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Brewing Chinese Labor Change May Raise Prices

Published April 20, 2010

BY MARC SANI

LOS ANGELES, CA—What happens in China never stays in China—it reverberates worldwide. So concern over China’s rising labor rates and the stability of its currency, the yuan, has executives at companies big and small keeping a calculator close at hand.

Industry consultant Jay Townley forecasts little in the way of consumer price hikes due to rising labor rates. “I don’t think labor is going to be a major issue. They (the Chinese) aren’t going to do anything to appreciably disrupt the recovery of their export-driven industries,” he said.

Wayne D. Gray, vice president of KHS, concurs. “I agree with that assessment. I don’t think labor rates will increase,” he said. Still, Gray has seen increases on aftermarket components mostly due to currency fluctuations.

Neal Todrys, Topeak’s president, said suppliers must take a long-term view. China has a large and growing middle class and factory work is less attractive to them.

“With that said, in the short term, prices will remain stable. But China’s population is so much bigger than ours. They have 320 million people in the middle class now and it’s growing. I don’t see anything happening immediately, but it’s coming,” he added.

Still, double-digit wage increases in China, particularly in southeast China’s Bicycle Belt, has sparked some concern among Taiwanese manufacturers with mainland factories.

Bob Margevicius, Specialized’s vice president of product development, said wage increases are a reality, but are having a minimal effect on the company’s suppliers.

“Most have been gradually raising salaries while improving the work environment, adding valuable social benefits and managing employee welfare. All of these activities are necessary as China evolves into a developed country,” he said. “The scramble in China today is to retain employees.”

Wages have increased—on average—about 16 percent in eight export-driven Chinese provinces. (China has 23 provinces.) But where the average factory worker still earns about $6 a day, better management and increased factory efficiency can absorb double-digit wage increases.

Several factors are driving the hikes. Among them is a new generation of workers—many raised as a single child because of China’s “one child” policy. They want jobs near home and they expect to enjoy a greater share in the country’s economic growth.

Low-skilled factory workers also are reluctant to travel several thousand miles to work at a low-wage job in coastal cities where the cost of living is high. Many had been laid off and returned home when the global recession began to bite into orders.

And the global recession has brought labor issues to a head. There is new interest on the part of the Chinese government to improve business in its interior provinces, in part to keep men at home with their families. As a result the Chinese are building new infrastructure to attract factory investment.

But the Chinese government is also fostering labor-rate uncertainty, said Ying-Ming Yang, chairman of the Taiwan Bicycle Exporters Association and president of tire-maker Kenda.

Chinese authorities, who make decisions on minimum wage rates, benefits and pensions with little warning, often surprise factory management.

Business hates uncertainty, Yang said. “I worry that the situation could get worse,” he added. For example, one province announced that minimum wages would go up 28 percent effective April 1. It later made the date retroactive to March 1.

Still, OE pricing has remained relatively steady and consumers have yet to feel any upward price pressure from Chinese goods. The question, Yang said, is how long can manufacturers absorb cost increases?

Kenda has moved some production back to Taiwan from its Chinese operation as the pay gap tightens between Taiwan and Chinese workers, Yang said. At its Chinese operations Kenda has bumped up salaries and now pays for food at workers’ dormitories.

Dr. David Hon, president of Dahon, said the current situation is “quite manageable” for well run, ethical manufacturers.

“We obey the labor and tax laws and that doesn’t seem to affect us too much,” he said. “But new laws and greater scrutiny will affect those who don’t play by the rules,” he said, noting that as government cracks down on tax and labor law cheaters it puts pricing levels on par with ethical operators.

Still, Chinese manufacturing is tightly tied to the industry and companies need to respond to remain competitive, Yang said. He urged companies to improve their work environment, increase factory efficiency and build a strong brand image in China to better penetrate the local market.

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