Doing Business in China Becoming More Expensive

The combination of low wages, minimal regulation, and a cheap currency attracted many manufacturers from around the world to China and made the country the leading source for electronics, shoes, toys, furniture, and lighting. It was always assumed that foreign investment and economic development would eventually raise wages and consumer power in China, but the vast population in the hinterland was expected to delay that process significantly and maintain downward pressure on prices. It now looks like the days of ultra-cheap labor and scant regulation in China may be coming to an end sooner than expected.

In its first annual study, titled "China Manufacturing Competitiveness 2007-2008," the American Chamber of Commerce in Shanghai found that a stronger Chinese currency and rising wages are putting pressures on manufacturing margins in China. More than half of foreign manufacturers in China believe the mainland is losing its competitive advantage over countries like Vietnam and India. Almost a fifth of the companies surveyed are considering relocating out of China.

Chinese government policies are also contributing to the change. A new labor law that took effect on January 1 has significantly raised costs by requiring companies to provide employee benefits including pensions; to guarantee collective-bargaining rights; and to hire for the long term. New work rules significantly limit the amount of hours that can be worked without bringing overtime into play.

Returning from a 10-day trip to China, a local Wisconsin company reported to their Customs Broker, M.E. Dey, "What I saw in this last trip was unlike anything in my past five years of traveling there. Prices are virtually out of control – not just for commodities but for every possible input to the many products manufactured there. ... McDonald's, as a point of reference, raised wages 30 percent across the board in January for their entire Chinese workforce. … it was estimated some 30 percent of the factory workforce in Guangzhou would not return from Chinese New Year, making factory workers that much scarcer, again driving up real wages, regardless of what the minimum wage may be."

The possibility of Chinese manufacturing jobs being outsourced to Vietnam, India, and elsewhere is widely discussed. Chinese manufacturers may also be in the market for labor-saving capital equipment that can increase production efficiency.

-- Stanley Pfrang