China's Wage Landscape is Changing: Are you Ready?

By now, you've probably heard quite a bit about the wage landscape in China and how foreign companies are paying more for labor (funny how we don't hear anything coming out of China about mainland-owned and government enterprises upping wages, too -- perhaps workers are a bit scared to protest and demand more in these situations?). But what does the changing landscape imply for Western companies? A recent Reuter's article does a good job of summarizing some of the changes in a FAQ format. It's a must-read for companies with operations in the region, and those sourcing from Chinese suppliers, and especially those owned and/or operated by Western JVs.

According to the story, the recent strikes show that a "copy-cat chain of strikes" is indicative of "a workforce that is becoming bolder, and that may prompt some companies to preemptively raise wages ... Younger migrant workers are becoming more demanding about job conditions ... They are also gaining more bargaining power as the flow of potential job seekers tightens, because of wider opportunities and fewer entrants into the workforce as the population ages." As a result of escalating wages and wage demands, Reuters suggests additional companies might "move production from crowded coastal regions to cheaper inland parts of China, or to other low-cost manufacturing countries such as Vietnam."

Any company doing business with Chinese suppliers should also pay more attention to labor-drive supply risk. In this regard, one expert quoted in the piece suggests that, "the risk of such disruption may prompt some companies to reconsider inventories, management and diversity of suppliers." In other words, some organizations may not only take a hit given the cost increases coming from factories paying higher wages. They may also face the double whammy of tying up additional working capital in inventory given labor risk in their supply chain as well.

The Spend Matters bottom line is that the China cost is going up. A gradually appreciating -- a very gradually appreciating, I might add -- RMB will only contribute to a rising China price as well. Moreover, the Chinese government appears to be pretty clear on where its sympathies lie: "The unrest could also boost government efforts to encourage more systematic collective bargaining between workers and managers to determine wages and conditions. Official unions will remain kept under the thumb of the government, but at the factory level they may become more insistent on workers' demands."

If you're not willing to tolerate low double-digit price increases -- at a minimum -- as well as potential working capital hits based on the changes coming out of China in the next 24 months, it's high time to look elsewhere offshore. Or to consider the total cost implications of bringing some of your spend back home.

Jason Busch

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