Monday, July 5, 2010

Rising yuan forces rethink of China ops

Jul 5, 2010

Manufacturers consider moving to places with lower costs like India

THE recent rise of the yuan is prompting a rethink among Asian companies with manufacturing operations in China.

Analysts say a more robust yuan would further erode China's labour-cost advantage over other links in the global supply chain, even as foreign-owned factories in China are seeing more workers strike over poor working conditions.

Last month, China's central bank pledged to let the yuan trade more freely against the United States dollar, with the result that the yuan hit five-year highs of 6.8089 to the greenback in the days that followed. It has since risen 0.8 per cent against the US dollar since the June 19 announcement.

The prospect of having to shell out more for higher wages is forcing manufacturers to think of relocating to Bangladesh, India, Indonesia and Vietnam, where wages remain relatively low.
Analyst Bruce Tsao from Capital Securities in Taipei said dramatic wage hikes in the mainland are 'adding more woe to labour-intensive industries in China already troubled by low profit margins'.

'Such factories may not move out of China soon, but the trend is inevitable in the long term,' he said.

Taiwan's Feng Tay Group, which supplies about one-sixth of Nike sports shoes, said it was planning to boost production in India as its Chinese manufacturing base shrank.

The company made 51 million pairs of shoes last year, 20 per cent in five Chinese plants. 'The ratio will keep falling in the years ahead,' said company spokesman Amy Chen, adding however that its Chinese plants would 'remain our production base of high-priced products'.

'We'll keep expanding our capacity in India over the next five years, considering its competitive edges like ample supplies of quality workers, relatively low wages and concessions offered by the government.'

Bangladesh, which has the lowest minimum wage in the world at just US$25 (S$35) a month, could also be poised to reap the benefits, as long as it can resolve its own chronic labour disputes and fix its crumbling infrastructure, experts say.

'Bangladesh has a huge opportunity to capitalise on rising costs in China,' said Mr Ifty Islam, an investment banker at Dhaka-based Asian Tiger Capital.

'But it is difficult to get more foreign firms to come if we can't prevent labour unrest,' he said.
China is not only facing the challenges of higher wages, but also that of growing labour unrest.
Production at a Japanese-owned electronics factory in northern China was suspended from Tuesday to Saturday as 3,000 workers went on strike over pay and benefits. It marked the latest in a spate of labour unrest to hit foreign-run firms in China, highlighting growing discontent among millions of workers over low salaries and poor conditions.

The official China Daily has warned of 'an end to cheap labour in China'.

Over the weekend, Chinese Premier Wen Jiabao said China's economic situation was good but the domestic and international economic environment was 'complicated'. He warned China's ma- croeconomic control policy is facing more difficulties with the global financial crisis and the unpredictability of the global recovery.

Separately, a deputy Chinese central bank governor, Ms Hu Xiaolian, stressed on Saturday the importance of avoiding excessive volatility in the currency.

'Speculative and flock-driven fluctuations are a big blow to confidence,' Ms Hu told a forum in Shanghai.


[Comment: The problems of economics are complex and inter-related. You keep wages low to encourage investment in manufacturing. But as the economy improves, the workers are no longer satisfied with low wages and demand higher wages. But if higher wages does not come with higher skills, there are other countries with workers who are willing to work for less, and the factories go where the labour is cheapest. Then what would China do? They need to skill-up. Then they find they are competing at the next level. But the next level of jobs have to be attracted to come in. Until there is enough jobs, they workers go off to foreign lands in search of better jobs. And compete with the indigenous labour force in those foreign lands. Like Singapore. And the workers in Singapore find their wages depressed because of the cheap imports and wonder if they should be protected. But if we protect our jobs by keeping the foreigners out, then the manufacturers will move to where production costs is cheapest. If imported labour keeps us cheap and competitive, then Singaporeans will still have jobs alongside the foreigners. But if we have no imported labour, and we demand higher wages for low-end jobs, the jobs will move offshore.

The wage supplement that the govt gives to the low wage worker has been called a subsidy to the employers. In a sense it is welfare - except we get commercial operators to hire Singaporeans cheap, then we top up the wages. It is not much different than paying employers to employ workers.]

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