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Chasing China Up The Food Chain

The other day I was looking for a pair of gym shorts in Guangzhou and stopped at a sporting goods store.  I found some — with a label proudly advertising “Made in Thailand.”

The Chinese are the latest to feel the effects of wage competition, and both government officials and ordinary people are worried that Chinese industrial growth could slow as low wage countries lure businesses away.  Already, soaring wage rates in China are forcing companies to flee for the cheaper labor in Vietnam, Myanmar, and Cambodia. China Daily has the story:

Wage rates in China’s key manufacturing heartland of Guangdong have increased by 158 percent over the past 10 years and by 11 percent in the year to 2010. Some other areas of the country have seen even bigger rises…

A number of multinationals as well as companies from Hong Kong, Taiwan and the Chinese mainland are moving some of their production to nearby Southeast Asian countries, particularly Vietnam and Cambodia, where wage rates are often a fraction of those in China.

Only last week, German Chancellor Angela Merkel was on a two-day visit to Vietnam with German companies looking for cheaper manufacturing sourcing opportunities.

In response, Beijing continues to invest and offer incentives for corporations in the cheaper — but inconveniently located — western provinces.

Other adjustment strategies will be familiar to Americans: the Chinese are looking to move up the ‘food chain’ to higher value added products where skilled Chinese workers can command a premium over workers in cheaper locations.

There are special economic zones and science parks to attract high-value, low-labor manufacturing companies. The switch to robotic labor is also changing the game: Foxconn, a computer components manufacturer with a major new base in Chongqing, plans to have a million new robots operating within three years.

Assisting the switch to high-value, low-labor manufacturing is China’s access to workers able to operate manufacturing machinery but who cost less than similarly educated workers in the developed world. The maintenance and management of machinery requires less labor but more capital. Just as the US and Germany moved to capital and technology intensive industries, so too China must move up the value added food chain if it hopes to survive.

The trouble is that as China automates, it will run up against the same problem we have in the US: manufacturing stops creating many jobs when robots displace human workers from the assembly lines.  China is facing its own version of a scissors crisis: low wage competition and high tech automation will make it harder to provide secure jobs and rising wages for the hundreds of millions of people expected to move from the country to the city in the decades to come.

There are no easy answers to this problem; at least in the United States we are facing into it from a position of (relative) wealth.  Much sooner than it hoped, China is going to have to cope with challenges like an aging population, the consequences of pollution, and the need to replace manufacturing as the main engine of job growth.

The gym shorts, by the way, were well made and attractively priced.

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