China's Evolving Labor Cost Outlook

From now to 2020, manufacturers migrating westward from China's eastern provinces will benefit from cheaper labour costs but will still face fast-growing wage inflation in those provinces and will lose competitiveness to companies operating in India and Vietnam, according to a recent report by the Economist Intelligence Unit.

The once vibrant manufacturing hubs of Guangdong, Zhejiang and Jiangsu will have the highest labour costs (exceedin RMB 40 per hour) in 2020. Provinces along the mooted 'Silk Road' - Anhui, Hubei, Chongqing and Sichuan - will look more competitive, with wages ranging between RMB 30-35.

However, manufacturers hoping from respite from the rapid wage increases being seen in the eastern regions should temper their enthusiasm about China's inland regions. Though provinces to the North and West look cheap in hourly wage terms, they will see some of the fastest growth in wages during the next five years.

Wage increases of 12-13% look astronomical compared to average annual growth of 1.9% in global manufacturing wages recorded by the International Labor Organisation between 2010 and 2013. That said, China's wage costs will continue to look cheap compared with the US, South Korea, Brazil and Mexico during the next five years.

The above factors will support a series of regional trends in the coming years, namely:

  • Continued migration of low-end manufacturing out of China: though low cost, manufacturers will baulk at having to adjust their cost bases by 10-15% per year. What makes this more onerous is the informal nature of employment in the low-end sector, with frequent staff turnover, employers will have to offer better deals for fear of losing workers to the highest bidder.

  • Increased emphasis on regional infrastructure build-out: China will push ahead with infrastructure projects both in the mainland and in the Asia-Pacific region, such as the road and rail networks previously discussed in South East Asia and the 'New Silk Road', as it looks to migrate its manufacturing base.

  • More complex demands on logistics services: corporates will respond to wage pressures and new opportunities in low-cost manufacturing hubs by lengthening their supply chains and putting more emphasis on logistics services to link up their operations, thus creating more opportunities for logistics service providers and third-party logstics companies.

  • Stronger purchasing power for Chinese workers: higher wages, plus a stronger RMB, is a support for growing consumer demand both on mainland and international markets.

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