The Economist published an insightful article titled “The end of Cheap China: What do soaring Chinese wages mean for global manufacturing?”
The key observation is the fact that wages have been rising steadily and some good facts are given. While there is no consensus, several sources state that wages have risen already more than 10% only this year, and “labour costs have surged by 20% a year for the past four years.” Specifically:
Labour costs (including benefits) for blue-collar workers in Guangdong rose by 12% a year, in dollar terms, from 2002 to 2009; in Shanghai, 14% a year. Roland Berger, a consultancy, reckons the comparable figure was only 8% in the Philippines and 1% in Mexico.
AlixPartners, a consultancy, offers this intriguing extrapolation: if China’s currency and shipping costs were to rise by 5% annually and wages were to go up by 30% a year, by 2015 it would be just as cheap to make things in North America as to make them in China and ship them there (see chart). In reality, the convergence will probably be slower. But the trend is clear.
The Operations Room has blogged on this topic before (and even have some predictions on how cost changes will impact offshoring). The article argues that
If cheap China is fading, what will replace it? Will factories shift to poorer countries with cheaper labour? That is the conventional wisdom, but it is wrong.
Conventional wisdom has some powerful backup (wisdom of the crowds) and is not to be dismissed entirely. Rather, each operations strategy should be tailored to the firm’s competitive strategy. In our Operations Strategy class we introduced a new case “Who is the next China”, arguing that, for some industries, China will be substituted by other countries and we can fairly well predict by which countries. But that location decision must carefully consider all relevant criteria: market demand factors, supply factors, technological factors, and macroeconomic and non-market factors. Relevant tools here are to include the Total Landed Cost into the Total Cost of Ownership. And it is true that this will keep many companies near coastal China because the entire supply base may be there and productivity is growing. Luckily, life is not just about one dimension (labor cost)…
But it is also true that the global economy is continuously recalibrating itself towards new equilibria. I find it useful to look at this process by making an analogy of wages and other local economic factors with temperature: natures seeks equilibrium and heat moves from high temperature to low. So it is with economic flows. This continuing globalization process does provide a positive message for social welfare and global stability: it lifts stranded boats (while, admittedly, slowing down the rise of, or perhaps even lowering, the high boats).