China’s suppliers are beginning to modify their starkly utilitarian factory complexes, bearing employee comfort and recreational needs in mind.
At the same time, China’s new generation of workers, demanding improved working conditions and pay, are eroding the cost competitiveness of many export products, particularly those in labour-intensive industries such as garments, footwear and bags. Because of rising manufacturing costs and the decoupling of the yuan’s peg to the US dollar, profit margins for these products are estimated by some to be between 2-5 percent.
Hong Kong Small and Medium Enterprises Association chairman Danny Lau says low costs, especially inexpensive labour, are China’s biggest competitive differentiator among global factories. Yet while suppliers are still able to negotiate specifications with clients to avoid price adjustments, they may have no choice but to raise quotes if worker-related expenditure continues to climb.
Should this happen, "many buyers will choose to source from Vietnam and other countries with lower production costs", says Lau. To reduce outlay, companies are moving away from the Pearl River Delta region.
One company, Guangzhou Canttro Extension Electronics (Group) Co. Ltd, has built factories in Hangzhou, Zhejiang province, and Wuhan, Hubei province. General manager Zheng Haibin says manufacturing in the cities along the Pearl River Delta is no longer as cost effective, and moving to the Yangtze River Delta region could save the company 10-20 percent in labour expenses.
"Many companies in the Pearl River Delta region offer higher than minimum wages, which range from CNY1,500-2,000 [USD220-295] per month, but employees still feel unsatisfied," Lau says. He believes China’s workers should not compare their salaries with those in developed countries such as the UK, where hourly wages stand at around GBP7 (USD10.50). Instead, the average rate of CNY10 (USD1.50) per hour should be seen in relation to what workers received 10 years ago, which was roughly CNY1.25 (USD0.18) per hour, says Lau.
That belief, however, is not shared outside manufacturers’ circles. Institute for Contemporary Observation director Liu Kaiming has done his own research, which shows labour-intensive industries generally have a markup of at least 10 percent.
One of the factory owners he talked to in Jiangsu province even said the factory would not accept orders if the potential profit was less than 20 percent. If the profit margin were only 2 percent, Liu opines, it would be better for the supplier to let a fund manager handle its money. Investing in a savings account, even, could result in 5 percent earnings per annum.