Weighing Global Pricing: Wage Inflation vs. Productivity Gains

Last week, the New York Times published a story offering up an inside look at wage inflation on the shop floor in China. But the story could have been about low-cost manufacturing in any developing country -- not just the one that happens to be the target of many of today's headlines. The article zeros in on the case of a worker in a bicycle factory who, "working a 45-hour week makes the equivalent of $263 a month". But as recently as February, he made "just $197." According to the article, "factory owners and experts who monitor the nation’s labor market say that businesses are having a hard time finding able-bodied workers and are having to pay the workers they can find more money ... And higher wages in China are likely to lead to higher prices in the United States — at the mall, at the grocery, even at the gas pump."

As global sourcing practitioners, what's most important to us is how wages translate to export prices. In this regard, "Chinese companies are already passing along some of their higher costs to overseas customers with July offering up the biggest increase in history (.4% overall)." But rising labor costs do not necessarily have to bring higher overall prices. According to the article, at the bicycle factory in question, the "average labor cost for each bicycle has actually edged downward" because "sales are growing 30 percent a year and increasingly large-scale production has brought savings. The cost of engineering a new bicycle design, or handling the accounting and other back-office operations, is spread over more and more bicycles as production rises." What's the lesson here? When it comes to global sourcing, remember that productivity can be as important as hourly labor costs in determining the "total labor cost elements" of parts, assemblies and finished products.

Jason Busch

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