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Constantly changing employment legislation
In the global economy recently, the best firms feel the shifting sands well in advance of the changes transforming the landscape. They then respond very fast and innovatively to the shifts. Wage increases in China are one of these transformative changes potentially. China’s economic growth has radicalized completion for skilled manpower within china among local and multinational companies who carry out business there. Due to these, wage levels have hiked, mostly in China’s urban areas.
Historically wage rates in China have been in developed markets have been about 6%. However, this year, 13 provinces in China, pushed by their governments, have hiked the minimum wage level by a mean of 19 percent. Various main manufacturers carrying out businesses in China have increased wages to cope with problems posed by increasing employee turnover and even suicides. For example, in Foxconn (Guangdong Province), turnover had risen from 8.3 percent in 2001 to 14 percent in 2009. During 2010 in just two months, almost 10 employees committed suicide. As a result, Foxconn has increased the monthly salary level for industry workers from 900 RMB to 2,000 RMB (US$300). Also offering a salary increase of 32 percent from 24 to its Chinese workers is Honda. Hewitt Associates LLC reported a medium salary increment by MNCs in China of 8.3 percent in 2009.
Unsurprisingly, a recent study carried out by Accenture indicates that salary increment in china is expected to affect cost of manufacturing and the effects will vary across the variety of industries and products. Most notably, findings suggests that the effect of unpredictability in labour cost on the final price or margin of firms with a firm manufacturing base in China is important, but the effect on sourcing decisions is likely to be low, given that impact on margins will be made ineffective by improved efficiency. Examine the following evidence:-
• Margins for firms with a strong manufacturing base in china (i.e. 30 to 99% percent china productions) are expected to reduce about 1-5 percent if a minimum wage of 30 percent is assumed. The reason being that labour cost stands for a minimal portion of MNC price for those firms. Such companies may distract the effects on margins by increasing their productivity, lowering costs and improving their chain supply processes.
• Even though china’s wages have grown faster than in many other low-cost countries (LCCs), its hourly salary rates are still very competitive compared to those in the developed world, mostly in factories that need untrained manpower, for example apparel. Also, the absolute wage difference between China and developed countries is widening continuously and China’s salary rate in the apparel factory stands for less than 8 percent of the overall mean wage in the UK or the US, due to the historically minimal base-salary rates in China.
• There expectations that the cost raise will remain low, with no important effect on consumer demand. With the increasing purchasing power of local Chinese customers, the additional demand is expected to aggravate price hike in the end. Moreover, such a direction may have a limiting effect on margins for export goods that are produced in China. Easily explained, salary hike in China will drive positive change for MNCs but should not cause a reactive panic among these firms. For some MNCs that today hugely import producers in China, LCCs such as Malaysia, Vietnam, Indonesia, and Thailand may become highly appealing as another source for production globally.
Otherwise, MNCs thing of using these sources may get demerits for example minimally developed facilities ports, roads, shortages of trained personnel, and political instability. MNCs with China-based production amenities go ahead to find more manufacturing sites in interior and western parts of China, here salary levels are still lower compared to those in the eastern coastal cities. Generally, what can producers do to diminish the impact of salary inflation in China? Our investigations recommend four plans:-
1. Focusing on operational excellence
To distract the effect of rising labour costs in China, MNCs require to desire high standards of excellence in operations. Specifically, they should create a mix between their functional areas as well as improve their outcomes, efficiency and optimization process.
2. Expansion across the ASEAN and West China
MNCs in China can also take a “China plus” approach model with their own manufacturing operations, locating more plants in West China as well as in Association of Southeast Asian Nations (ASEAN) member countries. From this point of view they can help minimise structure cost and increase chances of change across the region to improve future advantageous improvements. Also, these firms can move their production and supply efforts nearer to markets with potential high demand.
3. Optimizing across the world
MNCs can make Centres of Excellence instead of taking the huge decision of shifting outside China all their manufacturing bases. These centres can assist optimize a company’s production standing worldwide and focus on a Total Cost to serve model. With a worldwide optimized manufacturing standing, firms can easily move manufacturing functions among different facilities as required to keep costs minimal and to serve their most demanding markets fast. The only main factor liable to change is labour cost and it continues to undermine MNCs’ operating margins. Both MNCs and domestic manufacturers will require to enhance their excellence in operation and production plans to continue leading the curve as consumer demand continues to grow. China especially, and Asia more generally, will continue to form the basis of the world economic foundation as a leading source of goods and services. For this reason, it is important that producers enhance their standing in this region to maintain their competing position on the world’s stage.
4. Grow the local market
With strong demand, improvement in business and consumer sectors, China remains to be an increasingly vitally important final user market for MNCs. To get hold of the advantage of the opportunities by this new direction, MNCs with manufacturing operations in China can reshape their supply chain management plans to distribute and sell products to Chinese customers. That will include making changes such as strengthening capacities in export transportation, storage and distribution.
For the past twenty years China has been a low-price gold mine producer, appealing an increasing number of MNCs. 153 of the largest 200 exporters in China were companies with a foreign stake in 2009. Various indices have contributed to making China the manufacturing hub of choice: -
- Minimal investing input and domestic sourcing costs.
- Understandably favourable government policies such as foreign direct investment (FDI) liberalization and tax exemptions for MNCs in China.
- Stable infrastructure and low cost of workers.
In china the hourly wage rate today is about 9 percent of the rate in developed Western economies e.g. the UK.
China’s low- labour-cost merit will however not last forever. Indeed, since 2008, the cost difference between provision in China and elsewhere has decreased. Increasingly, pricing globally is controlling prices of raw materials. Policies of the Government of China (inclusive of currency revaluation and increase in the minimum salary) are changing in favour of improving local workers’ welfare and away from maximizing benefits to manufacturers and investors in China. Increasing infrastructure cost as firms invest in more complex equipment has been noted due to a focus on productivity gains among some firms manufacturing in China.
The advantage is that generally for the past ten years wage increases in China have been stable and predictable. While China’s absolute labour costs may be slightly higher than that of other LCCs, China offers higher productivity and a higher sense of security these are two important considerations in firms outsourcing decisions. In this study, we examined wage levels for three industries: apparel (footwear), heavy equipment, and high technology (personal computers).the medium hourly wage has increased over the past four years for the three industries with the highest wages in the high technology industry. In china privately owned companies’ wages are expected to rise 17 percent annually in the next three years.
Labour-cost increases have created margins at 48 percent for US firms with manufacturing operations in china, says a published research.
Therefore, it’s vital to understand the nature of wage increases in China and their effect on the unit cost of products as well as end price or margins of companies.
Wage increases in China have been affected by a number of forces.
- Few skilled workers in eastern China, where most of MNC manufacturing takes place. The rising cost of living in megacities like Shanghai and Beijing causes the shortage. For example, the consumer price index (CPI) in October 2010 reached a high record in the last two years (4.4 %), real estate prices are also skyrocketing. Tax cuts in rural areas have also made it expensive for workers to migrate to China’s coastal areas. When the ratio of works to work seekers exceeds 0.96, regional labour shortages emerge. By May 2010 that ratio hit 1.01 in eastern China, when the number of rural workers available and suitable for labour intensive work in the region fell from 120 million in 2007 to just 25 million in 2010. Some MNCs such as General Motors, HMC Enterprise Co., Motorola and Intel have moved manufacturing facilities inland to find talent as well as open new markets.
- Aging of the workforce and increasing education levels among younger workers have made it harder for companies to get workers to agree to the same terms earlier generations had accepted. As members of the “one child” policy generation begin entering the workforce, they are further contributing to the changing labour mix.
- Government policies have highly favoured local workers and their rights, which is part of the government’s economic stimulus strategy. For example, the Chinese government’s most recent 5-year plan included a priority to “increase Chinese people’s income.”
To that end, the Labour Contract Law of 2008 improved wage standards as well as provided protection for workers from baseless dismissal. In the 3rd quarter of 2010 Beijing’s government also increased its minimum wage by 20 percent, bringing it to 960 RMB (US$140), while Dongguan City raised salaries by 40 percent in 2009, bringing the average to US$160 per month.
Meanwhile, Chinese police have grown increasingly tolerant of mass protests, particularly those demanding higher pay and better working conditions from foreign employers.
Wage hikes in China have directly impacted the gross margins of MNCs with production bases in China. To fully comprehend the nature and extent of the impact on production costs, Accenture used a comprehensive supply chain process model. “Source” and “Make” are the largest cost components across a manufacturing company’s supply chain operations. The contribution of direct labour cost is relatively higher in these two components. therefore, wage increases in China will likely have the greatest impact on MNCs’ sourcing and manufacturing decisions.