China's Aging Population Threatens Its Manufacturing Might

China, the manufacturing hub of the world, is in danger of losing that title.

China's Aging Population Threatens Its Manufacturing Might
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Its population is aging fast as its one-child policy, begun in the 1970s, begins to bite. This, in turn, could lead to a huge labor shortfall by 2050, according to experts.

China's workforce, those between the ages of 15 and 64, is expected to start contracting beginning in 2015. The number of new entrants into the workforce is already falling and will decline by 30 percent in 2020 compared to 2010, according to Beijing-based research firm GK Dragonomics.

"In the case of China, you have a shrinking number of people in the young adult workforce, shrinking numbers of children feeding into this force, and a growing number of the aging workforce," Judith Banister, senior demographer at Javelin Investments in Beijing, said.

In 2010, there were 110 million people 65 and above in China; by 2030, the number will increase by more than 100 million, according to the United Nations. By 2050, more than a quarter of the population will be over 65.

In an article published in the China Economic Quarterly earlier this year, Wang Feng, director of Brookings-Tsinghua Center for Public Policy in Beijing, likens China's demographic structure to a bullet train racing into the unknown.

"Profound demographic changes in China are redrawing the parameters of the country's future," Wang wrote.

Over the past two decades, China has experienced what experts call "a demographic window of opportunity." UN data show the country's working age population grew from 66 percent of China's total population in 1990 to more than 72 percent in 2010 — fueling the nation's economic rise, when it grew at an average rate of nearly 10 percent annually.

China's working age population is expected to decline to 61 percent of the total population by 2050, according to the UN.

A one-child policy introduced in 1977 and rolled out nationwide two years later has contributed to falling birth rates, while life expectancy has gone up.

(Read More: Asia Caught Off Guard by Its Aging Population)

Thomas Gatley of GK Dragonomics said those between 15 and 24 are "the cheapest, most mobile and flexible in the Chinese workforce," but their numbers have been declining since 2005, a situation that has led to significant wage growth and demand outstripping supply.

UN data show there were 225 million people in this age group in 2010. By 2025, the number will fall by nearly 30 percent to 164 million. And in 2050, it will shrink to 124 million.

A cheap and young labor force that gave China its reputation as the manufacturing capital of the world is fast eroding. Plus, China's youth are now reluctant to take up low-paying factory jobs that come with long working hours under tough conditions.

Geoffrey Crothall, research director at Hong Kong-based China Labor Bulletin that tracks labor strikes and protests in the mainland, said that "the number of young people going into the workforce is declining. They're not willing to work 12 hours a day for minimum wages anymore. They're looking for alternative employment or pushing for higher wages through strike action and protests."

According to the Bulletin, in the first eight months of the year there were on average 29 incidents of labor unrest per month compared to 11 per month in the same period last year. Meanwhile, the average minimum wage in China has been increasing — 12.5 percent per year over 2006-2010, according to official data.

Over the past few years Apple supplier and contract electronics manufacturer Foxconn Technology Group has come to symbolize the changes and challenges plaguing China's labor market.

Recent worker-related unrest at the company, which employs 1.2 million people at its factories, has highlighted the fact that China's labor force is in the midst of a churn.

In mid-October, more than 200 workers at its plant in Zhengzhou refused to work in protest over their working conditions. Less than two weeks earlier, the company's Taiyuan factory in central China, which employs about 79,000 workers, had to shut down for a day after a riot left several workers hospitalized and detained by the police.

Also in mid-October, Foxconn admitted to using underage interns at a site in Shandong province.

According to the Bulletin's Crothall, "the younger workers are leading a lot of the protests, as they have higher expectations."

The rise in labor unrest is owing to greater awareness among workers about their rights and an unwillingness among the new breed of workers to make sacrifices in return for low pay, said China observers.

Migrant workers, one of the important components of China's labor force, are also declining as improving employment conditions in rural areas keep them from moving to cities in search of work.

Foxconn told CNBC via email, "China has changed dramatically in recent years, and many migrant workers who have been so important to the success of the manufacturing industry no longer want to be migrants, preferring, instead, to have good employment opportunities in their home province."

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As a result of this shift, factories have started to move away from the cities in China's industrial coastal belt. Foxconn, for example, has been gradually shifting its manufacturing operations to China's inland provinces to combat rising labor costs and shortages.

"Our goal in doing this is to give workers an opportunity to find employment and a competitive wage near their families and friends," the company said.

As China ages, the mobility of its workforce will reduce further, said experts, forcing more factories to rethink their location.

Moving Out

Many manufacturers, long used to a cheap and mobile workforce, are leaving the country for alternate destinations like Thailand, Vietnam and Bangladesh.

According to U.S.-based financial consultancy firm Capital Business Credit's quarterly "Global Retail Manufacturers and Importers Survey," released in September, 40 percent of U.S. importers and manufacturers are thinking of moving their manufacturing bases away from China.

The survey cited concerns over the quality of goods made in China, rising operating costs and competition from other manufacturing centers as the main reasons for moving out.

Over the past few years, several global manufacturers have closed factories in China. For example, German sports goods manufacturer Adidas losed its last factory in China's eastern Jiangsu province earlier this year. China's official news agency Xinhua quoted workers at the Adidas factory, saying they suspected the closure was caused by rising salaries.

In mid-October, China Daily reported that British oil and gas major BP had transferred the last of its solar business in China to the Chinese company it had joint ventures with, effectively exiting the market.

While some are moving out of China, others are increasing their level of automation to make up for the shortfall in labor supply.

For example, Chinese carmaker Great Wall Motors has Swiss robots and other machinery to weld together car frames, while Apple supplier Foxconn plans to put a million robots in its factories in China by 2014, according to a Reuters report.

China's changing demographic structure is like a rocky terrain the country's economy will have to navigate over coming decades, according to Patrick Chovanec, associate professor at Tsinghua University.

"If you have an uphill situation in terms of demographics, it's not like you can't climb the hill, but your engine has to be in good condition," he said, implying that China has to build a strong economy to overcome its demographic challenges.