China’s world-beating growth in the apparel industry has been built on the hundreds of millions of workers who are willing to work for wages low enough to keep the manufacturing cost in the cheap range. This was possible because of the enormous population that China has, providing the country surplus working hand to build the economy. But the scenario is not the same now and China is running-out of cheap labour quickly, resulting the investors to emphasize on the ‘China plus’ issue.
China Won’t Have Enough Labour to Meet Demand in The Coming Years
The International Monitory Fund economists say China will become a labour shortage country between 2020 & 2025 and there is nothing that the country can do about it. And the trend has already begun as the worker- wages are raising sharply due to labour shortage. A declining birth rate and Beijing’s one child policy for those years is believed to be one of the responsible factors to this situation. The Chinese government is more favorable to the workers more than ever. China’s National Bureau of Statistics said the size of the working-age population fell by 3.5 million to 937 million in 2012-a shift to a shrinking worker pool from the growing workforce that buoyed Chinese growth throughout the last decade.
Wage rates in China historically used to be only 7% of the developed countries. But the situation has changed now. This year, however, 13 provinces in China, prompted by their respective governments, have raised the minimum wage level by an average of 20 percent. Some major manufacturers doing business in China have raised wages to address problems of increasing employee turnover and even suicides. As you can see in the chart the working age population of China which is considered 15-59 years started its negative trend from 2012 declining by 4 million from previous year’s population. It proves the forecast of the IMF’s economists that the Chinese won’t have enough labour to meet the demand in the upcoming years. As a result wages in privately owned companies in China are expected to rise 17 percent annually in the next three years. According to published research, labor-cost increases have pinched margins at 48 percent for US companies with manufacturing operations in China. Given these projections, one can easily understand the nature of wage hike in China and their impact on the unit cost of products as well as end price or margins of companies.
China Now Has Third Highest Labor Costs in Emerging Asia
All those population complexities in China have resulted in a huge labour wage explosion. Only Malaysia and Thailand has a higher wage structure than China now in the emerging Asia. Among the basic apparel manufacturing countries (marked red in the below table) it can be seen that the wage structure in China has already risen to a level that is easily differentiable from the other countries. In fact, the hourly wage is forecasted to reach 6$/hr by 2020.
The wage-hike has substantially hit the margins of the Multi National Companies who are manufacturing their products in China. Many of them are shifting or planning to shift their business to the ASEAN areas and Bangladesh is now in a comfortable position to attract those companies.
In a research it is found that the industries that require unskilled labors such as the apparel industry, which have their 100% production done in China, have a 6.9% raise of product price due to the increment of worker’s wage. The heavy industries and the high tech industries have a price raise of even 14%. Some of the companies are adjusting their price by improving their supply chain but many of them are shifting to the west China and the ASEAN countries where the worker wages are still in their comfort range.This is not the case only in China but wage hike actually rippled over the entire Asia.
So it’s relevant that not only it’s China from where the multinational companies are shifting, but countries like Thailand, Malaysia and Singapore are as well no longer a suitable place for labour intense industries.
The beneficiary
It’s true that the worker wages specially in the most labour intensive industries like the textile and apparel industries should be raised due to one of the reasons that the workers should get their part and value for their efforts they have been giving to strongly hold the backbone of the economy; but from the manufacturing companies part-they are independent to source out the most profitable combination for the sake of their business. That’s why the basic industries which are mostly build on intense labour are shifting to the least developed countries like Bangladesh, Vietnam, Cambodia, India, Pakistan and Sri-Lanka where the wages are still in the lower range comparing to China. So in a sense these are the beneficiary countries due to the wage hike in China. It actually is a huge opportunity for the LDCs to capitalize and attract the companies who are in search of better investment opportunities. And Bangladesh is clearly ahead in this run due to her capacity and competitiveness. The key backlogs for the country in this critical moment are the political and regulatory instability along with energy crisis. If those are adjusted shortly, there is a huge possibility to materialize the issue of being the ‘next China’ and emerge as one of the big economies of the world.
