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.

Higher Wages, Labor Shortages and the End of Cheap Labor in China

Demands for higher wages and labor shortages have robbed China competitive advantages in the global economy by raising production costs and the prices of a wide range of consumer goods that China exports. According to Helen Qiao, chief economist for Goldman Sachs in Hong Kong, real wages for manufacturing workers in China have grown nearly 12 percent per year. Bill Powell wrote in Time, “That's the result of an economy that's been growing by double digits annually for two decades, fueled domestically by a frenzied infrastructure and housing build-out---one that, for now anyway, continues apace---combined with what was for a time an almost unquenchable thirst for Chinese exports in the developed world. Add to that the fact that in the five largest manufacturing provinces, the Chinese government---worried about an ever widening gap between rich and poor---has raised the minimum wage 14 percent to 21 percent in the past year. To Harley Seyedin, president of the American Chamber of Commerce in South China, the conclusion is inescapable: "The era of cheap labor in China is over."[Source: Bill Powell, Time, June 26, 2011]

"Mind you," Powell wrote, "that doesn't mean that labor costs in China, even in the most expensive parts of the country like Guangdong province, are higher than in most other places, particularly in the developed world. They aren't. The average manufacturing wage in China is still only about $3.10 an hour, (compared with $22.30 in the U.S.), though in the eastern part of the country, it's up to 50 percent more than that. The hourly cost advantage, while still significant, is shrinking rapidly. For the vast majority of companies, whether small, medium-size or huge multinationals, the decision about where to produce a product is always driven by multiple factors, of which the cost of labor is but one. "For lots of companies over the past two decades, the disparity was such that labor costs often drove the decision," says economist Daniel Rosen, the China director and principal of the Rhodium Group, a a New York City---based consulting firm. "Now, increasingly, that's no longer the case."

The factory model has run into some serious limitations, says Huang Yasheng, a professor of management at M.I.T. and the author of Capitalism With Chinese Characteristics . Now, they have to find a new model and move to a more innovative economy, Professor Huang said. The problem, though, is that those kinds of companies don’t create a lot of opportunities for young, migrant workers.

Closed Factories in China

Many of the companies that closed down had problems meeting their payroll before they closed and shut down owing workers months of back pay that workers never got. Many of the owners who skipped town in Guangdong were from Taiwan and Hong Kong; many of those in Shandong were from South Korea.

The situation has been exacerbated by a glut of factories built with foreign investment and approved by local officials anxious to generate new jobs.

The toy industry was hard hit by the economic crisis in 2008 and 2009 According to Xinhua, 3,631 toy exporters---52.7 percent of the industry’s enterprises---went out of business in 2008 because of higher production costs, wage increases for workers and the rising value of the yuan. Smart Union Group, which has three large factories, closed down, leaving 8,700 workers without jobs. After workers protested in the streets the government promised to pay them $4 million in back wages and help them find new jobs.

Shoes and textiles have also suffered. About 500 of the 3,000 shoe factories in the Guangdong county of Huidong shut down in 2007 and early 2008 and one sixth of the 44,200 textile firms surveyed lost money and two thirds barely broke even.

In Wenzhou 500 of the 600 factories that produced lighter closed up shop in 2007 and 2008. This occurred as result of too many factories and competition and the high cost of copper and zinc used to make the lighters.

Chinese Cheap Labor Industries Move Outside of China

Companies are aiming to stay ahead of the trend by moving inland to cheaper areas in China or to other developing countries. Some have even returned back home to the West. Wham-0, for example, decided to bring half of its Frisbee production and some production of other products back to the United States. Some high-end firms, such as biotech and drug companies, are moving out of China because of the cost and better incentives offered elsewhere. In some sectors there isn’t that much point doing business in China anymore. The cost of printing a 334-page, 23-centimeter-square hardcover book in China, for example, is around 45 cents, excluding shipping. The cost of producing the same book in the United States is about 65 cents.

Some cheap labor factories industries are moving to Vietnam, India or Bangladesh, where labor is even cheaper than in China. But many are staying put in the clusters of industries along China’s coast because of easy access to parts and materials. China’s improving infrastructure enables goods to be moved around the country and is particularly efficient shipping them overseas. “The effect can be seen on labor intensive light industries such as in textiles, handbag and shoe makers as well as electronics,” William Lo, an analyst at Ample Capital, told Reuters. “These manufacturers may choose some cheaper cost countries such as Vietnam and India.”

Many makers of toys, trinkets and cheap shoes have already moved to places like Vietnam, Cambodia and Indonesia. Bill Powell wrote in Time, “The changing economics of Made in China will benefit both the rich and poor world. Countries like Cambodia, Laos, India and Vietnam are picking up some of the cheapest labor manufacturing left by the Chinese. The owner of Guangzhou Fortunique, which supplies some of the U.S.'s biggest health care companies, told Time he has been considering moving to Cambodia. "We've seen our wage costs in China go up nearly 50 percent in the last two years alone," he says. "It's harder to keep workers on now, and it's more expensive to attract new ones. It's gotten to the point where I'm actively looking for alternatives. I think I'll be out of here entirely in a couple of years." [Source: Bill Powell, Time, June 26, 2011]

Toymaking, of course, along with footwear and textiles, was among the first industries to head to China as the cheapest source of reliable production. It's a labor-intensive, relatively low-tech industry---one that most economists assumed would be gone forever once it left. But a look at how the economics have changed over the past decade sheds some light on why companies like Wham-O are deciding to return. According to the BCG study, in 2000, China's average wage rate was 36 percent of the U.S.'s, adjusted for productivity. By the end of 2010, that gap had shrunk to 48 percent, and BCG estimates that it will be 69 percent in 2015. "So while the discussion in the short term favors China," says Hal Sirkin, senior partner at BCG and the author of the recent study, "the spread is getting down to a smaller and smaller number. Increasingly what you're seeing [in corporate boardrooms] is a discussion not necessarily about closing production in China but about 'Where I will locate my next plant?'"

A survey by restructuring firm Alix Partners found that labor in China is more expensive than labor in Mexico, India, Vietnam, Russia and Romania, with some of these countries also having the advantage of being near markets in North America and Europe. Some Chinese companies have begun outsourcing outside of China. Taking advantages of cheap labor, investment incentives and unrestricted exports, the Chinese-owned Nile Textile Company set up a factory along the Suez Canal in Port said, Egypt to produce ready-made garments and has been able to outcompete many rivals back home in China. As of 2009, about 950 Chinese companies had set up shop in Egyptian free trade zones. The Nile Textile Company employs 600 workers, 20 percent of them Chinese and the rest Egyptians. Workers earn about $130 to $150 a month. Access to cheap raw materials (namely Middle Eastern oil and Egyptian cotton) and nearness to good markets help it reduce costs. Most of its goods have a “made in Egypt” label and are exported to the United States.

Higher-end industries and goods requiring advanced production techniques, swift turnaround times and sophisticated supply chains, however, are likely to remain in China for now, Lo told Reuters. Rapid urbanization and economic development in China's interior has helped drive up wages and reduced the incentives for workers to uproot and seek work in coastal factory hubs. [Source: James Pomfret, Reuters, January 31, 2011]

Positive Effects of the End of Cheap Labor

Bill Powell wrote in Time, “Perhaps the most important effect of rising wages in China is that they will put more money in people's pockets, which is something that's in the interest of everyone---most emphatically Beijing's major trading partners, who urgently need China to increase its consumption in order to reduce drastic imbalances in global trade. As much as higher wages may cut into the bottom line of exporters like Charles Hubbs and thousands of Chinese-owned companies across a wide range of industries, the process is the inevitable result of China's becoming a wealthier country with a stronger currency. "It's exactly what needs to happen," says Rosen. [Source: Bill Powell, Time, June 26, 2011]

Many multinationals, meanwhile, have long since begun to focus their China manufacturing operations on the vast Chinese market. That HP factory in Chongqing produces its laptops only for the home market. In a survey eight years ago, the American Chamber of Commerce in South China found that 75 percent of its members were focused mainly on export markets. By last year, that number had flipped: 75 percent of 1,800 respondents now say their manufacturing operations in China are focused on serving the Chinese market. That's mainly because China's workers are steadily getting richer. For them, and pretty much everyone else concerned, that's the rarest of commodities in a troubled global economy: good news.

Some Chinese officials---aware that Beijing's Communist Party leaders including Premier Wen Jiabao advocate raising rural wages to reduce income inequality and speed China's transformation into a consumption driven-economy---seem willing to let low-margin industries wither away. “A moderate increase in the minimum wage will bolster the momentum of industrial transformation and upgrading,” Ou Zhenzhi, head of Guangdong's labor and social security bureau, was quoted as saying by the Southern Metropolis Daily, “A lot of sweatshop factories will go out of business and more value-added enterprises will eventually take their place,” said Crothall at the China labor Bulletin. “It (the Pearl River Delta) has got to up its game if it wants to maintain its position as China's premier employer.” [Source: James Pomfret, Reuters, January 31, 2011]

Retooling for Higher Value Products in China

In recent years many factories have started training their work forces, investing in sophisticated machinery and retooling their factories to make higher-value products. Some companies feel they have no choice but to follow this trend as the rising costs of labor and materials and low selling prices have made it hard to make money in cheap-labor industries. Ground zero for this trend is in Shenzhen and Dongguan, former cheap-labor factory centers.

Describing a new $70 million apparel factory in Dongguan Michael Shuman wrote in Time, “Nowhere to be found are the stereotypes of Chinese industry: the buzzing hive of menial laborers, medieval working conditions and outmoded equipment. The factory’s pristine white floors and brightly-lit aisles look more like a modern office suite than a clothing factory. In one corner, automated cutting machines slice out fabric for men’s pants, a process that wastes less material and requires only about half the staff needed to cut patterns by hand. In another section of the plant, a computerized system of ceiling tracks ferries the pants on hangers between sewing stations instead of having workers pass the pieces along. At the end of the assembly line, the high-quality garments emerge sporting brand names like L.L. Bean and Dockers.”

BYD, a Shenzhen-based company that became the world’s second largest battery maker in less than a decade, is even more ambitious. It has built a 1.6-million-square-foot assembly plant and has hired Italian-trained car designers to make plug-in hybrid cars. Hasee is a computer maker that was founded in 2002 and is already producing 100,000 laptops a month. By pouring it resources into research, focusing on innovative computers such as laptops that sell for less than $370 it hopes to be the world’s largest computer maker by 2020.

Chinese companies are expanding into software, biotechnology, medical devices and supercomputers. They are developing a passenger jet, several models of automobiles and opening up sophisticated chip plants as Japan and South Korea did before. Andy Rothman, a longtime China analyst, told the New York Times, “When a country is in its early stages of development, as China was 20 years ago, having an export processing center is good for growth. But there’s a point when that’s no longer appropriate. Now China’s saying, “We don’t want to be the world’s sweatshop for junk any more.”

Factors pushing China’s drive to produce more sophisticated products include the rising value of the yuan, the high cost of labor, labor shortages, new labor laws that mandate overtime and severance pay, the movement of workers to factories in the interior, high fuel and material costs, higher shipping costs, criticism over shoddy products and safety, efforts to clean up the environment---all of which make it hard to make money off cheap products and thus pushes companies to modernize and become more productive and efficient.

In its favor China possesses an array of ambitious entrepreneurs, fiercely competitive domestic markets and hundreds of thousands of highly trained engineers. The government is driving the process forward by tightening pollution regulations and encouraging companies to invest in expensive new machinery, often providing the money from state-owned banks to finance such upgrades. Beijing is discouraging the establishment of cheap-labor factories in southern China by ending tax breaks there.

See Food Safety, Food, People and Life; See Drug Safety, Health, Government and Public Services

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.

Last updated April 2012


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