CHEAP LABOR INDUSTRIES IN CHINA AND THE END OF CHEAP LABOR IN CHINA

LABOR-INTENSIVE INDUSTRIES IN CHINA

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knife factory
China is the world leader in labor-intensive manufacturing. It produces almost half of the world's shoes as well as clothes, household gadgets, toys, appliances, furniture, Christmas ornaments, utensils, sunglasses, and other stuff. China went from not producing any of this stuff to dominating entire industrial sectors in a very short period of time.

About 70 percent of the world’s umbrellas, 60 percent of the world’s buttons, 72 percent of U.S. shoes are made in China, and 50 percent of U.S. kitchen appliances are made in China. The majority of the American flags and hand-painted Jesus and Mary figurines sold in the United States are made at factories in China. It is hard for Americans to go for a few days with buying something made in China. New Balance once prided for making its shoes in the United States. Now it has four plants in China and one in Vietnam. Even things that say “Made in American” or “Made in Japan” or made somewhere else have components or ingredients made in China.

The average wage at a Chinese factory in 2009 was around $200 a month, 17 percent more than the year before. Even so the goods that are made are sold so cheaply profit margins can be dangerously thin. Bloomberg reported of an exporter of car covers and seat cushion, Zhejiang Mingfeng Car Accessories, whose profit margin in 2009 was only 2.5 percent.

The “China price” refers the fact that so many goods can be made so cheaply in China that China has cornered the market on many products. For Americans this has meant a lose of factory jobs but wealth of good deals at Wal-Mart and other discount retailers. By one count 9 percent of the good exported to the United States end up in Wal-mart.

By one estimate, cheap Chinese labor has added $1,000 a year to American household thanks to cheap goods. Ironically the goods that Chinese workers make are considerably more expensive in China than the U.S. An Apple computer sells for $2,750 in Beijing, about $500 more than in the U.S. Shoes purchased at an official Nike Store can cost $190. Sony large screen televisions cost 30 percent more in China than they do in Japan. The list goes on and includes everything from baby strollers to golf clubs.

China is experiencing an industrial revolution at about ten times the speed that it occurred in the West. China relies on energy-driven heavy industry to generate growth. Between 1980 and 2000 China relied mainly on light industry to generate growth. The shift from light industry to heavy industry has lead to a huge appetite for resources and energy and produced huge amounts of pollution. Steel, for example, uses up 16 percent of all of China’s power, compared to 10 percent for all the country’s households combined and produces lots of pollution.

In China, factories are erected with remarkable speed and retooled for new products with equally impressive speed---both important element of China’s rapid manufacturing rise. According to the consulting firm IHS Global Insight, China accounted for 18.6 percent of the world’s gross manufactured output in 2009. In 2010 it is expected to surpass the U.S., which had a 19.9 percent of the output in 2009. As of 2008, about 89 percent China’s high-tech exports came from non-Chinese-owned companies.

Many of the factories are owned by Koreans or Taiwanese of former Chinese workers or managers at factories who learn company secret at their work place, figure out some way they can make improvements and launch their own factory.

The profits made through labor-intensive industry sometimes is truly astounding. Sunglasses that are made at a cost of a dollar a piece by 300 young women working over tiny machines in a cramped three-story factory in southern China, for example, sell for $35 in the U.S. With most of the profit ending up in the United States.

The primary pieces of machinery in many Chinese factories are injection-molding machines. At one end they have large funnels in which rice-grain-size plastic pellets are poured. These are melted and forced by tons of pressure into carbon-steel molds that form the products being made. The molded plastic is very hot. Often the excess material, known as flash has to be cut off by hand with a very sharp tool. The machines cost anywhere from $3 million to $10 million new and is ideally put to work around the clock, seven days a week, 365 days a year.

Websites and Resources

Good Websites and Sources: China Labor Watch chinalaborwatch.org ; China Labor Bulletin clb.org.hk/en ; China Law Blog on New Labor Laws chinalawblog.com ; 2003 IMF Report on Labor Performance www2.assind.vi.it ; Book: Understanding Labor and Employment Law in China (Cambridge University Press, 2009) cambridge.org/us ; Time magazine’s Worker’s Wasteland Time.com ; Chinese Government Paper on Labor Policy xinhuanet.com ; Gloomy Photos of Workers zhouhai.com ; Rising Wages, Business Week Article businessweek.com ; New York Times Article About “Unknown Substance” nytimes.com Chinese Workers on Stuff Made for Americans (satire) theonion.com Industry: China-Made Products made-in-china.com ; U.S. Commerce Department Information by Industry for China buyusa.gov/china ; Wikipedia article on Industries of China Wikipedia ; U.S. Commerce Department’s Office of China Economic Area (OCEA) export.gov/china

Links in this Website: ; CHINESE FACTORIES AND MINES Factsanddetails.com/China ; AUTOMOBILE INDUSTRY IN CHINA Factsanddetails.com/China ; FOREIGN CAR COMPANIES IN CHINA Factsanddetails.com/China ; LABOR-INTENSIVE INDUSTRIES IN CHINA Factsanddetails.com/China ; LABOR-INTENSIVE INDUSTRIES--TOYS, CHRISTMAS STUFF AND FIREWORKS Factsanddetails.com/China ; LABOR-INTENSIVE INDUSTRIES--TEXTILES, FURNITURE, SPORTING GOODS Factsanddetails.com/China ; TECHNOLOGY INDUSTRIES IN CHINA Factsanddetails.com/China ; PIRATING AND COUNTERFEITING IN CHINA Factsanddetails.com/China ; SHENZHEN AND THE PEARL RIVER DELTA Factsanddetails.com/China ; ZHEJIANG PROVINCE Factsanddetails.com/China ; SHANGHAI Factsanddetails.com/China

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Workers at New Balance factory

Major Manufacturing Areas in China

Sometimes China is referred to as the “world’s factory.” The term is sometimes used to refer in particular to Shenzhen and the Pearl River Delta in Guangzhou. The industrial heartland during the Mao era was in the northeast provinces of Liaoning, Jilin and Heilongjiang. This area went through a period of decline in the 1990s and early 2000s and now is attempting to resurrect itself.

Guangdong accounts for about 30 percent of China’s exports and 30 percent of the world’s shoe production. For every shipping container bringing materials into Guangdong Province, nine go out filled exports. The region is currently going through a make over as it tries to clean up its environment and create an economy based more on services and higher value products. Makers of labor-intensive products like shoes and furniture that want to open new factories there are being told to look elsewhere.

Cixi is a thriving municipality in the Yangtze Delta. In 2007 it boasted exports of $4 billion from 20,000 private companies and only one state-owned company. Jonathan Franzen wrote in The New Yorker, “So many locals own or manage factories that the resident population is nearly equaled by the population of migrant workers who do the ordinary jobs.” The “wetland parks” set up in a former area of reeds and swamps of the Yangtze Delta are largely devoid of bird life.

Major factory towns in Zhenjiang Province include Jinhua, famous for bras; Lishui, a large manufacturer of synthetic leather; and Qiaotou, famous zippers and buttons. Wenzhou makes 80 percent of the world’s lighters and is also major producer of sex toys. Zhenjiang New Oriental Fastener Co. has 600 employees and produces millions of screws, nuts and bolts.

Chinese Manufacturing Model

Reliance on labor-intensive industry is sort like a stage that developing economies go through. In the 1980s, South Korea was leading manufacture of sports shoes and cheap textiles. These products are now made in China, Thailand and Indonesia while South Korea is a leading manufacturer of semiconductors and other high tech products. China is making more and more high tech products all the time.

The Chinese manufacturing model goes something like this: 1) find a suitable product, often a component for a larger product; 2) build a factory in a new development zone with one’s life savings; 3) steal skilled labor from competitors and hire cheap labor to do unskilled tasks; and 4) move factory if expenses get too high. [Source: National Geographic]

Sometimes Chinese start their businesses amazingly quick. In some cases a factory owner will take an empty building, map out what he wants with construction contractors in a couple hours. Construction starts the next day and the factory ready in two or three months. Many people who start factories are over optimistic figuring the will need 60 workers after one year when they only need 20 and rent much more space than they need and manufacture too many goods that they can’t sell.

Many Chinese start factories with no customers lined up in advance. Potential customers are courted with presents of cigarettes and sweets. Ideally the aim is to find a product that no else is making. In the old days many people got that rich this way with high profit margins but these days the competition is so stiff and copy cats are so quick to respond there are often several dozen companies making the same thing. With the stiff competition profit margins are low.

Cheap labor isn’t the only reason for the success of Chinese factories. They Chinese also build large factories to reduce costs through economies of scale and then take this a step further by employing a strategy called clustering, Established through a mix of central government commands and free market entrepreneurship, clustering means that companies that make similar things like socks, bras or cigarette lighters, group together making it cheap to supply raw materials and distribute goods, reducing costs further. Many cities attract industry by claiming a large plot of land for a factory zone and offering the land at low prices along with tax breaks and other incentives.

Clustering, See Socks Below

Long supply chains with multiple contractors and subcontractors are common in China. Often they only thing that hold them together is trust which leaves open the possibility for fraud, and contaminated goods. When the process breaks down or there is some problem it is often difficult to ascertain clearly who as fault.

Cheap labor can be viewed as an impediment to development rather than a boon. When the United States was growing there were labor shortages and this encouraged innovators to come of with labor saving device like the cotton gin and assembly line that increased productivity and efficiency. There is little incentive in China to be innovative because labor is so cheap and there supply sometimes seems unlimited.

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Rug factory

Profits margins for Chinese labor-intensive industries are very slim. If factories raise prices too high customers will seek producers in places where prices are cheaper such as Vietnam, Indonesia or Bangladesh. The rising value of the yuan has put a squeeze on factories who have to keep prices low to kept customers. They are trying to improve efficiency.

See Cheap Labor, Labor

Chinese Factory Towns

“The evolution of factory in China is pretty such the same regardless of where it is,” Peter Hessler wrote in National Geographic. “The first to show up are the construction workers...most of them unskilled migrants from rural villages, and the small-time vendors and entrepreneurs that sell them meals and grocers. Next to arrive are stores that sell construction supplies and shops that sell cell phones, most of them with prepaid phone cards. [Source: Peter Hessler, National Geographic, May 2008]

“When the factories are up and running, female workers show up to work in them. To meet their needs are clothing and shoes shops. Sometimes it months later when the garbage is finally collected and bus service starts. In many cases man holes are left uncovered out of concern they will be stolen. Once the factories settle in, training schools open up that teach English, computer programing and other skills so workers can improve themselves and make themselves more marketable.”

“There is a surprisingly lack of institutional and government support. In the y early stages there are few policemen. Once the town is up and going there are few libraries schools, hospitals or even government offices, Most everything is oriented towards business. The local government is looking for ways to make money not provide public services.”

Yiwu, the Center of China’s Cheap-Labor Industries

Yiwu, a thriving trade city of about 2 million people in Zhejiang province near China's east coast, is quickly becoming the center of China’s cheap-labor manufacturing. Keith B. Richburg wrote in the Washington Post, “Unlike Guangdong province in the south, which has largely shifted to producing higher-end, higher-tech products such as cellphones, laptops and iPads, Yiwu has emerged as the center of China's small-scale, low-end manufacturing - socks, zippers, batteries, plastic baby toys. [Source: Keith B. Richburg, Washington Post, November 1, 2010]

One section of the city, spread over several square blocks, is known as "Christmas Village," stacked with some 260 look-alike shops offering all the accoutrements of modern-day American Christmas - the plastic snowmen and reindeer for the front lawn, stockings for the chimneys and brightly painted ornaments for the trees. The red suit with white fur trim worn by most suburban mall Santas probably came from one of these shops in Yiwu.

October is normally the time of year when Christmas orders are shipped to their overseas destinations, and on a recent visit Yiwu was bustling with workers packing and stacking boxes. About 80 to 85 percent of these Christmas goods are for export, since Christmas is not widely recognized or celebrated in China - except for at the big-city hotels, restaurants and bars that cater to foreigners.

Chinese Factories and Foreign Companies

Few of the products made in China are actually created or designed there. Most of the products are made for foreign companies using designs and patents from foreign companies, with foreigners making the biggest profits.Only 35 cents from an exported toy retailing for $20 remains in China.

In recent years Chinese companies and Chinese industries have come to dominate many industrial sectors. While Japanese companies made their mark through innovation and offering new products and new approaches to production, Chinese companies are making their mark through delivering good products with low production costs and low consumer prices.

Many Chinese factories make products for foreign companies who sell the products under their names. Many of these factories make products under contract to trading companies, which are based in mainland China, Hong Kong and Taiwan, and they turn strike deals with companies and buyers in foreign countries. The foreign companies give their instructions to the trading companies which in turn pass on the instructions to the factories. Occasionally the foreign companies send representatives to inspect the factories for quality control but often they have little contact with factories that produce their products.

In recent years these arrangements have begun to change as foreign company and even retailers have tried to cut out the middlemen by dealing with the factories directly. Business is often conducted at large trade fairs.

Many of the largest Chinese companies have became large by making products for the domestic market. They are very competitive and have developed in a dog eat dog world. Japanese companies by contrast have been heavily protected. Some Chinese companies are building factories abroad, particularly in Southeast Asian countries like Malaysia and Thailand.

In the United States and other countries, many complain that low-cost Chinese labor results in laid off workers at home. One Pat Choate, the running mate of Ross Perot in the 1996 election went as far was as calling Chinese factory workers as "coolies" who took jobs away from American workers.

Low Tech Chinese Factories and Shoddy Products

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Brick making
In some factories chemical additives are ladled into buckets of molten steel. mixed together and poured by hand into molds. So they can meet international standards, many factories have to throw out high numbers of substandard parts.

Foreign companies that have operations in China complain that their production lines are shut down because steel deliveries are unreliable due to shortages and problems with the rail system. Because Mao wanted to industrialize the north, parts plants there are often far away from the production facilities in the south.

Chinese-made products traditionally have had a bad reputation. According to a report in 1986 in the China Daily, more than a third of all products made in China were defective or didn't conform to national standards. The article described "Red Flag" limousines which got only eight miles a gallon; electric blankets that electrocuted their owners; and air conditioners that caused women to lose all their hair. Some appliances malfunctioned the first time people used them.

Safety Problems in China

The string of product safety scandals, which has included ones involving toys, toothpaste, pet food, milk and car parts, has blackened the “Made in China” label and made customers wary of buying products produced in China. Referring to the tainted milk scandal, one Australian shopper told Reuters, “I was physically disgusted when I saw it on TV. If I’m shopping and I pick up a product made in China, yes I would put it back.”

In August 2009, the United States announced that it was going to set up an office in China to ensure product safety among a wide range of products exported to the U.S. Of the 467 products recalled by the U.S. Consumer Safety Commission in 2006, 221 were made in China, 113 were made in the United States a and 133 were made elsewhere.

In 2007 a great amount of attention was focused on product safety in China after the recall of toys, pet food, toothpaste, tires and other imports that were mislabeled, unsafe or contained dangerous additives.

Duncan Innes-Ker, a China analyst for the Economist Intelligence Unit in Beijing, told Reuters, “China faces a lot of problems because it is a developing into a big but very poor economy, and obviously you can’t have Western-style safety mechanisms in an economy where half the population doesn’t earn much more than a couple of dollars a day.”

Other reasons for the problem include corruption, the autonomy of local governments, and a culture of covering-up bad news, delaying reporting of problems to bosses.

A study in 2007 by a Chinese government quality control office found that 19.1 percent of the goods tested were “substandard”---meaning, in some cases, they contained toxins, lacked required labeling or lacked adequate safety protection. In France, reclining chairs imported from China were found to contain substances that caused allergic rashes and infections. The owner of one of these chairs who suffered skin problems for months told AP, “You sit comfortably on something and in fact you have a bomb under your butt.” The rashes were linked to an antifungal substance in the chairs.

The problem was os widespread than any good made in China was regarded with suspicion. A survey conducted in August 2007 after the toy, tire, toothpaste and food recalls of products made in China by pollster Zogby International found that 82 percent of American respondents were wary of Chinese-made products and two thirds said they would support a boycott of Chinese-made goods. Some proposed putting “China -Free” labels on products with no ingredients from China, with implication being products without Chinese ingredients were more likely to be safe.

A poll conducted by the Pew Research Center before the 2008 Olympics found that only 1 percent of Chinese interviewed said they had heard a lot about problems with Chinese-made products.

Response to Poor Product Safety and Quality

The Chinese government has gone through some effort to show that it is on top of the product safety issue: launching crackdowns, arresting people, initiating massive recalls, destroying heaps of products on television. Often though as concerns over one safety issue start to wane a new one pops up. When a quality problem hits one sector it damages the reputation of anything made in China.

China blamed the problem on a few, small rogue companies and said the overall quality of Chinese products was high and Chinese products as a whole should not be condemned because of a few bad apples.

In August 2007, China launched a four-month safety campaign, regarded as the biggest of its kind since the SARS outbreak in 2002 and 2003, that was part crackdown and part public relations campaign. The campaign was led by Vice Premier Wu “Iron lady” Yi, who randomly visited shops, restaurants and other businesses, scolding owners whose operation were no in order.

Export regulations were tightened to comply with international standards. Inspectors were sent around the country. Thousands of unlicensed manufacturers were closed down. Export products were carefully scrutinized. In October 2007, 774 people were arrested in a nationwide crackdown on the manufacturing and sale of substandard food, drugs and other products. The arrest came from investigations in 626 criminal cases in a safety campaign launched in August 2007.

There are many obstacles that still need to be overcome. Among them is the difficulty that Beijing has getting local governments to follow and enforce their directives due t lack of equipment and manpower and the fact that local officials are often deeply connected with the enterprises they are supposed tp be monitoring.

Image Sources: 1) Wikicommons 3, 5, 7) China Labor Watch; 2, 6, 8) Nolls China website http://www.paulnoll.com/China/index.html ; 4) University of Chicago

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

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© 2008 Jeffrey Hays

Last updated April 2012

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