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Increasing Labour Costs in China: Why Rising Wages Aren’t the Whole Story

November 24, 2019 Ramy Daoud, Western UnionEMC Member Services 14 Views

For years China was the undisputed king of overseas manufacturing with an enormous workforce and affordable material costs. In recent years, Canadian companies and other producers have been feeling the pinch as the price of doing business in China steadily climbed. Many attribute this change to the rising minimum wage, which grew 64% in six years, bringing paycheques above those in Argentina, Mexico and Brazil. Costs are significantly higher than those in neighbouring Sri Lanka and Vietnam.

But wages aren’t the only source of concern in China’s manufacturing sector. One of the countries major advantages has always been its vast land and enormous population – by far the biggest in the globe. No other nation can compete with these resources. Yet, like many others, China began to struggle in this area as more of the population flocked to urban areas and factory regulations tightened with international pressure. Suddenly producers were faced with a dwindling workforce along with more expensive materials. In Hebei, just north of Beijing, the number of available factories plunged from 900 to 150 in a single year. At the same time, the cost for plastic, PVC, glass and other necessary raw materials grew sharply and in most cases by 30% or more.

Though the number of China’s available workers dwarf those of other regions, they’re not immune to the global aging trend. The working population peaked at 925 million in 2011 but has been decreasing ever since. Combined with low migration and an average retirement age of 54, the problem is set to continue.

Additionally, companies haven’t seen the last of minimum wage hikes. Each province in China has varying rates, four of which increased salaries in the first half of 2019. The latest boost came November 1, with Hebei residents earning about 12% more.

Of course, just as there are multiple causes for rising costs in China, there are also numerous reasons why a complete exit from the country is highly unlikely for any company. Some argue that the threat of lost manufacturing contracts will force factories to upgrade and provide more value for exporters. Indeed, the country is investing in automation in order to overcome some of its shortfalls.

Even though areas like India and Vietnam can offer significantly lower wages and other tax benefits, moving production is not without risk. Newer locations lack the population size and industry scale of China, meaning the possibility of a labour shortage or assembly disruption is a distinct possibility. In fact, in some cases it’s near-impossible to manufacture a product start-to-finish without Chinese involvement.

Regardless of economic shifts, China is still an enormous manufacturing player and one of the world’s biggest economics. No single country can serve as a replacement, regardless of their incentives. More than likely, those with business ties to China will consider diversifying their locations – without actually exiting the nation completely.
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Ramy D Daoud, MFin
Western Union Business Solutions
ramy.daoud@wu.com

Sources: CNBC, Forbes, Soule, Blake & Wechsler, Inc, German Chamber of Commerce in China, china-briefing.com, Fortune.com, Bloomberg