-venture factory, the number of laid-off workers may equal 50% or more of the workforce. But those workers are still paid at perhaps 70% of their previous wage. These layoffs with pay are still considered employed workers on the government books. The government has no performance measurement for wage increases, only for the number of persons employed. In return the local government will stifle dissent over low wages and perhaps be lenient on tax collection.
  • Often, wives must be hired along with their husbands. Even though they have no skills and there is no position for them.
  • How much time will workers spend away from productive work for training? And what is the cost of the training itself?
  • In addition to time off for training, the workers get as much as three weeks off for Chinese New Year plus three "golden week" holidays per year.
  • Although a line worker's wage may be low, the line leader's wage may be 5-10x higher. In Thailand, for example, the line leader's wage may be only 10-25% higher. Consequently, the combined average wage in Thailand may be lower than in China.
  • A prominent global HVAC company manufacturing in China has 3 QA inspectors for every 10 line workers.
  • A 13th and 14th month (wage) bonus is often expected.
  • Non-wage benefits can include housing allowances, cell phone allowances, lunch and/or dinner, transportation from a rural area, uniform and even long johns, shampoo, towels, cooking oil, etc.
  • Is there only one Chinese worker doing the work done by one worker in the U.S.? Not necessarily. Many jobs were split into parts in order to simplify the work.
  • How much worker redundancy is needed to account for high turnover and/or lack of experienced workers in the job market?
  • White collar (support) workers' wages are not low. A design or manufacturing engineer's salary in Shanghai has been higher than in Singapore for some time.
  • The person on whose land your factory sits likely has a lifetime work contract for himself and family and even some relatives as part of the agreement to sell the land use rights to the factory.

These are some factors which might be ascertained with some due diligence. There are more that are not so easily identified. You see, the goal is to get your investment (money, skills and technology) - not to give ownership of the China market to foreign companies. For larger companies whose news could affect the queue of other foreign companies lined up to invest in China, there may be fewer hidden factors, but not necessarily. They just have the resources to absorb many of the smaller problems and so don't make them known.

And these are just the surprises associated with wages!!

Did you like this blog entry? Then check out Bruce Martin's previous post about China, Is Low-Cost Chinese Labor Affecting Your U.S. Exports?

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#1

Re: Do Your Exports Really Have a Cost Disadvantage from Chinese Labor?

07/22/2011 8:02 PM

Makes you wonder why companies continue to move their production there, and why the cost of their products still undercuts our domestic product. Lemmings?

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#2

Re: Do Your Exports Really Have a Cost Disadvantage from Chinese Labor?

09/22/2011 11:12 PM

Bruce,

When Ridge Tool Company moved production from Ohio to China they seem to have inspected quality into for instance their bolt cutters. From my perspective as a customer there is no advantage as the price has remained the same, non branded or lesser branded tools are 1/3 of the price.

Now let's say Ridgid decide to reshore, firstly the Chinese now have their (Ridgid's) superior technology (and probably even the original US made dies) and can compete at whatever price point they wish. Secondly, where are Ridgid going to get the toolmakers to replace those that they previously shafted in the US.

Ridgid are certainly not alone, Irwin took over Record Marples of the UK, now Record products still command UK prices but are Chinese in manufacture. GE buys its software from TATA in India, busbar assemblies from Shanghai and drive technology from wherever. The end result is GE Engineers of the current generation are not of anywhere near the calibre of those forced out in the "Downsizing". Cummins buys con rods from India, they fail where UK sourced items did not.

On and On it goes. The US manufacturers look only at increased margin but ignore both the downside risk and their obligation to their existing customers.

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