What wage inflation looks like in China

The Economist provides good background on what the labor market is looking like in China – The end of cheap China.

I’ve commented earlier on the changing cost structure in China. This article gives some specific numbers.

 “It’s not cheap like it used to be,” laments Dale Weathington of Kolcraft, an American firm that uses contract manufacturers to make prams in southern China. Labour costs have surged by 20% a year for the past four years, he grumbles.

Twenty percent a year over four years would be 107%, slightly more than doubling the cost of labor, which is the same as the follow comment:

Sunil Gidumal, a Hong Kong-based entrepreneur, makes tin boxes that Harrods, Marks & Spencer and other retailers use to hold biscuits. Wages, which make up a third of his costs, have doubled in the past four years at his factories in Guangdong.

Here’s a picture of what wage inflation looks like at the moment

On March 5th Standard Chartered, an investment bank, released a survey of over 200 Hong Kong-based manufacturers operating in the Pearl River Delta. It found that wages have already risen by 10% this year.

That’s 10% in 2 ½ months.  Ouch.  Far more than a mere 20% per year.

On the other hand…

The article says we should not count China out of the manufacturing game.  For starters, the article points out that other things, like skill sets of local workers and the supply chain mean other Asian countries are not an overall cheaper place to produce.  Second, many companies are automating (I mentioned that here.)  Another factor is a sophisticated supply chain already exists in China.

The article also focuses on the appearance of major innovation taking place in some companies, such as Huawei.

One of the comments that encourages me is a small indication that intellectual property rights might eventually be protected:

In a sign that at least China’s private sector is beginning to take intellectual-property rights seriously, Huawei is locked in bitter battles over patents, not only with multinationals but also with ZTE, a cross-town rival that also wants to shift from being a low-cost telecoms-equipment maker to a creator of sexy new consumer products.

One example does not change a pattern.  I do hope Huawei’s efforts are the start of a major trend.

The last paragraph in the article almost sounds like Walter Russell Mead:

The pace of change in China has been so startling that it is hard to keep up. The old stereotypes about low-wage sweatshops are as out-of-date as Mao suits. The next phase will be interesting: China must innovate or slow down.

Back to the title – ‘cheap China’ many be winding down. It may be replaced with an innovation-based economy. I hope so. The last sentence contains the hint of the “or else”, which would be a much lower growth rate.

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