Issue of the week: Is China’s cheap-labor party over?

last updated 8 January 2015

It turns out that even in a workers’ paradise, it sometimes pays to go on strike, said Lucy Hornby in Reuters. Workers and managers at a Honda auto-parts plant in southern China settled a two-week walkout this week, after Honda offered workers pay increases of 24 percent to 32 percent. The strike was an unmistakable signal that Chinese factory workers are no longer willing to accept rock-bottom wages for backbreaking labor. The outcome also reflects a larger trend in China, “in which the balance of power may be shifting toward workers.” This has been a long time coming, said David Barboza and Hiroko Tabuchi in The New York Times. “China’s huge migrant labor force is gaining bargaining power,” as demographics, government policy, and outrage over working conditions converge to produce rapid gains for Chinese workers. But those gains come at a price. Higher wages will “raise the cost of doing business and could induce some companies to shift production elsewhere.”

That’s a price worth paying, said Supply Chain Digest. Before the strike, workers at the Honda plant toiled 10 to 12 hours a day, six days a week, for about $150 a month—half what workers in other Chinese factories earn. The Honda workers get subsidized meals and free lodging in factory-owned dormitories, “but sleeping with four to six per room in bunk beds is not exactly easy living.” So it’s not surprising that Chinese authorities didn’t interfere in the strike. In fact, the government appears to be tacitly encouraging labor unrest, up to a point. In part that’s because the government wants to raise wages to increase domestic consumption. But demographics are also forcing the government’s hand. China’s declining birth rate is shrinking the supply of young people entering the labor force. With fewer replacement workers available, employers can no longer threaten to fire restive workers en masse.

The upward spiral in labor costs is good news for some of Asia’s other economies, said John Berthelsen in The Asia Sentinel. “Multinationals show no compunction about getting up and going” when labor costs increase, and they’re likely to move some of their manufacturing from China to Vietnam and Bangladesh, where wages are one-half to one-quarter the prevailing Chinese rate. But while those countries can offer lower costs for supplying simple items in bulk, “the Chinese have become sophisticated enough to hold onto the trade for items requiring higher skill levels, sophisticated design, and quick turnaround time,” such as smart phones. Labor costs are only a small component of the final price of such products, dwarfed by the cost of parts, marketing, and distribution. As China “scales the technological ladder,” smart labor, not cheap labor, will be its main competitive advantage.