After a massive revolt at one of the infamous Foxconn plants, is this the beginning of the end of China's low-wage manufacturing edge?
TAIPEI--Adam Yin, showing off plastic injection-moulding machines at a trade fair in the Taiwanese capital on Sept. 22, could be expected to be upbeat. But even he admits that business at Liguang, his Taiwanese-owned factory based in Ningbo in south-eastern China, is getting worse.
The factory operated seven days a week in 2011 and until June 2012, says Yin. "Now we are down to a five-day week. We are still making a profit but we have less work. And all the time, the Chinese workers want higher wages."
The combination of rising wages and the global economic slowdown isn't a good one for China's jobs market. The consensus at Taipei PLAS--a plastics and rubber trade fair frequented mostly by Taiwanese owners and managers of Chinese plants--was that China is losing its competitive edge as a low-cost manufacturing hub. Rising Chinese labor costs are squeezing Taiwanese firms who make products there. At the same time, the Taiwanese companies' order books are thinning due to the ongoing economic crisis in Europe and lacklustre growth across the developed world. The solution, they say, is to move somewhere cheaper.
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The possible dent in Chinese employment is hard to estimate, but it could be large. The political relations between Taiwan and Beijing, which claims the island as part of China, may be cool, but business links run deep: After the then Chinese premier Deng Xiaoping opened China up to capitalism in 1978, Taiwanese manufacturers--who had built up a solid export industry while China's economy slumbered--gradually shifted their workforces to the mainland, where wages were lower. Among them is Hon Hai Precision Industries, also known as Foxconn, the world's largest contract manufacturer of electronic components and Apple's top supplier. Quanta Computers, which claims to be the world's largest contract maker of laptop PCs, is also headquartered in Taiwan and does the bulk of its production in mainland China.
Data on the role Taiwanese firms play in China's job market are thin, but Taiwanese investment is a major force in China's economy. According to economists at BBVA (pdf; see page 5), US$6.7 billion of China's foreign direct investment (FDI) last year came from Taiwan, compared with $3 billion from the US and $6.4 billion from Europe. An older estimate put the total stock of Taiwanese FDI in China at the end of 2008 at $130 to $150 billion (pdf, page 31). According to estimates from Taiwan's government there were about 70,000 Taiwanese firms in the mainland in 2009.
And the China Beige Book, a survey of more more than 2,000 heads of companies across China, found that the rate of hiring had slowed by 9% for the third quarter of this year. The number of companies cutting staff also rose from 13% of the sample to 20%, and 5% of firms reported strikes.
And manufacturers are looking elsewhere. "With basic salaries rising all over China, I know of many Taiwanese manufacturers who are starting to look at Vietnam, Cambodia and Indonesia," says George Wang, another trade show attendee who describes his company, JoyFly Technology, as a sales agent for several Taiwanese plastics companies.
Sway Su, another attendee and a researcher for Taiwan's Plastics Industry Development Center, a trade association, echoes that view. "Manufacturing wages in some wealthier cities in mainland China are the same as in Taiwan now. So Taiwanese manufacturers want to move their production to Indonesia, Vietnam, Cambodia or Thailand and are looking at how to make that work." The minimum wage in Vietnam's capital, Hanoi, is 2 million dong ($95) a month. By contrast, in China's cheapest province for manufacturing, Jiangxi, in the nation's poor interior, monthly wages are around $137.
So pricey has China become that even Taiwan is starting to look attractive again. Eric Chang, the marketing manager of a machinery manufacturer owned by a Taiwanese family and based in Guangzhou, southern China, says his company might move production back home. "Our country has a better educated workforce, and factory wages in Guangzhou are approaching those of Taiwan now."
It's not just about the wages, however. Taiwanese manufacturers are quick to point out that they do not mind paying Chinese workers higher wages. In fact, because of the continuing bad publicity about conditions at Hon Hai, where a spate of workers committed suicide in 2010, they are desperate to shrug off a reputation for mistreating Chinese workers. "If wages rise gradually when the world economy is good that is OK," says Chang. "If they keep rising quickly and suddenly when no-one is doing that well, businesses like ours cannot cope."
But there are other reasons to look farther afield. China began phasing out tax breaks for foreign investors back in 2008 and they are mostly gone. Vietnam, meanwhile, now offers a range of sweeteners. Wang, of JoyFly Technology, says he has just returned from a research trip to Vietnam, where he found that factory land in the south could be leased for 30% less than in China's Pearl River Delta, the export hub close to Hong Kong. "Of course, Vietnam's roads are nowhere near as good as China's and there are often power cuts," he admits.
A lack of credit is driving manufacturers out, or even bust. The Beijing government has been urging state-owned lenders to curb loan growth for some time. Misjudged infrastructure projects that Chinese provincial governments championed as part of Beijing's massive economic stimulus program of 2009-10 may contribute to a huge pile-up of bad loans, economists say, though the extent of the problem remains a matter for debate.
As a result, getting loans from Chinese banks has been a problem for many months, says Gerry Wang (no relation to George), general manager of a Taiwanese owned machinery manufacturing company named FCS based in Ningbo. Liguang's Adam Yin says that banks in Ningbo are lending to successful factories at annual interest rates of 7% to 8%, and claims that in early 2010, rates were more like 6% to 7%.
Gerry Wang says his business is doing well, but "since about June, I am hearing that many factories near ours in Ningbo are going down to three-day weeks. They have a problem with not getting enough orders, they have the high wages problem, they have cash flow problems."
Factories are going bust all over China, particularly in areas where loan sharking syndicates known as gao li dai have moved in to fill the gap left by traditional bank loans. Wang says might open his next factory in Brazil instead of mainland China: "I am talking to agents about this at the moment."
And Taiwanese firms are not the only ones leaving. In July, sportswear maker Adidas said it would close its only wholly-owned Chinese plant because of rising wage costs. The Boston Consulting Group also forecasts that North American manufacturers might leave China and bring factory jobs back home within five years.
But China isn't well-equipped to compete on the higher end. China's government would like its manufacturers to move up the "value chain" and compete with more advanced Asian economies like South Korea or Japan in making high-tech goods. However, the country may not be producing enough creative minds or skilled managers (pdf), argued Edy Wong of the University of Alberta in a paper earlier this year. And university education remains a scarce luxury (video). The net result: China's export sector may be starting to hollow out.
This post originally appeared at Quartz, an Atlantic partner site.