Udhay Shankar N wrote: [ on 01:49 PM 3/22/2006 ]
http://www.guardian.co.uk/retail/story/0,,1719765,00.html?gusrc=rss
Going cheap
TVs and DVD players cost 45% less, in real terms, than they did a
decade ago; in the same period, the price of computers has fallen by
93%. High street prices have never been so low, but what kind of
consumers do we become when we can buy a handbag for £3 - and then
chuck it away? Andy Beckett on how the bargain boom changed the way
Britain shops
Another data point to contrast with the above -
this makes for interesting speculation on the
kinds of social revolutions (I am choosing my
words carefully) that might happen when the Walmart effect implodes.
Udhay
http://www.businessweek.com/magazine/content/06_13/b3977049.htm
MARCH 27, 2006
How Rising Wages Are Changing The Game In China
A labor shortage has pay soaring. That is sure to
send ripples around the globe.
For years, Yongjin Group has earned a decent
profit selling lamps and furniture to the likes
of Wal-Mart (WMT ), Home Depot (HD ), Target
(TGT), and Pottery Barn. But lately the company
has seen its margins shrink to 5% -- half what
Yongjin made when it opened its factory in the
steamy southern Chinese city of Dongguan 14 years
ago. Why? Labor shortages are forcing the company
to boost wages. Last year salaries surged 40%, to
an average of $160 a month, and Yongjin still
can't find enough workers. "This business needs a
lot of labor," says President Sam Lin. "This is a very tough challenge."
Some 1,500 miles northeast, in the city of
Suzhou, Emerson Climate Technologies Co. is
facing similar woes. The maker of air conditioner
compressors has seen turnover for some jobs hit
20% annually, and Emerson General Manager David
Warth says it's all he can do to keep his 800
employees from jumping ship to Samsung, Siemens
(SI ), Nokia (NOK ), and other multinationals
that are now operating in the tech manufacturing
hub. "It has gotten to the point that we are just
swapping folks and raising salaries," says Warth.
Wait a minute. Doesn't China have an
inexhaustible supply of cheap labor? Not any
longer. From the textile and toy factories of the
south to the corporate headquarters and research
labs in Beijing and Shanghai, the No. 1 challenge
today is finding and keeping good workers.
Turnover in some low-tech industries approaches
50%, according to the Institute of Contemporary
Observation, a Shenzhen labor research group.
Guangdong Province says it has 2.5 million jobs
that remain unfilled, while Jiangsu, Zhejiang,
and Shandong provinces say they, too, face
shortages of qualified workers. "Before, people
talked about China's unlimited labor supply,"
says Zhang Juwei, deputy director of the
Institute of Population & Labor Economics at the
Chinese Academy of Social Sciences in Beijing.
"We should revise that: China is facing a limited supply of labor."
Reports of labor shortages first cropped up in
late 2004, but companies thought the phenomenon
was temporary. Now a surge in both turnover and
wage costs is convincing multinationals and their
suppliers that the China game is changing
permanently. With the gap between wages in China
and those elsewhere gradually closing, the
pressure to pass price increases on to consumers
in the U.S. and other markets will start to
build. As Citigroup (C ) noted in a February
report: "The continuous growth of labor costs in
China, even at a moderate pace...is likely to
have implications for inflation worldwide." These
factors eventually will force the Chinese to
upgrade their entire industrial base to make
higher-margin goods. And those bigger paychecks
are building a consumer class in China that multinationals want to target.
"THERE IS A BREAK POINT"
The wage issue has started to affect how
companies operate in China. U.S. corporations and
their suppliers are starting to rethink where to
locate facilities, whether deeper into the
interior (where salaries and land values are
smaller), or even farther afield, to lower-cost
countries such as Vietnam or Indonesia. Already,
higher labor costs are beginning to price some
manufacturers out of more developed Chinese
cities such as Shanghai and Suzhou. "There is a
break point where people will say this is too
expensive," says Michael Barbalas, general
manager at the Suzhou plant of Andrew Corp. (ANDW
), a Westchester (Ill.) maker of wireless
networking gear. At his factory, he says, wages
have been rising by 10% annually.
This is a slow process, to be sure. Imports from
the mainland have yet to fuel inflation in the
U.S., while improved productivity in China has so
far offset higher wages. But economists say those
productivity gains are getting harder to find,
and manufacturers who are seeing their margins
hit, such as Yongjin, can hold out for only so
long before they have to try to raise prices.
The pressure has as much to do with skills as it
does with numbers. Although the total labor force
is about 800 million, relatively few people have
the qualifications employers want. For most
textile, toy, and tech-assembly jobs, for
example, export-oriented manufacturers prefer
women from 18 to 25 years old or people with
experience operating machinery. "The skills base
does not meet the demands of a rapidly growing
market," says C.P. Lee, Asia-Pacific human
resources chief at Motorola Inc. (MOT ), which has 9,000 employees in China.
As a result, companies across the board are
feeling the squeeze. Last year turnover at
multinationals in China averaged 14%, up from
11.3% in 2004 and 8.3% in 2001. Salaries jumped
by 8.4%, according to human resources consultant
Hewitt Associates LLC. And a January report by
the American Chamber of Commerce in China found
that rising labor costs have pinched margins at
48% of U.S. manufacturers on the mainland. "China
runs the risk of losing its advantage" of cheap
labor, says Teresa Woodland, an author of the report.
That means managers can no longer simply provide
eight-to-a-room dorms and expect laborers to toil
12 hours a day, seven days a week. When
30-year-old He Maofang first arrived in Dongguan
in 2000, for instance, "work was hard to find."
But now "there are plenty of choices," says He,
who started at Yongjin last June. In addition to
boosting salaries, Yongjin has upgraded its
dormitories and improved the food in the company
cafeteria. Despite those efforts, its five
factories remain about 10% shy of the 6,000 employees they need.
Many companies are compensating for the shortages
by penetrating deeper into China's vast
heartland, where wages can be half what they are
on the coast. General Motors (GM ), Honda (HMC ),
Motorola, and Intel (INTC ), for instance, have
all shifted some manufacturing or research to
inland locations in recent years, both to tap
lower costs and to open up new markets. But a
two-year-old effort by the Chinese government to
lift rural incomes through tax cuts is keeping
some potential factory workers on the farm. So
with investment growing in the interior, labor
shortages are popping up there, too. "More and
more multinationals are looking for opportunities
in second-tier cities," boosting salaries there
faster than in the traditional manufacturing
strongholds farther east, says Jean Lin, head of
the compensation practice at Hewitt.
BETTER TRAINING
The trend goes beyond the factory. Only about 10%
of Chinese candidates for jobs in key areas such
as finance, accounting, and engineering are
qualified to work for a foreign company,
estimates consultant McKinsey & Co. While China
today has fewer than 5,000 managers with the
skills needed by multinationals, 75,000 jobs for
such managers are expected to be created over the
next five years, McKinsey says. The talent crunch
"is the No. 1 constraint on China's growth," says
Andrew Grant, McKinsey's China chief. "It will
hit earlier and be more powerful than any [other]
constraint," such as raw materials shortages.
Some U.S. companies in China believe better
education and training is the way to stay ahead
of the game. Motorola regularly hires graduates
straight from school and then trains them at its
"Motorola University" in Beijing. Intel Corp.,
which has invested $1.3 billion in chip assembly,
testing, and research and development in China,
has backed initiatives that have trained 600,000
teachers there. "It helps contribute to our
future workforce," says Intel China President Wee Theng Tan.
LOWER ENERGY BILLS
Others are doing everything they can to retain
employees. St. Louis-based Emerson has introduced
flexible work hours at its Suzhou plant for
workers with children. It has built a "green"
office with solar power, ambitious recycling
plans, and chargers for the electric bicycles
used by many staffers. And to build loyalty the
company holds quarterly parties for the entire
staff and organizes free trips to resort areas.
"I chose Emerson because it is a well-respected
company," says 25-year-old Rocky Lu, who started
as a technician at Emerson's Suzhou plant in
February. He got a 50% raise from his last job,
at a state enterprise, to nearly $400 a month.
Emerson is cutting costs elsewhere to ensure that
rising wages don't price it out of Suzhou. It has
lowered utility bills by raising the thermostat a
couple of degrees in the summer and dropping the
mercury in the winter while passing out long
underwear to keep workers warm. It has added
reflective light fixtures that can use
lower-wattage bulbs. And it has recently tapped
excess heat from its factory to warm dormitory
showers. "So far it's an even trade-off" between
rising labor costs and efficiency gains, says
Emerson manager Warth. "We have to deal with it
if we want to remain in business."
Beijing realizes that it, too, needs to deal with
the issue if it wants to stay in business. So the
government is further loosening rules that
prevent rural residents from moving to cities to
work and is offering tax breaks to overseas
Chinese who return to the mainland. The higher
education system is also being overhauled to
include more practical classes and vocational
training in a bid to expand China's skilled
workforce by a third, to 8% of the population.
China will still be the world's workshop. But the
world will need to adjust to the inexorable rise of the workshop's wages.
--
((Udhay Shankar N)) ((udhay @ pobox.com)) ((www.digeratus.com))
