Han Zheng, the mayor of Shanghai, has just delivered a pleasant surprise to the city’s workers: their minimum wage is to rise by more than 10 percent in April.
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Chinese Yuan
No one will be getting rich — the new rate amounts to a less than princely 1,232 yuan ($187) a month. But Mr Han’s announcement is part of an emerging trend. Chinese officials are seeking to head off a repeat of last year’s labor unrest amid fears that persistent and rising inflation could provide a further irritant in wage discussions.
In a rash of disputes between May and August, employers were hit by strikes or other problems, including Honda’s Chinese subsidiary and some of its China-based Japanese suppliers, such as Omron.
The outcome was a wave of pay rises, notably a 30 percent increase at Foxconn, the Taiwanese owned manufacturer of electronic products such as Apple’s iPad, after a spate of suicides drew attention to working conditions.
Shanghai is not alone in moving early to head off further unrest this year. Beijing’s municipal government raised minimum wages by 21 percent in January, and the southern province of Guangdong is also considering a rise.
The increases are likely to reignite debate about whether China’s rising wages will prompt companies to shift production to other locations in emerging Asia. Plenty of business leaders think they may.
Matt Rubel, chief executive of Collective Brands , the U.S. footwear group that owns the Payless shoe stores chain, is shifting a chunk of production from China to Indonesia, south-east Asia’s largest economy.
“The utopia for one stop sourcing for quality and low price has been China ... but utopias never last,” says Mr Rubel.
Harry Lee, chief executive of Tal Apparel, a Hong Kong garment maker, takes a similar view.
“Five years ago, if you asked me the best place to set up a factory, first would be China, second would be China and third would be China,” he says. “Today it’s very different.”
There is substantial room for doubt, however, about the long-term impact on China as an Asian manufacturing center.
Rising labor costs in China are not a new phenomenon. Research by the International Labour Organisation suggests that Chinese wages have been outpacing the rest of Asia for at least a decade.
Chinese workers received real wage rises averaging 12.6 percent a year from 2000 to 2009, compared with 1.5 percent in Indonesia and zero in Thailand, according to the ILO.
At about $400 a month, Chinese workers are now three times more expensive than their Indonesian counterparts, and five times as costly as in Vietnam, although they remain considerably cheaper than in Taiwan and Malaysia.
However, that simple calculation takes no account of changes in relative productivity. Stephen Roach, chairman of Morgan Stanley Asia, says World Bank data indicate productivity growth in Chinese manufacturing of 10 to 15 percent a year since 1990.
That averages out at close to the same level as annual real wage increases over the last decade, suggesting unit labor costs may have risen very little, if at all.
Accenture, the global management consultancy, concluded in a report published on Monday that a minimum wage rise of 30 percent would cut margins by just 1 to 5 percent for companies with a large Chinese manufacturing base.
Noticeably, much of the discussion about production shifts relates to labor-intensive, low-margin sectors such as footwear and textiles, which have been relocating for years to Vietnam, Bangladesh, Cambodia and elsewhere.
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Chinese workers assemble electronic components at the Taiwanese technology giant Foxconn's factory in Shenzhen.
There is little talk, however, of shifting more complex manufacturing such as silicon chips and flat panel screens, for which labor makes up as little as 2-3 percent of total costs.
Intel , the U.S. chipmaker, recently opened a $1 billion plant in Vietnam, and Hon Hai and Compal, the Taiwanese equipment manufacturers, have also set up assembly plants there.
However, manufacturing experts doubt that many high-tech companies are planning to abandon China — not least because many rely on suppliers who have co-located in southern China’s vast technology clusters specifically to be near their customers.
Bhavtosh Vajpayee, head of technology research at CLSA in Hong Kong, says: “It is not possible for these high-tech companies to shift much of their production to Asean countries; they just don’t have the skills and the infrastructure that is needed. It just cannot be done.”
Additional reporting by David Pilling in Hong Kong, Anthony Deutsch in Jakarta and Robin Kwong in Taipei