The Inevitable: China's Getting More Costly

A colleague dropped a line from China over the weekend to tell me that it looks like the great firewall was blocking Spend Matters (it seems access to the site from China has worked intermittently over the years). The timing of this note could not have been more opportune from another quick look behind the sourcing Great Wall because of an article in this morning's New York Times, suggesting that the costs of doing business in China are going up. Of course this should be no surprise to many Spend Matters readers already doing business and often travelling to the region. But for this message to hit home in what amounts to the international paper of news record -- given front and center billing on the website, I might add -- is telling indeed.

According to the NYT, "Coastal factories are raising salaries, local governments are hiking minimum wage standards and if China allows its currency, the renminbi, to appreciate against the U.S. dollar later this year, as many economists are predicting, the cost of manufacturing in China will almost certainly rise." The "aha" moment for many looking at the potential for materially rising Chinese prices came not from the government's willingness to consider the appreciation of the RMB, but rather wage increases in the private sector. Consider the case of Foxconn, which, in response to recent suicides, and most likely government and union pressure, "said that within three months it would double the salaries of many of its assembly line workers." Or look at Honda, which is planning on giving "1,900 workers at one of its plants in southern China raises of between 24 percent and 32 percent in the hopes of ending a two-week long strike."

It appears that those behind the micromanagement of China's judicially planned and managed economy (i.e., Communist party officials) are favoring these moves "as a way to spur domestic consumption and make the country less dependent on low-priced exports." The NYT also suggests that numerous other government interests are helping drive wage increases (e.g., a desire to narrow the gap between rich and poor, potentially in response to unrest throughout the country).

A continued price escalation of China-sourced goods should do more than spur US and European companies to consider their China-sourcing strategy. It should also lead them to re-evaluate local on-shore and near-shore options, not to mention other low-cost locales throughout Asia. However, given China's historic willingness to play only by its own economic and trade rules, we should all think seriously about the implications of China hoarding its supplies of strategic materials (e.g., rare earth metals) to give Chinese industries a leg-up on the overall market. After all, we all know who is really controlling things in China, even in the private sector. Clearly, when that red phone rings, there's more than a "yes minister" type of response.

- Jason Busch

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