As China's Wages Continue to Heat Up, Expect More Reshoring of Production Back to the U.S.
1. New York Times editorial "Chinese Labor, Cheap No More" by Beijing journalist Michelle Dammon Loyalka:
"But while China’s industrial subsidies, trade policies, undervalued currency and lack of enforcement for intellectual property rights all remain sticking points for the United States, there is at least one area in which the playing field seems to be slowly leveling: the cheap labor that has made China’s factories nearly unbeatable is not so cheap anymore.
Thanks to China’s rising labor costs, it looks as if America might be back in the manufacturing game sooner than expected."
2. From a CNBC report last February, "China's Role as 'World's Factory' Coming to an End":
"China’s economy is at a significant crossroads as it enters 2011, with wages rising rapidly and the labor force, particularly of migrant laborers, starting to shrink. The shift is causing many to predict the end of the country’s status as the world’s shop floor."
3. Bloomberg -- "Foxconn Technology Group, the world’s biggest contract manufacturer of electronics including Apple Inc.’s iPhone, raised the pay of its workers in China this month, the third increase since 2010.
Pay rose by 16 percent to 25 percent starting Feb. 1, the company said in an e-mailed statement yesterday. The basic monthly pay of a junior worker in Shenzhen has risen to 1,800 yuan ($290) from 900 yuan three years ago, it said. Foxconn will raise monthly salaries to more than 2,200 yuan for workers who pass technical examinations."
4. Hal Sirkin, a senior partner and managing director at the Boston Consulting Group (BCG):
"It's now becoming more effective to produce in the U.S. than it is to produce in a lot of different countries. Between the shift in the dollar and the incredibly rapid rise in wages in China, people are starting to do this. In a BCG report, we predicted that this would not happen until 2015. We're surprised in a very good way because we're starting to see it happen in 2010, 2011 and 2012. Now we think this is just the tip of the iceberg that we're seeing -- that we're going to see a whole lot more because the economics continue to shift in favor of the U.S. The fundamentals are that the tide has turned, as it did with Japan, as it did with the Asian Tigers. We're seeing a repeat of this with China."
HT: Scott Lincicome's blog and here on Twitter.
4. Hal Sirkin, a senior partner and managing director at the Boston Consulting Group (BCG):
"It's now becoming more effective to produce in the U.S. than it is to produce in a lot of different countries. Between the shift in the dollar and the incredibly rapid rise in wages in China, people are starting to do this. In a BCG report, we predicted that this would not happen until 2015. We're surprised in a very good way because we're starting to see it happen in 2010, 2011 and 2012. Now we think this is just the tip of the iceberg that we're seeing -- that we're going to see a whole lot more because the economics continue to shift in favor of the U.S. The fundamentals are that the tide has turned, as it did with Japan, as it did with the Asian Tigers. We're seeing a repeat of this with China."
HT: Scott Lincicome's blog and here on Twitter.
36 Comments:
History repeats itself once again. Those of us who understand business have been expecting this to occur all along.
History repeats itself once again. Those of us who understand business have been expecting this to occur all along.
This is good news. The last, large cheap manufacturing platform is coming to an end.
Other countries are either too corrupt, too culturally backward or too small to replace China.
However, global living standards will continue to rise, even w/o China. Productivity in manufacturing continues to rise, meaning manufactured goods will just get cheaper and cheaper.
I semi-agree with you, Benjamin, but what exactly do you mean by "culturally backward?"
Jon-
Many nations are hidebound, anti-female, corrupt, or steeped in religions/traditions that prevent commerce.
Mexico, Saudi Arabia, Nigeria, India come to mind, in varying degrees. Most of the Islamic world.
I do share a concern that any traditional culture cannot withstand free enterprise commerce, and so one day we end up with a homogenized blob of a planet.
Is that better or worse than a world in which women have no rights, or cozy religious or party nuts control GDP? Traditional cultures can be suffocating.
It is a big topic. I was speaking short-hand.
this is called a "lewis point" after economist arthur lewis.
wages in an industrializing nation remain stagnant for a long period. you are draining agricultural workers from the countryside and filling cities. this vast supply of new labor keeps rates down.
but at some point, you exhaust the migration capacity. suddenly, workers are hard to find and wages spike dramatically.
Ok, thanks Benjamin. I figured that's what you were talking about, but I just wanted to be clear.
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Will the U.S. stimulate China's economy through higher U.S. prices and lower U.S. profits, while going backwards producing more lower-end goods?
Or, will China's job growth slow, or reverse, while the economy heads into stagflation?
Another thing that one may wish to consider about "reshoring" is rising transportation costs. Oil prices keep going up which means it's more expensive to ship things across an expanding ocean.
Jon: "Another thing that one may wish to consider about "reshoring" is rising transportation costs. Oil prices keep going up which means it's more expensive to ship things across an expanding ocean."
While this may be true for large items, I doubt that the increase in shipping costs for something like an iPhone makes much difference.
Ships are very efficient.
Shipping is shipping. It's a cost, just like anything else. If that cost rises too much, firms look to cut it (if they cannot pass it on to customers). Even if it's a small item like an iPhone, if shipping costs are up, it eats into the bottom line, even if it is just marginally.
this is called a "lewis point" after economist arthur lewis.
wages in an industrializing nation remain stagnant for a long period. you are draining agricultural workers from the countryside and filling cities. this vast supply of new labor keeps rates down.
but at some point, you exhaust the migration capacity. suddenly, workers are hard to find and wages spike dramatically.
Don't forget there is also the Environmental Kuznets Curve which says that when GDP reaches about $4,000 per capita, people begin to demand cleaner air, water, etc. China's GDP per capita? $4,393.
Shame it isnt a 1:1 replacemnt that it needs to be.
That, and the cost of doing an iDevice in the US wouldnt be as expensive as Morganovich's audio gear. Even if you manufactured in worker-favoring(as oppposed to business-favoring) states in the North. It's nothing that couldnt be smoothed out in multiple generations of US-made product.
Don't forget there is also the Environmental Kuznets Curve which says that when GDP reaches about $4,000 per capita, people begin to demand cleaner air, water, etc. China's GDP per capita? $4,393.
It isnt likely to happen when the government can crack down on such demands. Same thing with the Lewis point, since China has the desire to quell riots so that it keeps its multinationals.
Jon: "Shipping is shipping. It's a cost, just like anything else. If that cost rises too much, firms look to cut it (if they cannot pass it on to customers). Even if it's a small item like an iPhone, if shipping costs are up, it eats into the bottom line, even if it is just marginally."
You are absolutely correct. Maybe I wasn't clear. My point was that an increase in shipping cost wouldn't likely be a primary consideration in any decision on where to assemble iPhones.
It isnt likely to happen when the government can crack down on such demands. Same thing with the Lewis point, since China has the desire to quell riots so that it keeps its multinationals.
Obviously, Sethstorm, you've not been paying attention to developments in China over the past few years: tree-planing in the Gobi desert, rudimentary environmental regulations, the Chinese government just paid a French garbage company to come in and help them set up landfills, recycling plants, waste-to-energy conversion plants, etc., things that were unheard of 5 years ago.
Additionally, you see Chinese wages nearly doubling throughout China and in many different industries.
Of course, China still has a long way to go. But to pretend that nothing is going on is just putting your head in the sand.
You are absolutely correct. Maybe I wasn't clear. My point was that an increase in shipping cost wouldn't likely be a primary consideration in any decision on where to assemble iPhones.
Ah, yes of course. I see your point and I agree. From my (admittedly unscientific) observations, where we are really seeing transportation costs affect the decision to reshore (or offshore, considering your POV) is in auto manufacturing.
There may be much less reshoring than we expect:
Rising Wages in China Good for Globals, But Few Jobs Coming Back
November 10, 2011
Chief Investment Strategist Keith Fitz-Gerald
Despite reports of major labor shortages in the eastern coastal parts of China, Fitz-Gerald said there remains "vast undeveloped low-wage areas ripe for industrial expansion" in the western provinces of China.
"They have a 50-year initiative called the "Go-West' program that is designed to push labor from the eastern regions to the western ones," Fitz-Gerald said. "If the jobs are pushed west, there will be no great exodus of jobs from China."
The majority of jobs that do leave China, he said, will probably go to areas with even cheaper labor, such as Indonesia, Thailand, Vietnam and Mexico.
"That should make U.S. manufacturers very nervous," Fitz-Gerald said of Chinese jobs moving to Mexico. "The Chinese would be building stuff on our back doorstep."
With a factory just across the U.S. border, a Chinese manufacturer would save a lot of time and money on shipping.
"They could become even more competitive than they are now," Fitz-Gerald said.
Mexico counts as reshoring. All reshoring means is moving your production closer to your customer base.
Mexico counts as reshoring. All reshoring means is moving your production closer to your customer base.
Not for the US, where it matters.
The majority of jobs that do leave China, he said, will probably go to areas with even cheaper labor, such as Indonesia, Thailand, Vietnam and Mexico.
"That should make U.S. manufacturers very nervous," Fitz-Gerald said of Chinese jobs moving to Mexico. "The Chinese would be building stuff on our back doorstep."
With a factory just across the U.S. border, a Chinese manufacturer would save a lot of time and money on shipping.
The more reason to enact a wider tariff that punishes China and like-minded Third World countries for being an unfree country.
The only thing that China cultivates is Third World despotism and disregard for workers.
China is not going fast enough. Those companies that aid and abet China, like that French firm, are cultivating a disregard for the worker in favor of the business.
When the Third World is no longer viable to be used as an economic threat by businesses against US workers, there might be progress. Until then, the better thing is to punish the unfree-actions and the businesses that support them.
Ah, Seth. That's some good ole fashioned racism right there. You're reminding me of that summer I spent in Alabama.
It's now becoming more effective to produce in the U.S. than it is to produce in a lot of different countries. Between the shift in the dollar and the incredibly rapid rise in wages in China, people are starting to do this. ...
But the problem in the US was never wages. It was all of the stupid regulatory rules that made rapid action very difficult for companies that needed to change on the fly.
It is by not a good thing to learn that Chinese workers are getting more and more pay while their American counterparts are stagnating. The last time I looked getting higher pay for being technically proficient and more productive was supposed to be desirable.
Other countries are either too corrupt, too culturally backward or too small to replace China.
What the hell do you mean Benji? A country like Vietnam, Indonesia, Mexico, Turkey, or Ireland is more than capable of assembling iPods. The reason that the work is not there yet is because costs are still lower in China.
VangelV says: "Chinese workers are getting more and more pay while their American counterparts are stagnating."
China needs to increase consumption, and so does the U.S..
Of course, it's important where the money for the higher wages comes from, e.g. government, productivity, prices, profits, exports, etc..
From same article above:
Last week the Guangdong province, where many of China's factories are concentrated, announced a 20% increase to the minimum wage. Combined with two earlier hikes in April and July, the total increase over the past 10 months is a startling 42%.
And with an eye toward boosting domestic consumption, the government plans to keep the raises coming - on average 20% a year through 2015.
That extra money will get spent with domestic Chinese businesses as well as U.S. corporations with a strong presence in China - such as McDonald's Corp - but is dramatically raising costs for Chinese manufacturers.
Between the wage increases and slumping global demand, the Federation of Hong Kong Industries warned on Tuesday that as many as one-third of Hong Kong's 50,000 factories could downsize or close by the end of the year.
In the case of the U.S., too few dollars were "refunded" in the form of tax cuts from dollar outflows of trade deficits and dollar inflows of U.S. Treasury bonds, to sustain private consumption growth.
Ah, Seth. That's some good ole fashioned racism right there. You're reminding me of that summer I spent in Alabama.
My issue is with their government and how it interacts with business in very worker-hostile ways. Had Tiananmen Square gone the other way, and made China less despotic, I'd have a higher opinion of that country. They chose company-town despotism over free will.
As for Alabama, the only thing they get right is immigration law. That's the only law that I want to see coming from the South - not RTW, which reduces overall freedom to the set of people who oppose unions.
China needs to increase consumption, and so does the U.S..
I do not believe that this is true. In the case of the US it has consumed far more as it should have even as it experienced capital destruction, destroyed its education and training system, and strangled productive activity with useless regulations. What the US needs is more savings. And what China needs is for its government to spend much less on projects that would make no sense to the private sector.
Last week the Guangdong province, where many of China's factories are concentrated, announced a 20% increase to the minimum wage. Combined with two earlier hikes in April and July, the total increase over the past 10 months is a startling 42%.
And with an eye toward boosting domestic consumption, the government plans to keep the raises coming - on average 20% a year through 2015.
Why should the government set wages to begin with? This is just useless tinkering that is an attempt to stave off the effects of the massive inflation inside of China. When I was trying to price out my vacation this year I was looking at close to 35% more for what I paid all in for my previous China trip. That is a massive increase given how little the food component is. Imagine the inflation experienced by the average Chinese family?
That extra money will get spent with domestic Chinese businesses as well as U.S. corporations with a strong presence in China - such as McDonald's Corp - but is dramatically raising costs for Chinese manufacturers.
That is my point. The government is creating inflation. It needs to stop.
"Don't forget there is also the Environmental Kuznets Curve which says that when GDP reaches about $4,000 per capita, people begin to demand cleaner air, water, etc. China's GDP per capita? $4,393."
absolutely.
environment behaves like a luxury good in terms of demand.
this is also going to up costs in china.
i do wonder how state share of GDP affects this. if the state is a big part of the economy, does that push the inflection point out?
seth-
"It isnt likely to happen when the government can crack down on such demands. Same thing with the Lewis point, since China has the desire to quell riots so that it keeps its multinationals."
what complete nonsense. seriously, do you just make this stuff up?
wages are soaring and environmental regs in chain are tightening. it's already happening. you are making completely counter factual statements.
seth-
"The only thing that China cultivates is Third World despotism and disregard for workers."
what an unmitigated pile of bovine excrement.
yeah, we should have kept the chinese in backbreaking, dead end agricultural jobs at 20% the wages they could earn in manufacturing.
why do you think they were so anxious to move to the cities? because it was a better opportunity. you act like they were rounded up and marched at gunpoint. sorry, but that was how they GOT to the countrside, not how they came to the cities. that was mao. this was done by choice.
i am continually dazzled by what a bizarre and false version of reality you seem to inhabit.
morganovich: "what complete nonsense. seriously, do you just make this stuff up?"
Sethstorm occasionally arouses from his slumber on the couch in his mother's basement, sits up to type a few keystrokes on his laptop, hits the "publish" key, then drifts back to sleep.
He may believe he is documenting his dreams.
"i am continually dazzled by what a bizarre and false version of reality you seem to inhabit."
Yeah, but isn't it nice, at some point in an otherwise ordinary day, to get an unexpected chuckle?
wages are soaring and environmental regs in chain are tightening. it's already happening.
Yet they are not able to speak up against their company without fear of retribution, and they still are viable for businesses to use it as a threat to workers in First World countries. Once those problems are solved, then progress has occurred.
environment behaves like a luxury good in terms of demand.
Absent requirements for parity with First World countries.
VangelV, even you will spend instead of save when you see a bargain (e.g. based on price).
Rather than individuals choosing to spend or save their dollars, government chose to spend those dollars for them.
VangelV, even you will spend instead of save when you see a bargain (e.g. based on price).
True. But I consume out of savings and do not need to borrow for the purchase of consumer goods. And I do not use more than a sliver of my savings for consumer goods if there is something more important that is needed.
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