China’s Fading Labor Arbitrage
I have made it clear that I’m not bullish on China. The increasing cost of transportation will make it dificult to economically make Walmart fodder in China and ship it back to the US. We have already seen it the steel industry where both US and Mexican steel makers are doing very well.
The Economist points out another problem for China – Fading Labor Arbitrage.
“WHEN clients are considering opening another manufacturing plant in China, I’ve started to urge them to consider alternative locations,” says Hal Sirkin of the Boston Consulting Group (BCG). “Have they thought about Vietnam, say? Or maybe [they could] even try Made in USA?” When clients are American firms looking to build factories to serve American customers, Mr Sirkin is increasingly likely to suggest they stay at home, not for patriotic reasons but because the economics of globalisation are changing fast.
One of the leading reasons companies chose to off shore manufacturing to China was labor costs. Between 2005 and 2010 the wage for factory workers in China increased 69%.
“Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America,” says Mr Sirkin. That calculation assumes that wage growth will continue at around 17% a year in China but remain relatively slow in America, and that productivity growth will continue on current trends in both countries. It also assumes a modest appreciation of the yuan against the dollar.
The year 2015 is not far off. Factories take time to build, and can carry on cranking out widgets for years. So firms planning today for production tomorrow are increasingly looking close to home. BCG lists several examples of companies that have already brought plants and jobs back to America. Caterpillar, a maker of vehicles that dig, pull or plough, is shifting some of its excavator production from abroad to Texas. Sauder, an American furniture-maker, is moving production back home from low-wage countries. NCR has returned production of cash machines to Georgia (the American state, not the country that is occasionally invaded by Russia). Wham-O last year restored half of its Frisbee and Hula Hoop production to America from China and Mexico.
BCG predicts a “manufacturing renaissance” in America. There are reasons to be sceptical. The surge of manufacturing output in the past year or so has largely been about recovering ground lost during the downturn. Moreover, some of the new factories in America have been wooed by subsidies that may soon dry up. But still, the new economics of labour arbitrage will make a difference.
In the beginning companies will simply reconsider plans to relocate plants to China but with increasing transportation expense and increasing labor costs in China it will become increasingly uneconomic to produce consumer goods in China to sell in North America. You would think that Mexico could be the big winner but it is going down the path to a failed state. Who would want to build a facility in today’s Mexico?
Cross posted at Newshoggers
3 Responses to “China’s Fading Labor Arbitrage”
Ron, the transportation expense concern for shipping (water transport, not truck transport) is premature. We don’t know when we’re going to face true fossil fuel shortages.
Now, the China labor issue is interesting. Currently labor rights are bleak in China because there is an ocean of willing hands. (Because the one-child policy favored boys, there are great numbers of surplus males, whose future might be colonizing other nations, or used in war, such as against Taiwan.) I’m not convinced at this time that there is going to be wage growth as large as claimed by your source.
China’s one-child policy is going to make it age rapidly, and we can predict a labor shortage for China as for the USA and Europe eventually, but that’s a long way off.
If there is wage growth, and oil prices rise substantially more, then I’ll anticipate what you and your source are saying here. Yes, if wages get too high or other labor laws are enacted, that will remove the primary advantage China offers, and though water transport is cheap, if oil ever got high enough, businesses might relocate closer to the USA (and Europe), yes.
What are the alternatives for business? Well, it’s timely now to think back to it, then: in the 1980s, I saw an ad for Pakistan, enticing businesses (production) to locate there. Doing it today (or in other Middle Eastern and North African nations) might be good for US-”MENA” relations (notably, Pakistan), but rather than go there, I’d envision businesses would look at Latin America and eastern Europe if China had effective cost parity with these.
DLS
As I have said many times before it’s not about a shortage of fossil fuels but a shortage of affordable fossil fuels. There is plenty of oil that can be had for $150 to $300 a bbl but at that price transportation as we know it will be radically changed.
No doubt about ugly effects of expensive petroleum, Ron. No doubt. I often, though, believe you’re “rushing to be premature.” Hopefully you won’t want that!
Note also my statement, which is also an observation: Relocation means, most likely, Latin America or eastern Europe.
India is too tricky because of political fractionation and instability as well as the other problems elsewhere such as corruption. The Middle East and North Africa would do well by being the sites*, but they won’t qualify; the central Asian “Stans” probably won’t, and of course the world shits on sub-Saharan Africa because it’s in such poor and getting-poorer (unlike the rest of the world) shape.
* North Africa — Europe’s nearby spot to relocate industry if eastern Europe doesn’t succeed — including for what you’ve said about rising wages in China — also in E. Europe, someday, perhaps. North Africa should be less challenging than Turkey or the “Stans”
(Side note: North Africa is a possible future ballistic missile as well as Europe’s big immigration threat, you know.)