The hollowing out of Chinese Manufacturing

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An honorable member of the Coffee Shop Has Just Posted the Following:

Never knew I would see this!!!

The great American manufacturing renaissance? Maybe not. But China is losing the low-wage edge. With manufacturing already in the doldrums, dizzying wage increases, long a reality on the factory floor, have become government policy last fall: the new leadership of the Communist Party wants disposable per-capita income to double by 2020.

Regional governments, authorized to set their own minimum wages, responded. In April, Shanghai raised its minimum wage by 12% to 1,620 yuan ($260) per month, the fourth year in a row of steep increases. Shenzhen raised it to 1,600 yuan. In 2012, minimum wages were boosted in 23 provinces and large cities. So far this year, 14 provinces and cities have already made the move. Wages above minimum have jumped as well.

In the Pearl River Delta, overall manufacturing wages jumped 9.2% this year, up from last year’s 7.6% increase, according to the annual survey by Standard Chartered. Three quarters of the companies expect wages to rise 10% over the next 12 months. And an analysis by the Japanese business daily Nikkei determined that China now has the highest per-capita labor costs among emerging Asian countries, after they climbed 60% from 2009 through 2012!

Results: price increases, particularly in coastal regions, that may be even steeper than wage increases; and manufacturers that are seeking to cut their exposure to these ballooning wages.

Every major automaker in the world has been investing billions every year in China to build new plants and increase production capacity as China has moved from an automotive backwater to the largest market in the world. Hence, a daily litany of announcements by Ford, VW, Nissan, BMW, even gasping PSA Peugeot-Citroën, that they’d build another plant. Bailed-out GM is among the leaders of the pack, plowing US taxpayer billions into plant, equipment, and jobs in China. They’re all frantically producing for the Chinese market – stimulated by rising wages and a flood of money. Exports come later, once Chinese demand stalls, and when “overcapacity,” already a dreadful word in the auto business, will take on new shades of meaning.

But they all have to deal with rising labor costs. So strategies are shifting. Companies are using more of what they’d been using for decades in developed countries: automation. Hardly anyone welds manually at assembly plants in high-wage countries. But they do in China. And it’s getting expensive. Nissan for example. About 65% of the welding at its Dongfeng Nissan No. 1 plant, which came on line in 2004, is done by hand. At its No. 2 plant, which began operating last year, only half of the welding is done by hand; the rest by robots. A reaction to the annual 10% wage increases.

Manufacturers in the Pearl River Delta told Standard Chartered that wage increases have been absorbed by higher productivity as output per worker has risen faster than wages, thanks to investments in technology. And they’re planning to increase these investments – to replace workers with automation. The hollowing out of manufacturing. Now even in China.

Other companies in the survey plan to move manufacturing inland, where wages are lower. And many plan to offshore production to cheaper countries. This trend is particularly strong among companies producing for export.

Ito-Yokado, which operates 175 superstores in Japan and is part of Japan’s largest retail group Seven & i Holdings, is shifting its production of clothing from China to Myanmar, among other low-wage countries, to cut its reliance on China from 80% in 2011 to 30% this year. Consumer electronics company Funai Electric – the main supplier of electronics to Wal-Mart and Sam’s Club – expects to shift 90% of its production in China to cheaper countries.

A trend confirmed by a friend of mine, an executive at a US company. They manufacture big-ticket consumer products with plenty of unique technologies that get pilfered in China, where they’d set up shop a few years ago, under pressure to bring down costs. But they pulled up their stakes in 2012 and shifted production to North America – well, Mexico.

Companies are always searching for the greener grass, and offshoring by companies in China will continue. It shows up in the numbers. Manufacturing has been growing at anemic rates, or not at all – despite the booming auto industry – while other sectors, such as the property sector, are in the middle of a powerful bubble. But companies with a good reason to stay in China, like automakers, are plowing fortunes into technology and automation to cut down on workers.

Robots are the great equalizers. They’ve become outright cheap, and unlike wages, they cost the same everywhere. A Chinese company investing in automation in order to overcome rising wages, ironically, loses is low-wage advantage over competitors in developed countries – and will have to compete eye-to-eye. Meanwhile, jobs will be lost to robots or will migrate to cheaper countries. Ultimately, it conforms to the goals of the Chinese leadership to push production and wages up the pyramid, away from the curse of low-wage manual work that any robot can do for less. But hollowing out manufacturing, as it has been done so successfully for decades in America, comes at a price.

In America, aircraft maintenance was a highly paid blue-collar job that required education, training, manual skills, and brains. It was one of the perfect middle-class jobs with generous healthcare, retirement, and vacation benefits; and free flights! They were working for icons like Delta, American Airlines, Continental, TWA, or Pan Am. Icons indeed! Read.... When Flight Safety Gets Outsourced To China


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