Thursday, 11 October 2012

The end of the end of the world

For manufacturing firms in developed countries such as the United States and the United Kingdom, the rise of China as a manufacturing base was seen as the end of the world.  With a seemingly endless supply of low-wage and diligent Chinese workers, manufactures elsewhere have been forced out of business and those that survived retreated to more high-tech products which were still beyond the reach of Chinese firms.  But the end is no longer nigh.  The bountiful supply of cheap labour has dried up and wages in China are rising along with demands for better working conditions.  Not only does this suggest the end of Armageddon for manufactures in developed countries but may also open up new business opportunities.

The industrialization of any economy whether it be Britain during the industrial revolution in the eighteenth century or modern day China involves the mass migration of workers from the agricultural sector into manufacturing.  The increase in productivity (the ability for workers to produce more in the same amount of time) generates a surge in wealth which typically first goes mostly to the owners of factories employing the cheap labour.  But there comes a point in time when the supply of workers from the countryside starts to fall off and firms have to compete more to keep workers which results in wages starting to rise.  This is crucial for the formation of a consumer society as workers gain spare cash to spend.  This is where China is positioned at the moment and it is a trend that is likely to pick up in the future. 

Along with the typical momentum involved with industrialization, demography is another factor that is adding to the upward pressure on wages.  Population growth is slow due to China’s one-child policy which limits the available pool of labour.  With most families only having the one child, parents are investing more in the education of their single progeny and this combined with the bright prospects for the Chinese economy mean that younger workers are aspiring to more than menial factory jobs.  The trade-off is that higher wages are required to attract and maintain employees.  

Rising wages are a boon for China as its new-found wealth begins to be dispersed to its citizens to a greater degree.  And higher pay for Chinese workers also offers some respite for competing firms - both in other low-wage countries and in developed economies.  Wages are now lower in other countries in Asia such as Vietnam and Cambodia.  This will attract factories to move there and help spread the benefits of industrialization. 

But a mass exodus from China is not expected.  China provides not only cheap labour but excellent transport links and suppliers of various components required for manufacturing which have been developed as China has become a key cog in the global supply chain.  Instead, China is expected to increasing replace workers with machines as pay rates increase further.  This will also be accompanied with a shift toward more high-tech products.  But this opens up the chance for big pay-offs for Western firms that can supply the machinery to Chinese factories as well as companies that can tap into the growing consumer market as employees get paid more. 

Doing business in China will still continue to present difficulties.  The Chinese government is doing its best to control the economy during this unprecedented surge in growth (for details, see Why China needs a slowdown) but that is like trying to steer the proverbial bull through a china shop.  The politics generated by a rise of China as a new power can also be problematic such as in the case of Japanese firms struggling with a nationalistic backlash over issues dating from over 60 years ago.  The growing pains involved in the coming of age of a country of 1.3 billion were never going to be easy but changes in the economy in China are offering up a new wealth of opportunities.

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