China...times they are a changin'!

I’ve recently been noticing a number of articles in Industry Week dealing with labor disputes and issues in China;

• Strike Halts Honda's Production in China
• Honda Offers Pay Raise to Chinese Strikers
• Honda's Chinese Parts Plant Resumes Full Operations
• Honda Resumes Car Production at Two Assembly Plants in China
• Japan's Brother Says Hit by China Strike
• Foxconn Gives China Workers Dramatic Wage Hike
• Microsoft Opens Probe after China Factory Report

Foxconn, Honda, Brother have all been the target of labor disruptions driving higher labor costs. Foxconn and Microsoft are both mired in reports of poor working conditions. While China’s communist government doesn’t officially allow unions, they seem to turn their head at labor protests – so long as the protest doesn’t appear to be critical of government policies. Is it any wonder that this is happening? 

Prices for electronics have been pressured downwards continuously over the past several years. Just look at the cost of a laptop today compared to a few years ago. Almost a 1/3 the cost. While some of these reductions are due to economies of scale and improved manufacturing techniques, much of the savings is because of the low cost of labor. 

Even still, factory wages are significantly more than a typical Chinese worker could make farming or as a laborer in the rural parts of the country, and so workers flocked to the factory towns. As a result, China’s workers started having a disposable income. Money for televisions, cell phones, bicycles and automobiles. 

The same desire that drives consumption in the West, is starting to permeate life in China. The Chinese worker wants the same things that you and I want. Can you blame them? So what do these changes mean for us? To a certain extent, we will need to accept that things will get more expensive (in the case of electronics, the downward price trend will slow and perhaps even reverse). 

Chinese workers will continue to demand fair wages and better working conditions (as they should!). But these changes can continue only to a certain point. At some point (as it did in North America, Europe and Japan), the wage pressures are going to increase to the point that the advantages of doing manufacturing in China will start to disappear and China will transition from being a low cost supplier of goods to a net consumer of goods.  

At this point work will be moved to the next hub of low cost labour (India? Africa?). My advice for companies with manufacturing in China? First and foremost, take notice of the working conditions in the factories. It doesn’t matter that the contract manufacturer is a separate company with their own policies, it is your company name and brand that is attached to the product.Have a plan in place in case your manufacturing source (or their supplier) goes on strike.  

Also, (and I’m sure this is something that you are doing already), closely monitor the costs from your manufacturing operations. At some point, costs will rise to the point where you will need to start looking at other sources. The sooner you recognize that point, the better off your company will be.

Before looking for another low cost offshore location to manufacture your goods, consider bringing your manufacturing back to North America. While labor costs would be undeniably higher, these additional costs might just be offset by reduced lead time, reduced transportation costs, improved quality, reduced risk and improved goodwill. Just a thought.