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LOOK SMART HR: Everything You Need to Know About Labor Costs in China...

Let's face it - it's hard to look smart on the global scene as an HR Pro when you're in that mosh pit you call a company on a daily basis. One of the things you need to be literate about is that giant sucking sound - in the old days, it was NAFTA.  Over the last decade, it's really been what's going on in China.

Here's what you need to know about China now. The trend has been there for a few years, but China's no longer the low cost producer of goods in the world, as evidenced by this chart from Business Insider (email subscribers, click through for the graphic):

Chart-of-the-day-china-is-no-longer-a-low-cost-producer

So Vietnam and Indonesia have always had a cost advantage over China, but let's face it - China wins because of unlimited capacity and billions of workers, right?  Well - costs are going up in China and the unlimited supply of workers is slowing down.  More from the brainiacs at KKR:

"Between 1990 and 2010, urbanization was clearly a major driver of growth in China. The 1990-2000 time period was characterized by a ramp up in rural-to-urban migration, while the 2000-2010 time period was characterized by rapid urban real wage appreciation and home prices. But urbanization also created a massive divergence within the population. Since 1985, the average wage in Shanghai and Beijing has increased 56 times (5500%) versus “only” 25 times (2400%) in rural areas like Gansu and Qinghai4. The other big macro factor relating to urbanization that should be rethought is that the pace is now finally slowing, and is likely to decelerate to less than 10 million annual rural-to-urban migrants by 2030 versus an average of 15.8 million over the past twenty years (Exhibit 39). As this transition occurs, it has implications for, among other things, GDP growth and infrastructure investment."

Translation - the only constant is change, and China's advantage in production, while still substantial, is slipping.  Wages are going up everywhere, and if you want to get production in the areas where labor costs are rising more slowly, you're going to take on other costs - like higher shipping.

Boom - you're now China-literate.  Go talk about slowing urbanization in China with the ops people.  #fascinating

Update - Time's 4/22 edition reports that the average cost to ship a 40-ft container from China is to the West Coast is $2,302, up from $1,184 in 2009.  

Comments

Lance J Richards

I think there's a need to also factor in the Chinese educational infrastructure, and its' limits. Market absorption of labour has certain thresholds (skills, competencies, volumes), and those could also force a slowdown in the migration.

Also, shrinking wage elasticity will cause folks to have a second thought before heading to the east coast or to Chongqing.

Slowing urbanisation? YES... fully agreed. Diminished desire? Hmmm.

Has the global recession (ostensibly over now for most of us) finally worked it's way through this particular snake?

I'm still watching to see how this capitalist economy interfaces with socialism with Chinese characteristics...

Joel Kimball

For us, the real sexy discussion w/Ops is the length of the supply chain vs quality. Finding and fixing a mistake in Mexico versus that looooooong chain of 6 weeks supply leading to Chonguing? Yeah HUGE difference.

Labor costs? Meh - that's so 90's. Supply chain length and time/cost to recover from an issue? That' so sexy! #supplychainmanagement

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