China On Strike: The Rising Cost of Offshore Labor

Last week’s strike at the Omron auto parts plant in Guangzhou was the latest in a series of labor disputes to rock China’s industrial sector over the past two months. It’s an amazing change we’re seeing, as the western world’s favorite source of cheap manufacturing labor begins to transform itself into something quite different: a country with a rising middle class, demanding the perks of a developed economy.

Western sellers of cars, computers, apparel and other popular consumer items must be having conniption fits. Many exist on perilously thin margins – that’s why they flocked to China in the first place – yet are facing higher supply chain costs at a time when demand for their products is anything but assured. More than a few will be booking flights to Vietnam, Malaysia and Bangladesh, in search of the next army of compliant, low-cost workers.

They’ll need to look fast. What’s happening in China isn’t a temporary phenomenon. Already we’ve seen strikes at Chinese plants making critical automotive parts for Honda Motor Co., Nissan Motor Co. and Toyota Motor Corp.; electronic components for Japan’s Mitsumi Electric Co., Ltd.; air-conditioning systems for a division of Ingersoll Rand, and beer for Denmark’s Carlsberg Group, to name a few. And let’s not forget the recent turmoil at the Taiwanese-owned Foxconn Technology Group, which boosted wages following a rash of employee suicides at its massive complex in Shenzhen. By all appearances, the summer of the Chinese industrial worker is far from over.

A curious thing about these uprisings is the way in which the Chinese government is treating them. There’s been no replay of the Tiananmen Square protests of 1989; demonstrators aren’t being arrested or shot, and the military isn’t out in force. The strikes are even being reported in the state-controlled Chinese press. So what’s going on?

Consider first that the strikers are making fairly narrow, specific demands for better pay, working conditions and chances for advancement. They’re not challenging the legitimacy of the Chinese government. (Not yet, at least.) There’s even a sense that Chinese leaders are welcoming the protests as an excuse for developing a stable middle class. After all, if workers aren’t adequately paid, how can they afford the level of consumption that’s critical to a vibrant domestic economy? China has spent the last 20 years making products for world markets, but with its extensive natural resources and population of 1.3bn, it represents the biggest market of all.

And so the endless migration of global manufacturing capacity continues. Or does it? Josh Green, chief executive officer of Panjiva, suggests that it won’t be so easy for manufacturers to find “the next China.” They’ll need a location that mirrors the three ingredients to China’s amazing success: government policies that are friendly to trade, a solid infrastructure of factories and transportation capability, and a large, under-employed labor pool.

That last element is what has allowed China to keep its labor rates down even as manufacturing activity has soared. As Green points out in a recent article, “there were so many people that needed jobs that it seemed companies would always be able to find more people that were willing to work for very little.” Emphasis on “seemed,” because this state of affairs is fast coming to an end.

India, with its population of more than 1.1bn, is the obvious alternative. But total costs there are unacceptably high, says Green, thanks to a lumbering bureaucracy and lack of supporting infrastructure for trade. With its huge population and widespread use of English, India “should have been China before China was China,” Green says. But bodies alone don’t make for an attractive source of low-cost production.

And what about all of those developing countries, like Vietnam, Indonesia and Malaysia? Eager as they might be for business, they lack the populations to support a sustained environment for manufacturing. Once industrial activity gets a foothold in any of those countries, competition for labor will quickly drive up wage rates.

Leaving us, then, with the prospect that there is no “next China” on the horizon. To be sure, manufacturers will keep on sourcing in China for some time to come; even with substantial raises for its workers, the country will still be a lot cheaper than most alternatives. (Although Apple Computer might have to shave a few points off the staggering profit margins that it derives from the iPhone, iPod and iPad.) But don’t expect another part of the world to emerge as the next center for low-cost offshore manufacturing on an equally massive scale.

Instead, companies will have to look beyond the cost of labor to other aspects of their supply chains. Green says they’ll need to do a better job of working across multiple geographies. Adrian Gonzalez, director with ARC Advisory Group, sees a renewed push for continuous improvement through practices such as Lean manufacturing.

There’s still plenty of waste in most global supply chains, Gonzalez says. Now is the time to begin hunting it down. One possibility is for multiple shippers serving a common retail customer to combine loads for the more efficient use of equipment, and fewer empty miles. The idea has been talked about for years, but with supply-chain costs on the rise, its time might finally have come.

Ultimately, though, manufacturers, retailers and buyers will face an even more unsettling notion: the end of rock-bottom prices for consumer goods. Big-box retailing was built on the philosophy of deep discounting, with Wal-Mart Stores and its competitors demanding ever-lower costs from suppliers. The ready availability of cheap labor in the developing world made it possible.

The search for cost savings never ends, says Simon Ellis, practice director for supply chain strategies with IDC Manufacturing Insights, “but at some point you’re going to find that there simply aren’t adequate [low-cost sourcing] alternatives anymore … and just accept that the global economy has now emerged, and we’re going to have to pay emerged-economy labor rates.”

As consumers, we’ve been trained to expect – indeed, demand – an endless stream of bargains. Now, as we face the reality of a world marked by ever-rising costs, higher standards of living and dwindling resources, we’re in for a re-education.

– Robert J. Bowman, SupplyChainBrain

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