How China Gets Our Business !

[Colin]

http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&contentId=A35473-2004Mar6&notFound=true

By George Stalk and Dave Young

Sunday, March 7, 2004; Page B03

China's emergence as one of the world's leading export nations is driven by a huge disparity in the cost of producing goods, caused primarily by hourly wages that are a fraction of those in the United States and Western Europe. This is not news. What is news is that the cost disparities are likely to expand rather than to shrink.

Typically, a U.S. or Western European factory worker costs an employer $15 to $30 per hour. A Chinese factory worker earns the equivalent of less than $1 per hour. If, over the next five years, wages in China increase at a rate of 15 percent annually, while they increase at 3 to 4 percent a year in the United States (a healthy growth rate), in 2009 the average hourly wage will be $2 in China and $18 to $35 in the industrialized West. So, despite the disparity in growth rates, the hourly wage gap will have widened to $16 to $33. Government-mandated labor costs in the West, such as workers' compensation, will make the difference bigger still.

That assumes no dramatic change in relative currency values. Predicting exchange rates, especially over the long term, is hazardous. But Japan's experience may help set expectations. Largely as a result of Japan's success with industrial exports, the yen-dollar exchange rate went from a low of 360 in the early 1970s to about 100 today -- an almost fourfold increase in the value of the yen relative to the dollar over about 30 years. If China's yuan were to strengthen against the dollar at a similar rate over the next five years, the wage gap would narrow significantly. But Chinese wage rates would still be less than half those in the United States.

Wage rates are driven, first and foremost, by supply and demand. As China's industrial sector and middle class grow, wages and other labor costs will increase. But they will not increase enough to close the gap with -- and improve the competitive positions of the labor forces in -- the United States, France, Germany or Japan. The gap is just too wide -- and the Chinese labor pool too deep -- for this to happen.

China still has 800 million people living in the countryside -- nearly three times America's entire population. The migration of China's rural labor force to manufacturing jobs will mitigate any steep rise in low-skilled wages in this decade. Although higher-skilled workers will demand higher wages, the supply of candidates for these positions is also great and increasing. According to the National Science Board, every year three times as many students are graduating with bachelors' degrees in engineering in China as in the United States.

The story only gets worse. Wage rates are just one factor driving China's cost advantage. The productivity of the labor force is another. Productivity is gauged in many ways, including quality, output per unit of labor cost, and output per unit of capital and support costs. Here, too, the Chinese are excelling. Often (although not always), once a Chinese plant's initial manufacturing problems are worked out and it has moved along its learning curve, it can achieve quality equal to that of leading plants in the West.

In terms of capital requirements, Western companies operating in China are finding they can reduce their investments compared with their home countries. For example: Western companies often pay up to 50 percent less to purchase machines and tooling in China than at home.

Moreover, companies operating in China can cut capital costs by replacing expensive machinery with inexpensive labor. One leading manufacturer of large kitchen appliances has stopped using conveyors in its Chinese factories in favor of manual material handling. The firm achieves quality comparable to that at home, but at lower cost.

China also offers other incentives to Western companies: low-cost land, low import duties and tax breaks. One major corporation claims to have received so many incentives for one of its factories that its construction was virtually cost-free.

These initial savings are only the beginning. Leading companies buying from Chinese firms and operating in China have been able to lower their costs over time, achieving annual reductions that rival or exceed what is considered usual in the West. Ten percent improvements in cost per unit per year are common for goods after their production is moved to China. These improvements stem from expanded scale, deepening of relationships with indigenous suppliers and an extremely competitive environment.

What's next? The cost advantages of manufacturing in China are not likely to shrink anytime soon. In fact, our experience suggests that the gap will increase before it decreases. We're convinced that as many as 15 percent to 20 percent of industrial products now made in the United States -- together with their associated jobs -- will migrate to China and other countries.

Another 20 percent to 30 percent of jobs are up for grabs, depending on the ability of U.S. corporate and government leaders to come up with ways to secure America's competitive advantage. The longer Western managers wait to sort out their China strategies -- whether by competing, moving or outsourcing -- the greater risks their companies face. Sitting this one out won't work.

Authors' e-mails:young.dave@bcg.com

stalk.george@bcg.com

George Stalk and Dave Young are senior vice presidents, in Toronto and Boston respectively, of the Boston Consulting Group, a management consulting firm with 60 offices in 37 countries.

[Colin]

I'm never sure where these figures orginate but they're misleading. The highest minimum wage in China is 574 yuan per month in Shenzhen, and the lowest is 160 yuan in Sichuan (for a full list, see here). Assuming payment for an eight-hour day, five days per week (or a 160-hour month), the monthly minimum in China can range from 1 yuan - US$0.12 - to 3.59 yuan - US$0.43 - per hour. However, workers in the manufacturing sector often receive less than the legal minimum (including working overtime), so even the higher figure of 43 cents may be too high. Having said that, some workers earn a great deal more than the minimum wage - even in low-end manufacturing. But it's fair to say, I believe, that for the majority of factory workers the minimum wage is equal to the maximum wage. I remember meeting several women in Shenzhen several years ago who on their day off were searching for another job in the hope of getting more than 9 yuan (US$1.08) per day (and they were putting in 15-hour days, six days per week).

It's also worth remembering that Chinese factories often provide dormitory accommodation and meals. Whilst it's true they deduct money from workers' wages for these provisions, I'm not aware of any research that actually looks at whether owners recoup the cost of constructing dormitories from said deductions. I once had a production line manager in China tell me that each worker in the factory cost US$100 per month (factoring in everything); and that costs for a worker in the same type of factory in Burma totalled US$28.

I'm also somewhat dubious about articles that simply say that Chinese workers earn 48/61 cents per hour without putting it in context. This sounds an incredibly low figure to people in Canada or the US, but it would be useful to know, for instance, what a wage of 574 yuan per month might purchase in Shenzhen (bowls of noodles around the factory for 1 to 2 yuan, and so on). It's also worth considering conditions at home that drive young people to factory work. It's not unusual, for example, for an entire family in rural China to eke out something less than 500 yuan per year after local government officials have extracted illegal taxes. (For a fascinating example, see the China Labour Watch translation of a taxation notice to a Chinese farmer. Total annual income for a family of four: 388.45 yuan, or 97.11 yuan each). Even earning less than half the monthly minimum, an 18 year old in Shenzhen could pocket in a month more than her entire yearly earnings at home. What might a young person in the US endure to earn in a month what they might earn at home in a year?

This is not to say that Chinese wages are fair, too high, or too low. It's to simply suggest that the issue is more complex than the 48/61 cents per hour figure allows.

Source: Susan Ferriss, "Free trade's faded dream: A panacea punctured," Edmonton Journal, 23 November 2003.

Posted by Stephen Frost at November 24, 2003 10:09 AM / TrackBack

http://www.asianlabour.org/archives/000083.html

[edwinr]

Certainly lower labor costs are driving many traditional hi-fi manufacturers to move production to China. In that equation you can include such traditional manufacturers as Quad, and in Australia, even Whatmough has moved some production off shore. I guess as hi-fi consumers we benefit in the short term from low cost product on the retailers shelves, but at what damage to traditional U.S., Australian and U.K. based manufacturers? After all most of the innovation and advances in hi-fi have been sourced from home. The Chinese based manufacturers are very good at making and selling low cost products based on Western research and developments. If our local manufacturers go to the wall; less money for R&D; we lose out.

[sheltie dave]

One way to look at countries is to picture them as companies. The US once was where China is now - a slumbering giant with limitless resources and a cheap, untapped labor market. Nowadays, we seem to be more toward the long-in-the-tooth, mature and doddering end of the production cycle, with newer industrialized countries enjoying modern factories and lower production costs as they kick our asses.

All of the great empire nation states through the years had great economic success that was spearheaded by an economic instrument that provided an exclusive manufacturing or resource edge. Portugal and Holland had two of the greatest world navies, England grew so rich off the cotton and exotic goods trade from India that they were forced to build the Suez Canal only to see it rendered moot in under thirty years. The US first had that world's fastest ships during the California Gold Rush era, and then the built the transcontinental railroad to open the west to mechanized travel.China is working on the Three Gorges dam network to provide power to the interior and get the cheapest electric they can build.

Maybe the gainclones and other computerized algorithym based amps will soon rule the amplifier world due to cheap costs and high quality.

[Audio Flynn]

Nowadays, we seem to be more toward the long-in-the-tooth, mature and doddering end of the production cycle, with newer industrialized countries enjoying modern factories and lower production costs as they kick our asses.

+++++++++++++++++++++++++++++++

What has the USA comercialized in the past 10 years of any significance?

I can think of nothing.

THe personal computer from the days of the 8088 processor and PC DOS is about 25 years old.

NASA should be all converted to discovery of terrestrial technology to give the USA dominance over a new market for something.

Portable affordable non fossil fuel energy generation is all I can think of that we could export world wide.

Min fusion reacotrs the size of refridgerators perhaps.

It has to be something radical.

++++++++++++++++++++++++++=

In the last 10 years I only see us as being the world leader in corporate fraud (ENRON).

[ZAKO]

AUDIO FLYN.....Are you trying to suggest all corporations are like ENRON? What about Klipsch? or Harmon int. JBL or RCA ???

[Audio Flynn]

AUDIO FLYN.....Are you trying to suggest all corporations are like ENRON?

+++++++++++++++++

No

BUT

When Enron is "under the wing" of Arthur Anderson (one of the most respected consulting firms for decades, until a few short years ago) and corporate ethics are so corrrupted it makes investors unsure of the validity of many companies.

Investor confidence is subjectively low now.

What I am saying is that the poor ethics of heads of companies like ENRON and TYCO are amazing when the details come out.

++++++++++++++

I read a comment in a book a couple of years ago.

Societies decline when elected officals and captians of industry serve themselves selfishly without regard to the law.

I think it was from "The death of outrage" by some conservative thihker like WIlliam Bennet.