In recent weeks, workers at certain big company operations in China successfully used collective force and tragically unusual methods to increase their wages and benefits. A spate of suicides at Foxconn Technology Group’s Pearl River Delta plant and a strike at Honda Nanhai plant are two high-profile examples of how significant wage hikes can result amidst a climate of lingering concern over the world economy, rise in the yuan’s value and rising costs of consumer goods and production inputs.
In the USA, improved labor conditions evolved over an extended period through a mix of union organizing and collective bargaining, government action, improved macroeconomic conditions and competition for talent. China is poised to accelerate this process to warp speed as it moves from low-cost manufacturer of the world to a higher state of production. The recent labor unrest at Foxconn and Honda may be early though exceptional examples of a transformation of employee relations and conditions.
China’s 2008 Labor Code was one step in this direction, showing government support for fair treatment of and payment terms for employees. For employers that obeyed in practice the minimum wage and other provisions of the new statute, wage increases were significant. Unusual collective action at the Honda facility and elsewhere in China is a newer development. Unions in China are not what they are in the United States or Europe. There is a single national federation of workers in China, responsive to government and CCP leadership. Historically, employers have not seen their union as an adversary but as a working partner. The Honda experience shows what can happen in the absence of a recognized union. Honda workers reportedly received a 35% wage boost to end their strike. Foxconn employees reportedly had a 66% increase to US$400 per month and pledges to upgrade dormitory conditions and other working conditions. The days of US$100 a month production workers may be history, at least in eastern China. Average workers in coastal cities make about US$160 a month, but many employers offer 50% more than that to attract skilled talent. And rates are likely to go up at a greater rate than inflation. Note, however, that these figures are for workers who live in the coastal cities, rather than for migrant workers who are often paid a third or less than what is paid to established city residents.
What does this mean for business? For foreign businesses looking at China as purely a low-cost-labor source, their thinking is already outdated. Vietnam, Indonesia, India and other places offer large pools of lower cost labor. But the infrastructure and supply chain China has built far surpasses those available in these and other lower cost locations. Furthermore, as everywhere, Chinese managers are deftly increasing productivity to keep labor cost in check. One might expect the upward pressure on costs from rising labor rates to produce equivalent price increases to purchasers of Chinese exports, but with productivity gains, Chinese exporters may be able to offset a significant part of the increases.
The more likely takeaway for foreign companies seeking to manufacture or source within China is that the consumer purchasing base of China is increasing rapidly, not only by numbers of people in the middle class but by average disposable incomes. Thinking of China production for Chinese and other Asian consumers (rather than primarily for export) is more justifiable than ever. Rising wage rates should be seen as part of China’s push to increase the purchasing power of its citizens, which is increasingly a driving force behind the ability to sustain double digit growth rates.