China No Longer The Cheap Option
Published January 11, 2013
This article takes a look at the issues at the heart of the Chinese export economy, namely rising salaries and a shrinking labor pool which were once the biggest asset for Chinas factories. The article was written by Silk Road Associates but has also found its way on to the Global Sources website, although the article is brief it has hit the right points.
Chinas youth labor supply has started to decline
It was once popular to talk of Chinas endless supply of cheap labor. Not anymore. Labor supply has shrunk dramatically over the past decade.
Chinas youth demographic is expected to decline by 44 million over the next 10 years, according to the United Nations population projection division. Indeed, the average Chinese national is 35-years-old, compared to the average Cambodian (23 years) and average Bangladeshi (24 years).
The result is massive labor shortages. Officials in the southern Pearl River Delta, for instance, estimate the region suffers a shortfall of 600,000 workers. Or take the example of a major manufacturer of butane lighters who recently remarked to us that in spite of automating part of his factory floor and cutting his employee numbers in half, the average age of his staff has gone from 20-years, to 30-years, and now 50-years, as he struggles to find enough labor.
The situation is especially worse for factories producing low-value goods as they are either unwilling or unable to pay higher wages and it is common to hear of suppliers turning down orders from foreign buyers for fear that they will be unable to attract sufficient staff to fill the order on time.
Chinas wages are rising
Labor shortages have contributed to rising wages. Today, Chinas average manufacturing wage ranges from $200 to $550 (or higher). Moreover, the total monthly salary is likely higher as benefits-ranging from starting bonuses, performance bonuses, and marriage leave-are rising faster than monthly wages.
The result is that Chinas wages are now on par, or significantly higher, than wages in the rest of the region. For instance, monthly wages in Bangladesh are around $55 per month and similarly low in Cambodia ($100) and Vietnam ($100). Only Thailand, among the low-cost producers, has higher wages.
Chinas government has added to the pressure by hiking minimum wages in an effort to reduce income inequality, thus adding to wage cost pressure. Minimum wages have, on average, risen from $59 a month in 2000 to $166 a month in 2011. (The figures are calculated at constant 2011 USD/CNY rates; otherwise the increase in wages would be even larger, from $45 to $166).
To be fair, wage rates do vary across the country. Minimum wages are 30% higher in the coastal provinces ($187) than they are in the western provinces ($143). Wages can even differ between cities with minimum wages in Shenzhen at $234 in 2011 as against $203 in the rest of Guangdong province.
Nonetheless, the pressure on wages is clear and growing, whether because of market forces or government policy.
Chinas currency is appreciating rapidly
The Chinese renminbi has meanwhile appreciated a median 22% against 13 Asian currencies in the past five years, so impacting the countrys competitiveness. The gains are even larger against some of Chinas lowcost competitors. For instance, the Chinese renminbi has appreciated by more than 44% when compared to the currencies of Bangladesh, Cambodia, India, Laos and Vietnam (as the graph shows), a significant move when added to the countrys rising wages costs.
Such rapid appreciation may slow in the coming years, as the trade surplus narrows and the currency nears its fair value. Indeed, while nominal appreciation has been slower than critics in Brussels and Washington might like, real appreciation (adjusting for the countrys relatively faster inflation rate) has been rapid. Nonetheless, the damage is already done and a strong Chinese currency is another reason for the gains made by other low-cost manufacturers.
What does this mean for the automotive industry in China in 2013?
Obviously building cars with the sole purpose of exporting is no longer a cost effective game, the capital tied up waiting for goods to arrive in port is a long process if youre exporting to South America or the Middle East so vehicle exporters may find 2013 a tough year if they dont have strong demand in the Chinese market, and were thinking of commercial vehicle manufacturers and smaller passenger car manufacturers here. On the other hand, China has a growing internal demand to offset potentially weak exports against, but (and theres always one) competition is fierce thanks to 100+ different vehicle manufacturers in the same game and R&D developments are not low. All major manufacturers have partnerships with their rivals or develop the same technology in house which is spread across multiple in house brands, GMs Epsillon II platform is shared between 8 different vehicles, VWs MQB platform went into operation earlier this year and will eventually underpin the companys entire range of vehicles from Audi to VW to Skoda to Seat. But what about Chinese brands? It seems they are still too fractured and taking zero notice of governments plans to consolidate into a world class fighting force. Many manufacturers are overly keen on developing their brand range with new models. Only Chery and Guangzhou Auto have signed a memorandum to work together on R&D, but the extent of this arrangement is not yet known.
To survive in a high cost China, automotive manufacturers are going to have to cut back their expenses and sign technology sharing, platform sharing or joint R&D deals to stay alive. With micro growth rates here to stay, Chinese brands are going to have to push for lower costs and greater sales in export and domestic markets in 2013.