labour costs

China’s competitive advantage is not what it used to be as its development drives up labour costs. Diana Choyleva, head of macroeconomics at Lombard Street Research, discusses with John Authers how the rebalancing of economic power could occur.

By Ifty Islam of Asian Tiger Capital Partners

The collapse of Rana Plaza, the eight-storey building housing garment factories in Savar, near Dhaka, the capital of Bangladesh, has seen more than 300 killed and over 1200 injured, with many hundreds still missing.

Coming only five months after 111 deaths in an earlier factory fire, the overwhelming sentiment in Bangladesh has gone from shock to moral outrage about the scant regard for human life among the factory owners. There have been violent protests across Dhaka by thousands of enraged garment factory workers. 

By Saurabh Mukherjea and Ritika Mankar-Mukherjee of Ambit Capital

Indian newspapers paint a gloomy picture of the state of the nation. They point to the 5 percentage-point drop over the last five years in the country’s once-feted economic growth rate. They bemoan the depressed stock market which has delivered negative returns over the last five years. And they point to the stagnant incomes of their readers who are, generally, white-collar workers and businessmen.

What the newspapers don’t do is discuss the remarkable surge over the last five years in the fortunes of less privileged workers – wages for blue-collar workers have been growing at a staggering 15 per cent or more annually. 

It is no secret that the wage gap between Mexico and China has been narrowing in recent years. While labour costs in Mexico were roughly 200 per cent higher than China’s a decade ago, wage inflation in China and wage stagnation in Mexico have combined to close the gap to nearly zero .

But could labour in Mexico now actually be cheaper than in China? Yes, according to Carlos Capistran, an economist at Bank of America Merrill Lynch. Not only are average hourly manufacturing wages in Mexico now lower than those in China in constant dollar terms, they are 20 per cent less. 

More evidence of a shift in foreign direct investment away from China to other emerging Asian economies, headed by Indonesia, Vietnam, the Philippines and India.

HSBC says in a report that south east Asia’s share of global FDI inflows, which slumped from 8 per cent to 2 per cent after the 1998 Asian financial crisis, is back to 7.6 per cent – almost equal to China’s 8.1 per cent. With their young populations, these countries and India should see further FDI increases from companies looking to capitalise on low-cost labour, while Chinese inflows will slow as its population ages and its economy matures. 

By Ifty Islam of Asian Tiger Capital Partners

The fire and tragic loss of 112 workers in the Tazreen Factory on November 24 in Ashulia, the hub of Bangladesh’s ready-made garment (RMG) industry, has made headlines around the world.

As well as the human and material loss, substantial damage has been done to the image of a sector that accounts for 80 per cent of merchandise exports and to the country as a whole. The cost to Bangladesh’s reputation could be translated into economic losses if the global giants of apparel retailing, led by the US’s Walmart, as well as major trading houses such as Li and Fung, take business elsewhere in their moral indignation and outrage

One might normally assume that big multinational companies hold a lot of advantages in emerging markets. Besides the financial clout and extensive supply chain options, they have access to the fabled global talent pool and management strategies honed through decades, perhaps even centuries, of experience.

However, research by management consultants Hay Group suggests that multinationals may be putting themselves at a disadvantage to domestic companies in emerging markets through their reluctance to decentralise management responsibilities, and let go of cherished strategies that work in home markets. 

Jakarta bound?

As wages continue to rise in China, is Foxconn, the huge Taiwanese contract manufacturer that makes iPads for Apple and laptops for Dell, looking to Indonesia as a cheaper alternative?

The Indonesian press, which has stories about Foxconn investing in Indonesia all over its front pages on Thursday, seems to think so. The reality is somewhat more prosaic. 

sharp increase in the number of labour strikes in Vietnam, as reported by the FT on Thursday, has come just as manufacturers appear to be increasingly engaged in a battle for talent.

Prices of food and accommodation are rising faster than wages, making countryside dwellers reluctant to take factory jobs in far-away cities and industrial zones. That has led to a significant labour shortage in the electronics and garment making industries, according to the Vietnamese government. 

As technology manufacturers in China battle rising wages and labour unrest, it may give them some relief that things are expected to get no worse than last year – at least from a statistical point of view. 

Got a measly pay rise at the end of 2011? Or none at all? You might, after a brief look at new figures from the UN’s International Labour Organisation, consider moving to Argentina. 

Talk to any factory owner in China these days, and they will complain about the shortage of workers. With a population of 1.4bn, you wouldn’t think of China as being short of people – but it is increasingly short of people who want to be factory workers, it seems. 

Reuters

A labour dispute in Indonesia that has brought production at one of the world’s largest copper and gold mines to a standstill and cost the company hundreds of millions in losses may well be over.

US mining giant Freeport McMoRan Copper & Gold has reached a deal with trade unions to return 8,000 striking workers to work after a three-month stoppage, Reuters reported on Tuesday. 

Now that it is clear that Taiwan’s economy is headed for a slowdown, the media and politicians have taken up arms against an old ‘enemy’: the tricky issue of no-pay leave.

“Are you asking any of your workers to go on no-pay leave?” has become a standard question asked of nearly all Taiwanese chief executives whenever they appear in public these days. 

China factoryWilliam Fung of the Hong Kong based sourcing company for US retailers like Walmart Stores predicted in January that Chinese-led deflation in consumer goods was over. He predicted rising wages in China would feed through to consumers in the west if suppliers like his company, which sources more than half its production from China, could pass on their  cost increases.

It turns out they can. Research by New York Fed economists Mary Amiti and Mark Choi shows the cost of consumer goods imported to the US  from China rose by 7 percent between the second half of 2010 and the first quarter of 2011. The double-digit wage increases for workers in south China are starting to flow through to western consumers.