7/10/2007 – Electronic Business

Report from China: Labor costs rise; jobs shift to remote areas Some companies are shifting their manufacturing operations to less-developed cities in China to rein in costs. What the effect will be on China’s overall economic structure remains uncertain.

By Amy Wang, Contributing Writer — Electronic Business, 7/10/2007

Skyrocketing labor costs in China’s largest cities are pushing manufacturing out to the less-developed areas, threatening the economies of tier-one cities and creating massive shifts inside of China’s economy. While China’s role as a global manufacturer remains solid, the big question looming over cities such as Shanghai, Beijing and Shenzhen is what happens when factories relocate in more remote areas. Labor costs are rising even in some of the lesser-known cities, but not nearly as fast as in the tier-one cities, which experienced labor increases of 500 percent between 2001 and 2006. “Labor costs increased an average of three times in our factory during the last 10 years,” says David He of Hong Kong’s Ling Tin Capacitor. The company set up shop in Dongguang, Guangdong province, a decade ago because of cheaper labor and land resources. Since then, the average monthly income for workers in He’s factory increased from (US) $40 to $120, while salaries for engineers and management increased from $200 to $600—or more.
The company is still doing well, but He is worried about the upward trend line in labor costs. So far the company has no plans to relocate because of its proximity to customers and international shipping, yet for the first time the company is beginning to watch the cost increases. International companies looking to set up manufacturing or expand their capabilities within China already are looking at lesser-known cities. Foxconn, a leading contract manufacturer, capitalized on low labor costs in Shenzhen 15 years ago, but it recently expanded into Yantai, Shandong province. Foxconn is the registered trade name of Hon Hai.
The company contributes one third of Shenzhen’s total electronics export—an estimated (US) $21 billion in 2006—and employs 200,000 laborers. It negotiated a low-cost land deal and a very low corporate tax rate. Its recent push into Yantai, one of China’s fastest-growing commercial ports where labor is significantly cheaper, signals a shift in thinking. In 2006, Hon Hai Group completed its deployment for the production of motherboards and printed circuit boards in northern China. Yantai Science & Technology Park of Shandong province in northern China has become Hon Hai Group’s largest production base for panel-based products. Currently Hon Hai takes advantage of the huge talent pool in northern China to focus on the production of mobile communication products, such as cell phone cases and connectors on an OEM basis. The group said it would use its base in Yantai to tap the cell phone markets of Japan and South Korea. Nor is Hon Hai alone. Taiwanese manufacturing operations in Shenzhen are shifting in droves to Dongguan due to lower costs. Many market analysts believe the shift to less-developed regions will change the market demand landscape in China within the next several years.
Despite the changes inside of China, labor costs there are still lower than in many other areas. That has made it difficult for companies to retain the most experienced engineers. Frank Yan, human resources director at a Chinese original design manufacturer, says the retention cost for engineers is much higher than the initial cost of hiring them. “The cost of hiring an engineer hasn’t changed too much in last three years,” Yan says. “But once an engineer leaves, we have to recruit this position. This is more costly. We have to spend time looking for the right candidates, conduct interviews and train them. And once we relax after completing this process, the engineer may leave the company.” Yan says his company has set up a plan to allow top engineers to become shareholders after working there for a period of time. He says that will work well because everyone wants to be a boss in China.
At present, engineers still earn more in tier-one cities like Beijing, Shanghai and Shenzhen than in cities in western and Northeast of China. With three years’ experience, an engineer can easily make $1,000 a month in Shenzhen. To help equalize those costs, some Shenzhen companies have begun recruiting in other cities such as Changsha (Hunan Province) and Xi’an (Shan’xi province).