Friday, June 25, 2010

Chinese factories struggle as wages rise ‎

SHENZHEN, China Caixin Online -- Standing in a light rain, dozens of young men and women quietly waited at the closed gates of a Foxconn Technology Group recruiting office.

One woman said she'd traveled from another electronics company factory nearby to check out Foxconn's offer to increase salaries by up to 2,000 yuan ($295) a month. She called that kind of pay "unbelievable" for an electronics plant in China's Pearl River Delta.

The kind of work performed at Foxconn and her factory "is the same," the woman said. But the pay is not.

"I can only make 900 yuan there, so I'd like to quit and come over here and try."

Nevertheless, a notice posted at the recruitment office suggested a long and perhaps fruitless wait for the woman, as well as the other job hopefuls parked in the rain. The notice is also one reason why rumors, misunderstandings and doubts about Foxconn's salary increases have been brewing in Shenzhen and the rest of the Pearl River Delta, a major manufacturing base, for weeks.

Foxconn, the notice said, had temporarily suspended hiring May 29, more than a week before it announced June 7 that it would pay substantially more to qualified, front-line operators who pass a three-month assessment.

The hiring freeze also came just a few days before the company had implemented a one-time minimum-wage increase of more than 33% to 1,200 yuan a month. The rise was increased to 66% in a week.

These were unusually steep pay increases for Foxconn, China's largest contract manufacturer, which produces goods for Apple and other electronics giants. Yet the pay hikes followed 10 suicides and three unsuccessful attempted suicides at the company's sprawling Shenzhen campus since January.

Some blamed labor conditions for the suicides. And conditions among factory workers, particularly migrant workers, across China sparked similar discontent far beyond Foxconn. Workers at the Nanhai Honda factory in Foshan, for example, recently went on strike for two weeks and won a 35% pay raise.

Will more labor strife follow? Zhuang Li, vice president of Dongguan City Dalingshan Town Jutong Electronics Factory, doesn't think workers should get their hopes up.

"Widespread salary increases are unlikely," Zhuang said. "We won't follow the trend of increasing wages."

Strikes and other forms of labor-management friction are said to be hurting labor-cost advantages in China. And yet it appears to be dawning on Pearl River companies that the popular business model that's worked so well for years in the region -- a model based on low salaries and few worker benefits -- is coming to a close.

Revaluing labor

June 7 was a payday at Foxconn unlike paydays in the past. Luo Jun, a migrant worker at the factory said in the past a lot of employees simply picked up their cash and left. But this time "now that they say there is a raise," Luo said, "no one is leaving."

The 2,000 yuan base wage combined with overtime would allow front-line workers to make as much as 3,600 yuan per month. That's not much less than the average income for all Shenzhen residents last year, potentially reversing what was historically a wide gap between salaries for migrant and local workers.

A 2008 report, for example, said migrant workers earned only 27% of local workers' salaries in the city. The gap was widening, even as manufacturer earnings rose.

Wages in the delta region started climbing after the government implemented a new labor contract law in 2008. The most recent adjustment May 1 brought the region's four, minimum-wage standards over the past two years to levels that were up 30%.

Not all companies follow the wage rules. Liu Kaiming, director of the Shenzhen Institute of Contemporary Observation, said 90% of the factories he surveyed, regardless of size, file false salary reports with the local labor department and their customers. Numbers are fudged to make it seem they are paying minimum salaries.

Meanwhile, labor disputes have been on the rise. Liu reported in February that 52,140 labor dispute cases were reported in Shenzhen in 2008 -- 7.45% of the total number of cases nationwide. Most were related to migrant workers, and primary issues included late paychecks, excessive overtime and unpaid overtime.

Challenges for business

The Pearl River Delta was the first region to accept migrant workers and now hosts more than anywhere in China. Between 1986 and 2008, more than 300 million migrants have worked or currently work in the region.

These masses of low-paid migrant workers helped the region become a factory to the world over the past 30 years. Since the global financial crisis and an ensuing decline in exports, many migrants returned to homes in China's interior.

Labor shortages have been reported since last summer. A global economic rebound rekindled export orders. At the same time, companies in the region came under increased pressure to increase wages to attract workers.

The first to feel the pain were the business owners who had benefited from years of cheap labor.

This is the case for Zhuang's company, which is part of Taiwan's Taihua Group and has been making products such as stereos speakers and computer peripherals for Sony, Yamaha and other international companies since 1988.

Zhuang told Caixin the company raised its base salary 20% May 1. As a result, wages have grown to 12% from 8% of the company's costs, squeezing margins.

Zhuang said 90% of customer payments went toward wages and other costs. Customers are unwilling to pay more, even though labor costs are rising, and so the factory will post a loss of 2% to 3% this year.

The dean of Zhongshan University's Finance and Taxation Department, Ren Linjiang, said business is not necessarily bright for the Pearl River Delta's export manufacturers. Productivity has not recovered, he said, and rising wages will hike costs to levels that are unlikely to fall.

Foxconn strategy

As China's largest export company, Foxconn enjoys far greater flexibility than other manufacturers in the region. It has an advantage over others since, as one of the company's suppliers said, "only the biggest can survive" in the current competitive landscape.

Foxconn is one of a few leading companies that can set prices. Moreover, it can reduce the use of manual labor through automation or by relocating production to areas with lower labor costs.

The rating agency Standard & Poor's showed confidence in Foxconn, citing no plans to adjust the rating of Foxconn parent Hon Hai Precision despite the latest wage increases.

In fact, the raises appear to be a shift in strategy for Foxconn Chairman Terry Guo. "He simply added 66%" of wages "and will see how other factories react," said Wu Zhihao, marketing vice president at Shihlin Electric & Electronics Corp. "He has to raise wages this time, or there would be strikes."

So by significantly raising wages Guo "passed the ball to other companies and regained the initiative," Wu said.

And that's left most companies in the region facing a tough dilemma: Labor expenses have been the only elastic, controllable component of their business, but higher wages reduce this option's effectiveness and may cut competitiveness.

To avoid being squeezed out, companies may have to find new strategies. These may include automation, hiking productivity and reducing manual labor. Some companies have started considering factory relocations as well, although such moves are complicated.

Governments outside the Chinese mainland are trying to attract businesses. For example, the Taiwan Ministry of Economic Affairs is currently helping Foxconn find land on the island, discussing investment plans, and working to assist with utility, labor and other cost issues.

But Zhuang said although his company's officials have visited potential factory sites in Jiangxi and Guangxi provinces, as well as Vietnam and India, none of the alternative sites seemed a good fit.

"If you move, your raw material suppliers can't necessarily accommodate you," he explained.

Moreover, years of development has created solid supply chains in the Pearl River Delta and Yangtze River Delta manufacturing regions. As a result, low-cost materials can be obtained within 100 kilometers of many factories in these areas, encouraging companies to stay.

Labor upgrades

From a labor perspective, the latest wage increases have been a positive development. For example, Liu Kaiming of the Shenzhen Institute of Contemporary Observation applauded the salary increases.

"It's time for workers to receive reasonable compensation," Liu said, particularly since the blue-collar workforce market is shrinking.

In the current environment "companies are forced to constantly offer higher wages," he said. "The difference in incomes between white-collar and blue-collar jobs will be reduced."

Yet pay raises need not sound a death knell for manufacturing in China.

Associate Professor Lu Huilin of Peking University's Sociology Department said reasonable raises for workers will "not affect China's status as the world's factory" but rather "increase the number of value-added jobs" so that the "Made in China" label on manufactured products also becomes "Created in China."

Successful economic development in other Asian countries provides valuable lessons. Liu said countries such as South Korea adopted an export-oriented development strategy while actively investing in worker education and benefits and encouraging workers to move from the countryside to industrial and urban areas.

Blue-collar workers in these countries were able to share the fruits of national economic development, improving living conditions for their families, giving them dignity and providing education for their children. Ultimately, improved worker benefits raised innovation capacities.

If conditions for Chinese workers improve as well, while companies adjust to new realities of migrant labor and climbing wages, China's factories could enjoy a bright future. And workers at the Foxconn factory gate would see the benefits of waiting in the rain.