Wait a minute. Doesn't China have an inexhaustible supply of cheap labor? Not any longer. From the textile and toy factories of the south to the corporate headquarters and research labs in Beijing and Shanghai, the No. 1 challenge today is finding and keeping good workers. Turnover in some low-tech industries approaches 50%, according to the Institute of Contemporary Observation, a Shenzhen labor research group. Guangdong Province says it has 2.5 million jobs that remain unfilled, while Jiangsu, Zhejiang, and Shandong provinces say they, too, face shortages of qualified workers. "Before, people talked about China's unlimited labor supply," says Zhang Juwei, deputy director of the Institute of Population & Labor Economics at the Chinese Academy of Social Sciences in Beijing. "We should revise that: China is facing a limited supply of labor."A WSJ blog piece from last year harps on a similar theme. Still, it is difficult to foresee how China can continually keep a lid on upward wage pressures as the stock of rural workers flocking to industrial work continues apace and reaches...certain limits. Then there's inflation blowback from effectively importing easy money policies from the United States. For what it's worth, here comes TIME magazine with the often-bandied idea that neighbouring countries with even lower labour costs are eager to pick up the PRC's slack. Take Penang, Malaysia for instance:
After ferociously sucking jobs and investment out of Southeast Asia over the past two decades, the China Effect is now lifting once declining industrial hubs like Penang out of their long economic slump. The northern Malaysian state attracted $4 billion in investment for its manufacturing sector in 2010, according to the Malaysian Investment Development Authority, a 465% jump from 2009. "It's been rocky at times," admits Lim Guan Eng, Penang's chief minister. "But being an underdog has kept us on edge and made us work harder."I'm all for inter-Asian trade, of course. Try Bangladesh, mayhaps:
Penang's nascent boom is partly fueled by Western manufacturers wary of China's rising costs. It also stems from dramatic changes in China's economy that are redirecting trade flows across the region. Not all of the companies relocating to places like Penang are Western multinationals; in fact, many are Chinese firms. As salaries and spending power in China rise, the Chinese are importing more goods from the rest of Asia. At the same time, those rising salaries are forcing China to outsource more of its low-end manufacturing. According to a 2010 Citigroup ranking of 12 Asian countries by manufacturing wages, China was the seventh least expensive and Malaysia the eighth. "The pure-cost reason for being in China for certain economic activities is being eroded," says Sanjeev Nanavati, CEO of Citigroup Malaysia.
The result is a virtuous trading circle for Asia as the Chinese outsource more to and import more from the region. According to HSBC, intra-Asian trade is forecast to grow at an average annual pace of 12.2% until 2020, 40% higher than the rate by which Asia's trade with the U.S. is expected to grow in the same period. Nearly 50% of Asian exports (excluding Japan's) now go to other Asian countries, according to Credit Suisse. That's more than the current demand for Asian exports in the U.S., the E.U. and Japan combined.
Not surprisingly, the manufacturing belt that stretches from Bangladesh's western capital, Dhaka, to its southeastern port in Chittagong has begun to lure investors who sense a mini China in the making. Brummer & Partners, a $10 billion hedge fund and private-equity firm based in Stockholm, recently spent an undisclosed sum to obtain a minority stake in a Bangladeshi garmentmaker that counts such retailers as Gap and H&M among its customers. "We're starting to see these kinds of companies take an interest in Bangladesh," says Kiron Bose, the chief investment officer for Brummer's Bangladesh-focused private equity fund. From stitching jeans and T-shirts, Bangladesh hopes to crack the more complex and lucrative business of making sneakers for companies like Nike and Adidas. "Shoes are still a China story," says Bose. "That's where Bangladesh has to compete next."The article points out that rule of law and infrastructure also figure into the decision of where to set up (sweat?)shop, but if so, certainly China never figured high on either measure? At any rate, I certainly wouldn't bet on China holding on to its status indefinitely. It's called moving up the value-added ladder--a historical signifier of progress in development.
Meanwhile, we should certainly appreciate a detailed academic study on wage costs in Chinese production centres during recent years. While interesting, the welter of news articles on the subject only paint an anecdotal picture. Comparative studies with wages in other Asian countries over time would also be appreciated.