beyondbrics

Governments fighting inflation might normally be expected to challenge companies jacking up wages by over 100 per cent. But Beijing does not seem to be unhappy about the moves by Hon Hai, the Taiwanese company hit by a spate of suicides at its Chinese plants, to increase minimum pay by 30 per cent from July 1, and by a further 66 per cent in October for workers meeting performance standards.

The deaths of 10 workers puts Hon Hai, together with its subsidiary Foxconn International, in a category of its own. However, analysts say that these increases will be welcome to the Chinese authorities, both in themselves and in the precedents they set for other employers. Beijing wants to improve living standards for the tens of millions of migrant workers employed in China’s manufacturing plants and to boost consumer demand to ease global economic imbalances.

Chia-Lin Lu of Macquarie Group, says in a note today that Foxconn (Hon Hai) Group “surprised the market with the announcement of the second salary raise within a week”. Foxconn Group announced on 6 June that line workers in Shenzhen factories can earn up to Rmb2,000 per month (from 1 October), if they pass a performance review. This comes on top of a 30 per cent company-wide salary raise announced on 1 June (the base salary was Rmb900 before the first salary raise).

Ms Lu writes:

The China labour cost increase is a long-term unstoppable trend. We do not view this incident as a company-specific issue but believe that this trend will hit [providers of electronic manufacturing services (EMS),such as Foxconn] harder, as the EMS business model is more labour-intensive and low-margin in nature.

Ms Lu says that after the second raise, the total monthly cost per employee will increase by Rmb1,200, causing a 1percentage point drop in operating margins.

Reuters reports from Hong Kong “that Foxconn said today it would seek higher prices from its clients to help offset wage hikes. Meeting shareholders in Hong Kong for the first time since the deaths, executives at Foxconn said the company hoped to reach a consensus with customers this month.” Shares in Hon Hai and Foxconn have fallen by more than 10 per cent this week.

Other international groups have also been hit recently by industrial action in China. Honda Motor, the Japanese car maker, faces a new strike at a parts supplier soon after settling a dispute at a different plant. Workers at a Shenzhen plant owned by Taiwan’s Merry Electronics briefly stopped work on Sunday in a row over shifts.

RBS says in a report that wages are on the way up across the board in China:

Raising wages is a part of Beijing’s macro-policy. We believe rising income for wage earners is the direction of things to come, so we should see a broader range of enterprises raising wages in the next several years. A decade ago, it was important to allow enterprises to accumulate capital at the expense of labour. But with overcapacity and under consumption, the pendulum has now swung in the other direction.

RBS says the Chinese government supports hikes as a part of its policy to lift consumption and cut overcapacity. The impact on consumer price inflation this year should be limited and any interest rate hike is contingent on overall growth not just CPI figures. Wage hikes in 2010 should have a limited impact on CPI partly due to productivity gains. The annualised impact should be managed from the top-down to add less than 1 per cent to CPI. The bank says that in contrast to developed countries where unions drive wage hikes, “the Chinese government is leading the effort”.