TALKING POINTS
FALSE APPEAL: Vietnamese labor is cheaper, but productivity is lower
of the collective wage consultation
system, which shifts bargaining power back toward labor. At the same time, the new Labor Contract Law passed in 2008 continues to increase the cost of labor for businesses by strengthening protection of workers’ interests. Even if wage compensation grows at
the same pace as China’s nominal GDP, holding labor income’s share to its current level of about 40%, companies in China will still see their wage bills increase by more than three times by the end of this decade. But China’s labor costs are likely to grow even faster than that. Te gov- ernment has targeted a real GDP growth rate of 8% and an inflation rate of 4% a year for the next five years, which implies 12% targeted nominal GDP growth. If the renminbi continues to appreciate at its present average rate of 3-3.5% per year, China’s wage rate in US dollar terms will surpass Mexican wages in the second half of this decade. Just as significantly, the mainland will
close its wage gap with Taiwan in the next 10-15 years.
Where to go?
What should export-oriented manufac- turing companies do? Returning home is still not much of an option for Western firms. China’s wage rate is still far cheaper than American salaries. If we normalize the US wage to US$100 per hour, as of 2008 the hourly wage of Chinese manu- facturing workers was still only US$4.20.
24 China Economic Review • May 2011
At the current pace of currency apprecia- tion, Chinese wages will remain less than one third of US rates by the middle of the next decade. What of other developing countries?
Here, China may well lose its labor-cost advantage. Some companies are already moving south to Vietnam, Cambodia or Bangladesh to take advantage of their substantially lower wage rates. But wage rates are only a small part
of the equation that companies consider when deciding where to locate produc- tion. For example, while labor costs in Vietnam are around one-third less than Chinese labor, Vietnamese labor produc- tivity is also low. In addition, Vietnam has inefficient infrastructure, stifling govern- ment regulations and bureaucracy, and higher inflation. Te country also lacks complete industrial value chains in many cases, in particular in textiles and fashion. Nor are such countries immune from wage inflation. Te Vietnamese nominal
Gimme a raise
Wage rates compared 14
12 10 8 6 4 2 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Philippines
China Mexico Taiwan Source: US Bureau of Labor Statistics, National Bureau of Statistics
wage rate has gone up by 16% per year since 2000, while its labor productiv- ity has only improved by 12% annually. In comparison, even though China’s la- bor costs have been rising annually over 14%, its labor productivity has been increasing by close to 20% every year. Companies moving south to supposedly cheaper Southeast Asian nations may be ultimately disappointed in the net cost savings they realize.
Staying put
Moving inland is another option, given that the coastal regions have higher labor costs. Some companies have already done so. Intel, for example, built a large manu- facturing and testing campus in Cheng- du, Sichuan province. APL, a large ocean shipping company, recently relocated its 500-person back-office from Shanghai to Chongqing; the company expects to save around US$1.5 million in the first year following the move. In 2010, electronics contract manu-
facturing giant Foxconn (which makes Apple’s line of mobile devices) built a fa- cility in Henan province in central China that employs 200,000. Foxconn expects to save RMB16 billion (US$2.45 billion) in its first year of operation by avoiding Guangdong, its primary hub. However, moving inland is not a per-
manent fix: Labor costs are rising faster in the western provinces than on the coast. For example, while Guangdong’s wages increased 12% in 2008, they in-
US$/hr
Phtotex
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