creased 18.4% in Henan. Any labor cost advantage commanded by the western provinces will be short-lived. Tere is another option available to
export firms located on China’s coast: staying put. But to stay put without go- ing out of business, companies must stay active. To compensate for higher labor costs, manufacturing firms need to im- prove and innovate. A good example of the benefits of
such a strategy is Glory Shoes Industry, the largest utility boot manufacturer in the world. Its Pearl River Delta plant em- ploys over 7,000 workers. Glory makes shoes for brands such as Caterpillar, Wol- verine, Bates and Timberland. In 2007, in reaction to rising labor
costs on the mainland, the company set up operations in Bangladesh and Cam- bodia. After three years, Glory found that total per-unit production costs in China were still lower than in either of its for- eign locations. Glory has since begun to focus on improving efficiency at home. Te company bought better machines, implemented lean production methods and deployed an enterprise resource plan- ning (ERP) system. Before it began run-
Hard at work Manual labor costs in China, 2008
45 40 35 30 25 20 15 10 5 0
most of the production process done by machines, Ramatex is able to cope with the labor cost increase: Its major cost component is materials, not labor. Given that China is the largest cotton producer in the world, Ramatex is staying put, rec- ognizing the excellent logistical support and port access it currently enjoys. At the moment, therefore, many
National Beijing Shanghai Jiangsu Guangdong Yunnan Source: National Bureau of Statistics
ning an ERP system, Glory usually held US$15 million worth of inventory on any single day, and turnover time was 45 days. After ERP implementation, daily inven- tory has been reduced by more than 50%, and its turnover time dropped to 14 days. Another example is Ramatex In-
dustrial, a Singaporean company with a vertically integrated cotton textile manu- facturing facility in the Yangtze River Delta. Te processes it uses are highly capital- and labor-intensive. Te most labor-intensive part of production is sew- ing, and if Ramatex had specialized only in sewing, it may have been compelled to move to the interior or another country. But as an integrated textile firm with
Anhui Sichuan Jiangxi
companies have decided to stay in China by focusing on better process and better technologies, and this is probably wise. But in the next 10-15 years, China will no longer be a nation of cheap labor. Laws and regulations designed to protect labor’s interest will be more rigorously enforced, and the balance of power will shift toward the worker. Te danger, of course, is that by
adopting the European welfare state la- bor model at a time when its population is aging rapidly, China’s comparative ad- vantage in labor cost may erode before it actually moves up the value chain, leav- ing China stuck in the infamous middle- income country development trap. Let’s hope China manages to re-create a work- ers’ paradise without putting itself out of business.
China Economic Review • May 2011
25
RMB thousand/yr
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