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Division
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PO Box 7970
Madison, WI 53707-7970
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Vol.
7 #5, May 2008
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.
Preparations for the Olympic Games in Beijing are also impacting
business. The Tianjin and Shanghai Port Bureau has decided to
stop accepting hazardous cargo into the Xingang/Tianjin/Shanghai port
effective June 1 through the end of August.
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% across the board
in January for their entire Chinese workforce. … it was
estimated some 30% of the factory workforce in Guangzhou would not
return from Chinese New Year, making factory workers that much more
scarce, 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.
The Madison International Trade Association (MITA) will be holding a
luncheon seminar on the topic of rising costs in China and its affect
on Wisconsin businesses. More information is available on the MITA website.
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