PRC Labour Costs Too High? SE Asia May Beckon

♠ Posted by Emmanuel in ,, at 8/23/2010 12:02:00 AM
Here's another slant on the familiar story of rising labour costs in China. It may indeed be the case that countries in export competition with China are also experiencing labour unrest over low wages. Again, China often sets the standard others have to benchmark themselves against in the wider East Asia region. So, if wage rise in China, the understandable response of others will be to demand similar rises.

Be that as it may, many countries in Southeast Asia are more than competitive with China from the standpoint of wages considered alone. However, labour is but one component in the decision to site manufacturing as you too have to factor in transportation costs, worker productivity, and domestic political stability. Below, the Wall Street Journal focuses on infrastructure development in particular, finding Southeast Asian nations wishing to compete with China lagging well behind. There are no real objections from me to this observation, though it must be noted that efforts are underway to correct this situation.

First is the ASEAN single market scheduled to come into effect by 2015 and remove impediments to the movement of goods, services, capital, and (skilled) labour across the region. Second, regional firms are already busy linking up to create working partnerships. If you're an IPE junkie, that's the difference between regionalism and regionalization. Regionalism involves national governments establishing frameworks for regional cooperation with each other, while regionalization is more organic in that individuals, firms, and other private actors in the region create relationships across national boundaries themselves.

In either case, I do believe things are looking up in Southeast Asia--especially compared to mostly moribund Western developed economies:
A key example is Southeast Asia, a region of nearly 600 million people that was once one of the world's investment darlings until it was eclipsed by China. The average factory worker in Vietnam made about $136 a month last year, in Indonesia, $129 a month, well below the $413 a month in China.

But Southeast Asia also faces enormous hurdles, including underdeveloped legal systems and problems with corruption. There is also the possibility that costs could spiral more than expected as workers learn more about wage gains in China and press for raises.

"Most of the countries, if not all, look to China for pricing direction," said Bruce Rockowitz, president of Hong Kong-based trading company Li & Fung at a recent press conference. Even so, Li & Fung Ltd. has been able to mitigate some of its rising costs by shifting business to places such as Indonesia and Vietnam.

Several Southeast Asian countries—including Cambodia, Vietnam and Indonesia—lack sufficient infrastructure to support much larger manufacturing industries, even though their wages are cheaper than China's. Individual Southeast Asian countries also lack the scale to single-handedly absorb a massive influx of jobs from China.

Leaders in the region are pressing ahead with plans to stitch together the patchwork of nations into a common market and production platform by 2015. If fully realized, the project will include fewer restrictions on the movement of skilled labor from country to country and streamlined customs procedures.

Southeast Asian countries are also making headway on road and rail investments. Efforts funded by the Asian Development Bank and others have created three major overland trade corridors, with improved highway connections across Cambodia, Thailand, Vietnam and Laos.

Many companies are pursuing the same goals on their own. In the garment industry, more than a dozen Southeast Asian suppliers have reached agreements recently to more-closely integrate their supply chains by linking stitching companies in places such as Cambodia with raw-material makers in Thailand or other nearby countries. The companies effectively agree to market goods jointly so that they appear similar to suppliers in China, which often offer all the steps needed to make a whole garment, including access to yarns, fabrics, buttons and sewing, in the same area.

The long-term goal is to make Southeast Asia operate like one country with many states, rather than a region of 10 nations, says Van Sou Ieng, chairman of the Garment Manufacturers Association in Cambodia. "We have huge differences, but we have to make it happen" to grab more business from China, he says.