LABOR AND CHEAP LABOR IN ASIA
Cheap, hardworking labor has been a driving force in the economies of Asia. One analyst told Time magazine: "In most of Asia, factory workers put in long hours for low wages. That, in fact, is why U.S. firms have moved in.” On top of that Asia receives about $78 billion a year from workers working abroad. Analysts have said that if it wasn't for export quota from individual countries, companies that rely on cheap labor would all be in China rather than spread out in Southeast Asia.
In August 2011, the Asian Development Bank said that Asia needs to develop more high-quality jobs if he region is to sustain economic growth that it has been experiencing the last two decades. ADB chief economist Changyong Rhee said,”Asia has outstripped other regions in growth and employment creation since 1990.” But “Asia still remains home to most of the world’s poor...I don’t want to downplay the importance of economic growth, but on the quality job front, progress has been less impressive.” [Source: Reuters, August 21, 2011]
Reuters reported: “Citing figures compiled by the Manila-based development bank, Rhee said the two-thirds of workers in developing Asia, which excludes Japan, were employed in the informal sector in 2008, little changed from 1990. In India, the proportion of informal workers rose to 82 percent of the workforce, from 80 percent between 1991 and 2008. However, Thailand's percentage of informal workers dropped to 54 percent in 2008 from 70 percent in 1990, while Malaysia saw a drop to 22 percent from 31 percent over the same period.In contrast, informal workers made up 12 percent of the workforce in developing Europe in 2008, and 33 percent in Latin America and the Caribbean region. ADB said informal work is usually a sign of underemployment and lower incomes as well as the absence of social safety nets.
“The bank urged low-income Asian countries to make it easier for workers to move from rural to urban areas in search of higher-paying jobs, as well as support activities to increase productivity in the rural non-farm sector. It also recommended extending basic levels of social protection to informal workers.
Cheap Labor Industries
Japan's economic ascension had three distinct stages. The first stage was guided by the "priority production system" of the 1950s that stressed increasing coal and steel output and developing heavy industries like shipbuilding and timber making. In the second stage in the 1960s and 70s Japan focused on producing consumer products and automobiles for export markets. The third stage was the development of knowledge-based products like computers and electronics. [Source: Ian Buruma, Newsweek]
The Japanese went through a stage similar to the one that China is going through now in terms of copying and piracy. In the early stages of their development Japanese companies copied many American and European products. These companies and the Japanese government became more concerned with intellectual property concerns when Japanese companies needed laws to protect their patents and copyrights.
Japan’s talent for monozukuri (“thing making”) has been a key to its success. Many businesses got their start in one room neighborhood factories, relying on cheap labor, that made textiles, toys, tools and cheap electronic items. The first Sony portable transistor radio appeared in 1955 and the first Barbie dolls were produced in Japan in 1959.
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.
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.
Shoes and Textile Industries
Shoe manufacturing and textiles were among first industries to come to Asia and among the first to move on when wages rose. In some cases these industries got their start in Japan and then South Korea and then moved on to Indonesia and Vietnam and China. Nike was at the vangaurd of this process.
Wherever Nike went they raised wages and living standards. While they were accused of exploiting labor and damaging the environment in the United States and Europe they were welcomed in the countries they operated in as engines for growth. Other companies in search of cheap labor came. They mainly produced goods to be exported back to the country where the company was from, namely the United States. Investors sought profits. Their goal was not to improve the living standard of their workers. As workers skills improved, their wages rose and they begin to buy consumer goods for themselves. A middle class was generated.
The textile industry is major provider of jobs and foreign currency in many Asia countries. Textile companies tend to locate where labor is cheapest and growth has sometimes hindered by quotas in developed countries. The global industry went through a major upheaval in 2005 when a complicated global system of quotas was dropped and everyone was worried that the industry would en masse to China where economies of scale make huge cheap factories possible.
The system of quotas--originally put in place in 1974 to regulate a $350 billion-a-year global industry--limits the number of shirts, towels and other textiles any country can export annually to the U.S. and the European Union. As a result buyers couldn’t buy exclusively from the countries that make them most efficiently and cheaply, such as China, but must also order from less competitive places, such as Burma and Swaziland. One buyer said, "It's crazy: 80 percent of our clothing comes from 20 percent of the countries," says Joshi. "But we need to go to all these places because of the quota system." On December 21, 2004 all the craziness will come to an end. That's when a 1995 trade pact called the Agreement on Textiles and Clothing, signed by members of the World Trade Organization (WTO), stipulates an end to quotas.
For smaller developing countries that depend heavily on textile manufacturing, the end of quotas could be a dire economic blow. In 2002, for example, quotas on some items, including gloves and negligees, were lifted by the U.S. By 2003, Chinese exports of those goods had leaped nearly 200 percent from their 2001 levels, while Sri Lanka's exports had dropped more than 50 percent and Bangladesh's had fallen 46 percent. But the ending of quotas in 2005 “overall resulted in expansion and increased market shares” in places like Indonesia and Bangladesh as competition from China weeded out the strong from the weak and made made the strong companies more efficient and productive.
Limits of Cheap Asian Labor
Junichi Abe wrote in the Yomiuri Shimbun, “Unlike the way Japanese companies have set up production facilities in North America and Europe primarily to mitigate trade frictions, production facilities in Asia have been aimed at taking advantage of lower labor costs found there. The very premise of cheap and competent labor in other Asian countries, however, has begun to be questioned. Vietnam is one example. Vietnam is often said to be the top choice for Japanese firms in the so-called China-plus-one strategy, which focuses on the booming Chinese economy while also securing production facilities in other parts of Asia to spread out investment risks. The Japan Business Association in Vietnam said it had 124 member companies in March 2002. There were 243 as of February 2007.[Source: Junichi Abe, Yomiuri Shimbun March 14, 2007]
Kazuto Yachi, the general director of HAL Vietnam Co., the only overseas production arm of Hiroshima Aluminum Industry Co., put it this way: "As a result of the influx of Japanese companies into Vietnam, there has been fierce competition among them for excellent personnel. Although there are no major problems yet with securing workers here, it's getting increasingly difficult for us to get skilled technicians.”
HAL Vietnam was established in December 2002 in Hanoi's Thang Long Industrial Park. The factory has just over 300 workers, who, Yachi said, are "ready to leave us if they find jobs with wages higher than ours--even very slightly." Yearly turnover at the factory is about one-third of all workers, Yachi said. The companies also have to compete with their South Korean and Taiwanese rivals in attracting workers. According to a recent survey by the Hanoi Center of the Japan External Trade Organization, the top problem regarding labor management for Japanese companies in Vietnam is "wage increases" for their employees, which was cited by 75.9 percent of respondents. That was followed by "difficulties in securing mid-level managers" at 59 percent and "difficulties in securing technicians" at 50.6 percent.
Rising wages are also a source of trouble for Japanese firms operating in Jakarta, where companies began branching out earlier than in other parts of Asia. Takashi Aso, president of Pt. Metbelosa, an affiliate of Osaki Electric Co., said, "As the minimum wage was increased 10 percent recently, labor costs have been a major cause of rising production cost."Labor costs are affected by not only competition among businesses, but also labor policies of local governments. Given that wages in most of Asia are bound to rise with economic growth, Japanese companies, in expanding production there, can no longer take it for granted they will find "low-priced, excellent" labor.
In light of this, Toyota Motor Co.'s personnel management in Indonesia may serve as a guiding light. With Indonesia as its production pivot in Asia, Toyota, in collaboration with such parts manufacturers from Japan as Denso Corp. and Aisin Seiki Co., has a network of automobile parts suppliers throughout Southeast Asia. Toyota's local procurement rate of automobile parts in the Association of Southeast Asian Nations region has now reached 95 percent, earning Toyota a reputation as an "ASEAN-based" enterprise. Regarding wage increases in Indonesia, Hidematsu Ibaragi, president of Pt. Toyota Motor Manufacturing, Indonesia, said the average pay at his company for factory workers is "a little higher" than other companies in that country.
Although it is often said the quality of labor is relatively low in Indonesia, it is primarily because many Japanese companies have only used Indonesian workers for unskilled jobs, Ibaragi pointed out. "If we systematically train them, Indonesian workers would surely show a strong willingness to work, as well as a considerably high level of problem-solving capabilities," he said. Toyota's idea is to foster excellent workers on the strength of the Toyota formula of job training, instead of simply pinning hopes on getting cheap labor.
Chinese Cheap Labor Model
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]
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.
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.
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.
Nike, Reebok, Adidas and Poor Working Conditions in Asia
Nikes are manufactured in Vietnam, China, Indonesia and Thailand. It has been criticized for hiring underage workers, paying subsistence wages, hiring abusive managed and exposing employees to dangerously high levels of toxic chemicals. As of 2001, Nike produced 78 million shoes a year from contract manufacturers in China and about 160,000 workers in China relied Nike for jobs. Nike says the labor cost for a $85 shoe are about $2.50. If materials are included the cost is $16. If administrative labor is excluded the labor cost are only about $1.
Some Nike factories have been described as "little more than prison labor camps." Employees work 72 hour weeks and can be fired for refusing over time. One study found that workers at factories that make Nikes and Reeboks, monitored in 1995 and 1997, earned as little as 10 cents an hour and toiled for up to 17 hours a day. In response to criticisms, Nike asserts it doesn't make shoes, it subcontract the work.
Responding the criticism Nike promised to raise the age of employment to 18, improve safety use water-based rather solvent-based glues and use machines that do cause serious injuries. Some factories offer free day car and health checks and provide continuing education for their employees. In 1998, Tim Larimer of Time wrote: "Nike's factories in the region are above average...[We] found them to be clean, brightly lit and well-ventilated. Where the employees have to use foul-smelling glues, there are plenty of fans to carry the fumes.”
Adidas has been accused of using slave labor to make soccer balls. According to a lawsuit brought on behalf of dissident Baso Get, political prisoners in China "were coerced into waxing, stitching, and sewing Adidas soccer balls 14-18 hours a day in inhumane conditions" to make soccer balls for the 1998 World Cup.
Sweatshops are small factories that produce things like garments and shoes and light assembly plants that produce things like toys and cheap electronics. Stereotyped ones are hot, stuffy places, hence the name, where workers put in long hours, often working under harsh conditions, for low pay.
Most poor Asians would like to see more sweatshops rather less of them. They provide scarce jobs for people who otherwise wouldn’t have jobs. Even salaries as low of two ro three dollars a day, which seem minuscule by Western standards, are a lot of money for people living on sustenance level in agricultural villages.
Jeffrey Sachs of Harvard and Columbia and Paul Krugman of Massachusetts Institute of Technology, say that sweatshops are the first step taken by developing countries on the road to becoming developed ones. The economies of Japan, Hong Kong, Singapore, Taiwan and South Korea all got started with sweatshops. Responding to critics of sweatshops, Krugman told the New York Times, "A policy of good jobs in principle, but no jobs in practice, might assuage our consciences but it is no favor to its alleged beneficiaries.”
The biggest worry that many workers have is getting hurt on the job. In many cases the can't afford proper hospital care and their company won’t pay for their medical costs. Many end up getting help from a local healer and suffer injuries that prevent them from working at the factories again.
The Asian financial crisis in 1998 slow reforms to improve conditions at sweatshops. Owners wee unable to make improvements when they were struggling to cut cost to stay afloat.
Shortage of Professionals and Skilled People in Asia
The Economist reported in 2007: “Asia has more than half the planet's inhabitants and is home to many of the world's fastest-growing economies. But some businesses are being forced to reconsider just how quickly they will be able to grow, because they cannot find enough people with the skills they need. In a recent survey, 600 chief executives of multinational companies with businesses across Asia said a shortage of qualified staff ranked as their biggest concern in China and South-East Asia. It was their second-biggest headache in Japan (after cultural differences) and the fourth-biggest in India (after problems with infrastructure, bureaucracy and wage inflation). Across almost every industry and sector it was the same. [Source: The Economist, August 18, 2007]
“Old Asia-hands may find it easy to understand why there is such concern. The region's rapid economic growth has fished out the pool of available talent, they would say. But there is also a failure of education. Recent growth in many parts of Asia has been so great that it has rapidly transformed the type of skills needed by businesses. Schools and universities have been unable to keep up.
“This is especially true for professional staff. Airlines are one example. With increasing deregulation, many new carriers are setting up and airlines are offering more services to meet demand. But there is a dreadful shortage of pilots. According to Alteon Training, the commercial-pilot training arm of Boeing, India has fewer than 3,000 pilots today but will need more than 12,000 by 2025. China will need to find an average of 2,200 new pilots a year just to keep up with the growth in air travel, which means it will need more than 40,000 pilots by 2025. In the meantime, with big international airlines training only a few hundred pilots a year, Asian airlines have taken to poaching them, often from each other. Philippine Airlines, for instance, lost 75 pilots to overseas airlines during the past three years. China has been trying to lure pilots from Brazil, among other places.
“Similar problems are bedevilling the legal profession, which is suffering from a grave shortage of lawyers and judges. This can cause a long backlog of cases and other complications in what are sometimes rudimentary legal systems. It can damage the way business is done, for instance in dealing with intellectual property or settling contract disputes. According to the All-China Lawyers Association, the country has only 122,000 lawyers. That is 70,000 fewer than California where the population is only 37m (against China's 1.3 billion). Many business people might argue that California is overlawyered, but there are parts of China without any lawyers at all.
“A report presented at the Chinese Party Congress in March by the Jiu San Society, a group of progressive Chinese intellectuals, stressed the shortage of doctors. There are only 4,000 general practitioners in China. But if the government is to achieve its ambition of establishing community hospitals for the country's 500m urban residents, it will need 160,000 doctors to staff them. There is a huge shortage of nursing staff as well.
“The scarcity of accountants is already having a regional impact. In order to list their shares in Hong Kong or Shanghai, many Chinese companies are busy preparing internationally acceptable accounts and statutory reports. With the country's own bean-counters trained in Communist-era systems — which never paid heed to capitalist ideas like profits or assets — accountants are being lured to the mainland from Hong Kong and the rest of the region. A senior manager at one of the big audit firms recently arrived in Hong Kong after a long stint in Russia, took one look at his firm's ambitious growth plans and asked: “How are we going to do this without enough staff?”
“Technical skills, particularly in information technology, are lacking in many parts of the region, even India. One of the main concerns is that there are not enough skilled graduates to fill all the jobs being created in a vibrant sector. Nasscom, which represents India's software companies, has estimated that there could be a shortfall of 500,000 IT professionals by 2010. This means companies recruiting at job fairs in India are having to make lucrative offers to capture the most promising students. Even a junior software-engineer can expect to take home $45,000 a year.
“There is also a severe shortage of good managers. A study by the McKinsey Global Institute predicts that 75,000 business leaders will be needed in China in the next ten years. It estimates the current stock at just 3,000 to 5,000. And that assessment could prove optimistic. The study, which covered a broad spectrum of businesses and surveyed more than 80 human-resources managers, found that less than “10 percent of Chinese job candidates, on average, were suitable for work in a foreign company.” In engineering, for example, graduates were criticised for being too immersed in theory and not enough in practice. It concluded that the available pool of engineering talent in China was no larger than that in Britain, which now has a mostly service economy.
“China is even suffering from something of a brain drain. In recent years the Chinese have been able to travel abroad more freely to study and acquire skills. But many do not return. A recent report by the Chinese Academy of Social Sciences found that between 1978 and 2006, just over 1m Chinese went to study overseas and some 70 percent of them did not go back. The brightest are often tempted to stay abroad by local employers, because the competition for jobs has become global.
“The skills shortage comes in two forms: higher staff turnover and rising wage costs. Pay rates for senior staff in many parts of Asia already exceed those for similar staff in much of Europe. The going rate for a human-resources director working for a medium-to-large multinational in Shanghai is now $250,000 a year, and that is for “someone who has probably never even left China,” says Vanessa Moriel, the managing partner of Human Capital Partners, a Shanghai-based consulting firm. The chief executive of an international business based in India can expect to earn $400,000-500,000, with many earning well over $750,000, according to Korn/Ferry, a consultancy. For a chief finance officer the average pay is now $194,000 in China, $159,000 in Thailand, $157,000 in Malaysia and $73,000 in India. Wages for lower-level staff are also rising quickly, increasing by 14 percent in Indonesia last year, 11 percent in India and 8 percent in China — well above the rates of inflation in each country.
U.S. Losing High-Tech Manufacturing Jobs to Asia
Peter Whoriskey wrote in the Washington Post, “The United States lost more than a quarter of its high-tech manufacturing jobs during the past decade as U.S.-based multinational companies placed a growing percentage of their research-and-development operations overseas, the National Science Board reported. The rapid expansion of science and engineering capabilities in China and its neighbors pose a more formidable economic challenge to the United States, according to the group, with Asia rapidly boosting the number of engineering doctorates it produces and research dollars it spends. [Source: Peter Whoriskey, Washington Post, January 17, 2012]
“The National Science Board publication shows, vast government efforts in Asia are workingto attract and develop engineering outfits, and not just low-wage factories, have paid off. Since 2000: 1) Research-and-development expenditures in China and nine other Asian countries have risen to match that of the United States. 2) The number of doctoral degrees in engineering awarded in China has more than doubled, and now far exceeds the number awarded in the United States. 3) The number of research workers for U.S.-based multinationals working overseas has more than doubled.
“Over time, global science and technology capabilities have grown, nowhere more so than Asia,” according to the report. “In most broad aspects of science and technology activities, the United States continues to maintain a position of leadership. But it has experienced a gradual erosion of its position in many specific areas.” Although the long decline of manufacturing employment in the United States is often attributed to the cheaper wages in developing countries, China and developing countries in Asia have in recent years sought to lure more sophisticated manufacturing operations — and better jobs — by expanding their engineering prowess through government investment in education and research.
“Just as China and other Asian countries appear to be gaining in engineering, however, other factors at work are expected to give a boost to U.S. manufacturing by making it more competitive with China. Wages in China have been growing rapidly, lessening their advantage over those in the United States. Moreover, increasing automation in the United States is lowering labor costs. Finally, analysts said, U.S. workers are far more productive. Within five years, the cost gap between the United States and China to produce many goods consumed in North America will be virtually closed, according to a recent report from the Boston Consulting Group. “China’s overwhelming manufacturing cost advantage over the U.S. is shrinking fast,” the report said.
High Turnover Rates in China
The Economist reported: “A high staff-turnover rate helps to force up wage costs, and turnover-rates can exceed 30 percent a year in some places in Asia. Fiducia, a Hong Kong-based consultancy, reckons that the additional hiring and training costs of operating in Asia add a further 15 percent to the basic costs of employing someone. Factories in southern China now plan for a 4 percent loss of staff just in the week immediately after Chinese New Year, because people seem to like to start the new year with a new job. In middle management, the average retention period of an employee in Shanghai is just 1.8 years, with human-resources managers among the most difficult to keep. Some job applicants are known as “jumpers” because of their tendency to switch jobs every two years. [Source: The Economist, August 18, 2007]
“Struggling with high staff-turnover is harder still when many firms are also trying to expand. Last year Flextronics, a big electronics manufacturer, wanted to increase staff numbers in Shenzhen from 27,000 to 43,000. But to get a net increase of 16,000 people, it had to hire more than 20,000 because over the same period it had 4,000 employees leave.
“As well as excessive wage inflation there is also “title inflation” and “responsibility inflation”. Relatively inexperienced local managers are sometimes given ever-grander titles — much to the chagrin of their counterparts from Europe and America, who can find themselves sitting beside much less able and more junior colleagues described as “Senior Executive Vice President” or “Regional Chairman”. But these honours are handed out for a reason: many employers in Asia have found that awarding new titles to employees every 18 months or so can be a good way to keep them.
“Giving greater responsibility to staff is more troublesome. Yet many inexperienced managers in China are being given powerful regional roles or are promoted to positions where they lack sufficient knowledge or ability. Even though they may not seem ready for the job, it is often seen as the only way to keep them on the payroll.
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Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Global Viewpoint (Christian Science Monitor), Foreign Policy, Wikipedia, BBC, CNN, NBC News, Fox News and various books and other publications.
Last updated November 2012