SCDigest: Will Rising Wages in China Significantly Change Outsourcing Economics?
Through a special arrangement, presented here for discussion is a summary of a current
article from Supply Chain Digest.
In a recent interview, William Fung, CEO of
trading giant Li & Fung, predicted
China’s wages will increase an amazing 80 percent over the next five years,
significantly changing the cost dynamics for sending production to China. It
is also among the reasons the Chinese government is making aggressive efforts
to move the country into more complex, higher value goods that have a lower
labor costs as a percent of total costs.
"What we [China] will have for the next 30 years is inflation," Mr.
Fung told The Wall Street Journal. "A lot of Western managers have never
coped with inflation."
With its huge population and millions of people
moving into eastern cities from rural areas, China for most of the last decade
had ample supplies of workers, even as production and export levels surged.
Unionization is illegal in China, other than pseudo-unions tied to the government,
and workers rights have generally been extremely limited.
But some of that is
starting to change. Mr. Fung says that worker shortages will start to be seen
as the effects of China’s "one child" policies
meant to reduce population growth are felt. Some observers say there’s already
a shortage of workers in the key 15-to-34 age demographic.
Chinese wages also
took a sharp turn upward last year. Unusual strikes and other labor actions
drove a number of companies to raise wages 20-30 percent and local provincial
governments to do the same on minimum wages.
High levels of inflation in China,
driven by economic growth and rising commodity prices, place further pressure
on the government and companies to increase wages to keep up, leading potentially
to a vicious circle other economies have faced where rising wages perpetuate
an inflationary cycle.
Finally, China’s efforts to keep the value of the Yuan
low to pump up exports in turn leads to higher prices for its imports, adding
to the pressure on inflation and wages.
The result: the wage gap between China
and other developing countries will shrink, Mr. Fung says, adding that the
damper China has put on price increases generally over the past decade is ending.
"Things will be more expensive and people will buy less," Mr.
Fung warns, saying that the West will have to adopt new consumption trends.
- Will Rising Wages in China Significantly Change Outsourcing Economics? – Supply
- China’s Rising Wages Propel U.S. Prices – The Wall Street Journal
Discussion Questions: Are Western-based vendors and retailers underestimating the fallout from rising labor costs in China? How do you see these inflationary pressures playing out?