China's days as a low-cost powerhouse are numbered

Published on Tuesday 5 April 2011 16:01

When millions of workers didn't return to their southern China factory jobs after the Lunar New Year holidays this year, a turning point was reached for foreign manufacturers scraping by with slim profit margins.

Companies were already under pressure from rising raw material costs, restive workers and lower payments for exports because of a stronger Chinese currency. Despite raising wages, labour shortages kept getting worse as workers increasingly refused to take the repetitive and unskilled jobs that helped earn China its reputation as the world's low-cost factory floor.

At one of those factories in an industrial suburb of the southern Chinese city of Guangzhou, a worker uses a sewing machine to stitch together black padding for an orthopaedic foot brace. Across the aisle, others snip loose threads off disposable cushions for operating tables.

Later this year, these jobs will be gone as Guangzhou Fortunique's American owner, Charles Hubbs, moves a large chunk of production to South-east Asia.

"I don't know of any factory in China that can absorb both the raw material prices we have, the labour issues we've been looking at and the renminbi," China's strengthening currency, said Hubbs. The currency is also known as the yuan.

He's joining a wave of export manufacturers, big and small, that are moving from China's coastal manufacturing regions to cheaper inland provinces or out of the country altogether, in a clear sign that southern China's days as a low-cost manufacturing powerhouse are numbered.

Andy Lin, a sales export manager at a small Guangzhou clothing maker, said the owner has opened another factory in Jiangxi province to the north to cope with rising fabric costs and staff shortages.

Workers endure 14-hour shifts, with a 90-minute break, sewing casual shirts destined for Japan, Israel, South Korea and Mexico.

Foxconn Technology Group - the world's biggest contract electronics manufacturer with customers including Apple, Sony and Hewlett-Packard - is planning to gradually cut its workforce of 400,000 in the southern Chinese city of Shenzhen by a quarter and move the bulk of manufacturing inland..

China watchers at Credit Suisse, an investment bank, call the shift an "historical turning point" for China's economy and perhaps the world as the country's role in keeping global inflation low by supplying cheap goods is set to end.

"It may take a decade for China to see its export competitiveness erode, but we have seen the beginning of this happening," the Credit Suisse report said, predicting that salaries for China's estimated 150 million migrant workers would rise 20 to 30 per cent a year for the next three to five years.

That's partly because China's traditional advantage - its vast, cheap pool of workers - is drying up. Economists say it's the result of a rapidly aging population after 40 years of the one-child policy.

Economic growth is "creating more jobs faster than the population is creating new workers", said Stephen Green, an economist at Standard Chartered, in a report titled "Wanted: 25 million workers."

China's blistering growth has also lifted incomes and created more opportunities in poorer inland provinces, which means fewer people leaving for jobs in the richer coastal cities.

Some 30 to 40 per cent of migrant workers didn't return to their factory jobs in Guangdong province's Pearl River Delta manufacturing heartland after the annual Lunar New Year holiday in February, said Stanley Lau, deputy chairman of the Hong Kong Federation of Industries. Typically the proportion is 10 to 15 per cent.

That was despite Guangdong authorities raising minimum wages by up to 20 per cent in March. Many factories already pay more to retain workers but are still having a hard time finding manpower.

Hubbs employs about 500 workers earning 1,800 to 2,000 yuan (169 to 187) a month, a lot higher than Guangzhou's 1,300 yuan minimum wage - but he is still short of about 100 people. He wants to move 30 to 40 per cent of production to a new factory in Cambodia, Laos or even Burma in six to eight months.

He says existing workers won't lose their jobs. Instead they will be moving up the so-called "value chain," transferred to more advanced production lines.

Others such as Dahon, the world's largest maker of folding bicycles, think moving inland will help regain the low cost advantage they once enjoyed in southern China.

"It makes sense," chief executive David Hon said. "It could be a year, it could be two, but it seems like we'll be probably moving the bulk of manufacturing elsewhere."