China’s Rising Wages: Does it Matter?

The China price

There has been much press lately regarding rising wages in China and increasing unionization in China and it’s all true. Wages are rising in China, particularly in the coastal areas. On top of that, the Chinese government has gotten serious about collecting the various taxes and pensions and other employee benefits China employers are legally required to pay for their employees.

Unionization is also becoming a factor for foreign companies in China, especially for the larger ones. I give credit to David Wolf over at Silcon Hutong for having essentially called the Honda strike that is likely to lead to Honda increasing its worker wages by at least 25%. In Wolf’s post, entitled, Unionizing MNCs in China: Accept or Leave,

Wolf has this to say about unions in China:

The Economist does a superb write-up (Join the Party) on China’s growing effort to unionize the China staffs of multinational companies in China. Most apt is the magazine’s recommendation to the leaders of MNCs: accept unionization as inevitable.

The New Reality in China is that the nation’s leaders see the participation of foreign companies as less and less vital to China’s economy. (I respectfully disagree with them – I think the importance is changing, but not declining, but leave that aside for the moment.) If foreign enterprises aren’t being tossed out of China, the government is determined to strip away the special operating conditions to which companies from overseas have grown to feel entitled.

The recent strike at Honda supports Wolf’s thesis and there can be no dispute that the power of Chinese workers has increased.
But does it matter?

It matters to the company that does nothing but outsource its products to China and many of those companies are seriously considering places like Vietnam/Thailand/Mexico for their future product outsourcing.  But I actually think many foreign companies will benefit from China’s increasing wages.

Two things lead me to this conclusion. First, in looking back at the work my law firm has done over the last year as compared to the work we did over the five years preceding that, I note a major difference. Three years ago, probably eighty percent of our work was for companies looking to manufacture in China to save on their manufacturing costs. In the last year, I estimate around ninety percent of our clients looking to manufacture in China are planning to sell their product in China either right away of within the next few years. China is moving from “factory to the world” to “market to the world.”

I am in Japan right now and I have been here for two weeks, first working on this very public case and then taking on another Japan litigation matter with a short fuse. I have been meeting with a whole host of my firm’s Japanese clients, many of whom use us for their China work. They all are talking about the Honda strike and they all are saying pretty much the same thing and it goes something like this:

Honda has known all along that it would eventually need to increase wages in China, but the more Honda sells its cars into China, the better it is for Honda that wages go up. China seems to think it can have wages rise at only foreign companies, but we all know that is impossible. Every Japanese company already in China or looking to go to China is at least as interested in selling its product there as it is in manufacturing there and every company with any sense knows that to sell into China, the Chinese need money to buy. Japan’s economy has been in decline for a decade and really ‘nothing’ is happening here. Like it or not, we are all looking to China to buy our products and they are and that is what is going to help us. Some do not like to admit this, but it is true.

China’s increasing wages and unionization, a good or a bad thing? What do you think?

UPDATE: The Wall Street Journal just published an article by two Japanese analysts, entitled, Automating the Dragon: Rising labor costs present opportunities for the foreign companies that will help China mechanize its factories.

7 responses to “China’s Rising Wages: Does it Matter?”

  1. Unionization is bad, especially since the unions will probably be tools of the government rather than actually representing workers’ interests. In this way they will probably end up hurting companies and workers.
    Increasing wages are great as long as they come from natural improvements in the productivity of workers.

  2. A major round of wage rises long overdue for the workers at the frontline of the Chinese industrial revolution. The extraordinary sacrifices this group of workers has made in contributing to the growth of company profits and national infrastructure needs to be rewarded by an increased share of the GDP pie. Inevitable and long, long overdue. The share of wages as a % of GDP has sunk to low and alarming levels.
    As the article indicates, continued growth in China’s GDP will only be fuelled when the bulk of the population can afford to buy things produced here.
    I’m amazed people have been patient for so long. As prices have skyrocketed over recent years (for everyday goods, not inflated assets), average salaries have had only marginal increases. Bosses of all types (local and foreign) have taken the excuse of the GFC to limit wage growth, even when business has been booming and profits soaring (for domestic facing rather than exporting industries).
    From an individual enterprise’s perspective, an increase in the wages bill is obviously tough. However, the increase in the total pool of consumers able to buy goods and services creates new markets and demand. It can be a virtuous circle.
    The Unions have had little to do with it all. Staff are certainly becoming more assertive this year in indicating the expectations of healthy salary increases and better career pathways. Workers are voting with their feet and refusing to work in the most exploitative sectors.
    All healthy and inevitable.

  3. William above…. “increasing wages are great as long as they come from natural improvements in the productivity of workers” makes me feel ill. Obvious William has not been to an OEM factory lately. The “workers” taking sub 1% of the value created through their labour with the rest being nabbed by the factory bosses and far more so by the overseas “brand owners” etc. There’s plenty of room in there for a significant increase in wages by increasing workers shares in those fat margins. Given China’s workers 60 hour weeks (minimum), lousy wages, close to zero benefits etc, in already highly productive factories, I can’t see where those “natural productivity” gains will come from.
    The point of Dan’s post was that China’s workers will need to increase their share of national income for a positive flow on across the economy from increased consumption. A point well made.

  4. The biggest cause of Chinese workers getting such a small slice of the pie is the yuan-dollar peg. The peg is a direct transfer of wealth from Chinese workers to American consumers. Which is why it’s so ironic when American politicians complain about it.

  5. In response to Chris: in fact, I have been to Chinese production facilities. It is quite evident that the workers are paid little because they produce little. Wages will get better as workers become more educated and capable and get better tools and equipment. I don’t buy your Marxist exploitation theory.

  6. William above… the factories I’ve visited are actually quite genuinely productive.
    My point being that where ordinary employees share of the enterprise pie is so low (40-60% of turnover in most Western countries, 10-20% in China) there is room for expanding the share of the enterprise (and national) take.
    The reality is the OEM manufacturers are paid little, squeeze their staff to produce healthy margins and that the vast bulk of the total sale price of goods goes to either local factory owners and overseas brand owners.
    There is significant scope within existing margins for Chinese workers wages to double or triple without much impact on the bottom line. Along the way, yes efficiencies will occur as both local factory owners and overseas brands become conscious of the increasing cost of labour.
    However, the fallacies within the ultra right-wing brand of economics peddled by William and the like (Chinese workers are unproductive hence they get paid nothing) need to be challenged. Highly productive Chinese workers in ultra-modern world standard facilities are getting only marginally more than those in converted farmhouses in Wenzhou. Hence recent labour strife at Honda (which certainly operates world-class production facilities in China) and Foxconn.
    It is workers share of the total pie that is key.
    China’s domestic demand will only rocket when these key stakeholders get a meaningful share of the economic pie.

  7. Chris, what you haven’t explained is why workers’ wages account for so little of the cost of producing in China. “Factory bosses are greedy” isn’t a reasonable explanation; there is intense competition between factories so they aren’t colluding to keep wages low. If wages were too much lower at one place the workers would go elsewhere. The most logical explanation is that the workers are easy to replace because their jobs do not require great amounts of intelligence, training, experience or education. That’s why assembling a Honda is far less valuable work than designing one, or designing the production process of which the worker is a part.
    Frank Rizzo is onto something with his comment, too. The yuan-dollar peg makes all Chinese poorer, though I’m not sure of the exact mechanism by which it affects workers specifically.
    This is not “ultra right-wing” economics. This is just plain economics. Ask any college economics professor.

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