With the strike issue still on people’s minds, and the narrative changing to China-model-under-threat, it’s worth taking a look at the consequences of new labor demands.

The context is that minimum and actual wages have been rising slowly for the last few years, especially after the signing into law of the China Labor Law. During the recent boom the power shifted to Chinese workers, but it didn’t shift back to employers during the bust, because many of the workers went back home, and didn’t return to the East Coast.

Consequences

Workers clearly now have sufficient momentum to slowly push companies to match the salary increases given by Honda and Flextronics.

China’s position as the world’s workshop will not necessarily be threatened but its position as the cheapest place to manufacture will decline further (it has already fallen to 3rd place behind Mexico and India).

Countries like Vietnam are simply not viable as the ‘Next China’ simply because they would be overloaded just from receipt of the factories from two or three Chinese cities. Right now they can capture footwear, textiles and furniture plants from China, but it will be some time before they are a real threat; one that can pull semiconductor or pharmaceutical plants into their orbit.

That doesn’t mean there is no consequences for China. As salaries rise, workers will begin to drift back to the East Coast to take advantage of the higher salaries. Margins will fall in all industries in China, and exports will be lowered. Salaries will be tempered by the inflationary effects that they create (less factories, lower margins), but there will also be more salary demands coming from the inflation. China will be looking at persistent, long-term unemployment, and greater volatility. How much is anybody’s guess.

MNCs are unlikely to lose too much business due to salary increases for some time because it is the low-cost, employers, who don’t follow international labor standards that will be hit first. They will be pressured on profits, and will leave. The Chinese government had already planned for this exit; pushing them out using the Labor Law, so this is not unexpected.

What To Do

Look at Vietnam, India and Indonesia as talent sources but be aware that they will easily be overloaded with new factories. They don’t have the infrastructure and local market that China offers. In many of the alternative production countries there just isn’t much skilled staff to poach. Workforce availability will continue to be a core advantage in China for some time to come, even with the coming demographic bust.

Obvious, don’t rely on cheap labor. If that is your only advantage you don’t have any soon. As labor costs rise companies in China will have to automate more rapidly than they are now. Advantage will accrue to companies who can make the transition.

The market in China should also be a big element in your strategy. The fact of salary inflation is enough to build a local market over time, and there is also strong political pressure for China to build its internal market. This makes an increase in local demand more likely, assuming that there are no Black Swans to spoil  the picture.

The fact that competitors have their plants in China is of itself enough justification to have one too. China has a habit of “building so they will come”, and this works to your advantage. Labor costs might be lower in other locations, but the real strategic interest is in the final cost to produce and the availability of a local market. China delivers on this.

Finally, look at the bright side of ’s worker’s higher pay and better conditions. Consumer spending in China will increase, but you will need a product to match this market. If your company switches to this model, can you find the staff that complement this model?

More later …