China Becomes The High-Cost Provider Of Goods

China has a problem. Before the recession it was clearly the low-cost provider of goods among the largest nations of the world. Its inexhaustible workforce were another advantage. Its manufacturing facilities are massive.

It has only been in the last year or so that China’s cost of labor has spiked up.  Like Japan, the country is the victim of its own success. China has created a huge middle class, and that middle class expects a standard of living that relies on healthy wages, and in a nation prone to inflation, raises.China has also let US and other foreign manufacturers have some measure of control and inspection of the facilities that they have on the mainland. Apple Inc (NASDAQ: AAPL) can pressure Foxconn to treat workers better and raise their wages after a series of suicides. Foxconn cannot do without Apple’s business. Walmart (NYSE: WMT) suppliers cannot do without orders from the world’s largest retailer. The list of China exporters whose fortunes are tied to a small number of US companies has grown The workers at the Chinese companies have leverage. Honda of Japan learned that the hard way. Workers simply shut down an auto plant because they wanted higher wages. Honda gave in.

And, all of this is only the beginning of a period of rising wages on the mainland. China needs its own consumers to buy its own manufactured goods. It cannot rely entirely on the flagging economies of the US, and especially Europe. China must create its own nation of shoppers based on wages more than anything else.

China is also being squeezed by low-cost countries, some of them in unlikely places. Vietnam and Mexico have large pools of workers although not nearly as large as China. But developed nation manufacturers can make tactical use of the manufacturing in those countries to pressure the factory owners in the People’s Republic. More ironic, the West is now the home of huge pools of displaced factory workers who have no chance to find alternate jobs. Obama wants to make the US an exporting nation again. He has large pockets of unemployed who will work for less than they did a half a decade ago.

China’s wages will rise inexorably. There are too many factors to push it up for the Chines government to push the trend down, even if it wanted too. And that leave China in a bind. It will have to try to pass its industrial costs on to its trade partners to keep its manufacturing base profitable. And, its trade partners can not  stimulate consumer spending when they can barely stimulate job growth.

China is becoming a high-cost provider of labor in a world where low labor costs are more important than ever.

Douglas A. McIntyre

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