China's Cheap Labour No More

There are still armies of factory workers -- but they want better pay to stay

On my first day at work in Beijing at a state media company in 2007, my new boss took me out to lunch and I remember him saying the supply of migrant workers was "limitless".

He believed (or wanted me to believe) there was an endless supply of cheap labour for factories.

I was very skeptical -- eventually the country would run out of migrant workers because everyone had one-child families save for ethnic minorities.

Ten years later I wish I could go back to him and say, "Remember you told me the supply of factory workers was 'limitless'? You were completely wrong!"

Workers come from the countryside and are hardly "limitless"

Factory owners are having a tough time not only finding but retaining workers these days.

Rising labour costs have led to a high turnover rate among factory workers. Wuhan University did a survey of factories in Guangdong and Hubei and found 26 percent of workers in the Pearl River Delta had changed jobs.

"With high turnover, they have to pay workers more to retain them," said Albert Park, one of the designers of the survey and is a professor at the Hong Kong University of Science and Technology.

The average monthly wages in China rose to 4,126 yuan (US$603.78) per month in 2015, almost comparable to Brazil and much higher than developing economies like India and Vietnam.

In addition, in order to gain subsidies and tax benefits from the government, more than one-third of mainland factory owners try to gain favoritism from the state or the Communist Party. More than half surveyed received government subsidies, which account for 2.6 percent of their sales revenues.

Some factory owners resort to using robots to cut costs

About 23 percent of factory owners do this by serving in local parliaments and political consultative committees, while 39 percent are party members.

Because of rising labour costs, 40 percent of manufacturers in Guangdong and Hubei use robots in production. To Park, this means factory owners aren't sure demand will improve and so they are cautious about making large investments.

How much has changed in a decade! While we're pleased to know migrant workers are earning more money, the cost of living for them has increased too.

What they really need is access to education to further improve their employment opportunities. However, this is the next hurdle that really needs to be tackled so that children of migrant workers will at least see more hope for the next generation in terms of social and economic mobility.

China is Open for Business

Chinese President Xi Jinping addresses the World Economic Forum in Davos

Xi Jinping is the first Chinese President to address the World Economic Forum, and today he used the platform to take the high road, making the case for globalization in a time when the UK will implement Brexit and President-Elect Donald Trump advocates isolationism.

In his speech, Xi promised to improve market access for foreign companies, and said China has no intention of devaluing the yuan or launching a currency war.

He said protectionism had to be opposed and the finger-pointing stopped.

"Those who push for protectionism are shutting themselves inside a dark house. They have escaped the rain and clouds outside, but also missed the light and air," he said. "A trade war will only lead to suffering on both sides."

Xi says China is open to foreign companies... really?

Since his predecessor Hu Jintao's leadership, China has been protectionist too, making it harder and harder for foreign companies to do business in the Middle Kingdom. And with the further media suppression on foreign journalists and outlets, people on the outside find it harder to get the information they need to objectively assess the situation.

So if Xi really does keep his word, it will be interesting to see China open its doors for more business -- but are companies willing to pay higher wages for labour? And will this still be cheap manufacturing, or something higher up the manufacturing chain?

In addition, Xi said there was no point in blaming globalization to the Syrian refugee crisis or the 2008 financial crisis. He said there was "no justification for wiping out economic globalization all together".

How does the Syrian refugee crisis have anything to do with globalization, when it's a civil war in the country?

What kind of president will Donald Trump be?

Nevertheless, it seems Xi is keen to stimulate his country's economy -- apparently it grew just over 6 percent in 2016 -- and perhaps get rid of its overproduction.

As the inauguration of Trump drawer closer, many are trying to come to terms with the new normal in Washington. Will he continue to see it as one big reality show in the White House, or will he really take the job seriously and help those who voted him into office?

Xi is probably looking on horrified at having to deal with a man who makes knee-jerk pronouncements that may or may not have substance. However, he is probably impressed by how Trump handles press conferences by shutting reporters down...

Migrant Labour Crossroads

Young people in rural areas are lured into factories hoping for good pay

When I lived in Beijing from 2007-2010, there was a lot of work for people with little education -- restaurants, factories, security guards, retail. But there didn't seem to be enough work for educated people.

Millions of graduates out of universities were keen to start their careers and wean themselves off of their parents, only to find their wages hardly matched their expectations. They were soon ground down psychologically and for some physically by the monotony of their work. Many were depressed to find they were a tiny cog in a massive machine that kept churning mindlessly in one direction.

When I first arrived in the Chinese capital, my boss enthusiastically said China's economy would continue to boom for sometime because there was a limitless supply of migrant workers from the countryside who would be lured to the city to work.

Many migrant workers find it hard to move up in society

They really are the ones doing the mundane work. There is a steep learning curve in the beginning, not only in how to do their job, but adjusting to city life and hoping not to be taken advantage of. But once they understand the lay of the land and where they fit in society (near the bottom), it's a near impossible climb up.

My boss' prediction was completely false as I predicted, and these days fewer migrants are taking the gamble of moving to the cities. The good thing for them is that factory wages have increased significantly in the last few years, but can migrant workers keep up with factory work becoming less labour intensive and more mechanized?

Do they have enough education to keep up with labour demands?

Development economist Scott Rozelle at Stanford is concerned about this issue.

He and other co-authors have written a paper and found that China does not have a very well educated workforce. From analyzing census data, Rozelle found far fewer migrant workers completed secondary education, contrary to Ministry of Education official figures.

One of the reasons they may be dropping out of school is because the lure of getting a relatively high-paying job, and also many kids of migrant parents living in cities are unable to get a decent education because of hukou or residency permit issues.

Development economist Scott Rozelle

As a result the next generation of migrant workers are going to miss out on job opportunities because there will be a demand for more educated workers.

The paper says:

Wages are rising and low-wage manufacturing is moving out. China is already making plans to become an economy that will be based on higher value-added, high-wage industries. This will mean, of course, that there will be a high demand for skilled labour. International experience demonstrates that individuals will need to have to have acquired skills taught at the level of high school or above if they hope to be competitive in these higher value-added industries. If China fails to endow its labour force with such skills, not only will many individuals have a difficult time finding employment, the newly emerging industries may also falter from a short supply of skilled labour. The whole economy may experience slower development.

This may not be a prediction China's leaders want to come true, but they have not done anything to help migrant workers and their families get a leg-up on society through education and other social benefits.

The authorities seem to purposely keep this segment of the population at the bottom rung of the ladder, thinking China always needs to have cheap labour. They close down schools for migrant children and because of hukou issues, they cannot go to the same schools as Beijing residents, thus creating an even greater social and economic divide.

But if Beijing wants the economy to develop, then its people need to have the right tools to progress along with it. And if migrant workers are left behind in the next step of China's economic development, there will be lots of unhappy people who could spark civil unrest -- the last thing senior officials want to hear.

So why not give migrant workers a chance? It's a win-win situation.

Poorly Made in China

Very interesting read on manufacturing in China

A friend of mine lent me a book he thought I'd be interested in reading and he was definitely right. Called Poorly Made in China: An Insider's Account of the China Production Game by Paul Midler, it follows his time working in South China with both American companies and Chinese manufacturers.

The book is a fast read, mostly because it is clearly written and has good analogies to help layman readers understand the Chinese way of doing business, and more particularly, their mindset.

As an American fluent in Putonghua, Midler acts as the middleman in many business deals and has seen how they play out. One of the examples he gives throughout the book is Johnson Carter getting King Chemical to produce soap products to sell to retailers in the United States.

It's interesting to see the process from the beginning, how Johnson Carter thinks it is getting a good deal, having its products made in China, but little does the representative, Bernie know how the Chinese mind thinks. That is, things aren't always as they seem.

And for Midler it's an eye-opener to see how factories work -- how they really make their money.

In the beginning the manufacturer appears to bend over backwards to get the client, but once contracts are secured and production begins, the scheming begins. Clients wonder how manufacturers make money, but through patience and time they do, as paramount leader Deng Xiaoping once suggested, "crossing the river by feeling the stones".

Author Paul Midler who gives some insight into China

The manufacturers gently poke and push and prod their clients to see where their weaknesses are and from there begin to figure out how to take advantage of them. In some cases it's lower quality packaging or even the content of the soap for Johnson Carter is diluted -- but only if it's noticed.

It's this cutting corners that led to food safety scandals, like the melamine scandal in pet food in 2007 Midler talked about, but he didn't go into the even bigger controversy the following year when thousands of babies and children being sick and at least six died from melamine found in milk powder.

Some manufacturers feign ignorance, while others must have known what they were doing, but not necessarily what the health risks would be. This is China's biggest dilemma -- where a number of people and companies put profits before morality.

Even now six years after the melamine milk scandal, food quality cannot be guaranteed, which is why Hong Kong is the destination of choice for mainlanders to buy food products they deem to be safe.

Midler also gives examples of foreigners who think they can be successful by replicating what they've done elsewhere, or that they have no sense that mutual trust and benefit don't exist in China. In both cases they fail miserably.

At the end of the book he hints that when the Most Favored Nation status for China was debated in Congress, the Clinton administration should not have delinked economic and political reforms; Midler believes that if the United States held out for greater reforms, things may have been much different than they are today.

And so we are now stuck with the situation we are in now, where China and the US need each other desperately with no end in sight.

Reading this book made me think twice about all the products I use, particularly shampoo and soap, and wonder if it's legit, because in the end it's the consumers who bear the consequences of bad manufacturing in China... Scary thought!