China's Unions Paint Foreign Manufacturers Into A Corner

Where will Honda Motors (NYSE: HMC) and Toyota Motor (NYSE: TM) go to build their cars and trucks now that Chinese workers striking for better wages? Even if those wages are double what the workers make today, the answer is nowhere.

The cost of relocating factories is too great. The car companies want a large piece of the rapidly growing vehicle market in the world’s most populous country, and there is no alternative but to stay put.

Alternatives to China such as Vietnam, South Korea, and Mexico could not meet the demand of the automakers.Vietnam has a large, inexpensive labor force, but its GDP is only $93 billion, a sign that it is still an underdeveloped nation that lacks the infrastructure to handle large manufacturing operations. Korea ranks 15th in GDP among the world’s countries, but its labor costs are so high enough that its companies have moved much of their manufacturing to China. Mexico has a huge labor force, but is too far from Asian markets.

China and its workers are also aware that relocating large factories is costly. And Chinese car buyers may prefer vehicles made in China. The two largest auto companies in the People’s Republic as measured by sales, GM and VW, build most of their cars through local joint ventures.

Economists have pointed out that by supporting labor in disputes with foreign companies China may encourage workers in the factories of local companies to demand higher wages. That would raise Chinese labor costs and make the country’s exports more expensive and less desirable to its trade partners. That does not matter to Honda and Toyota. Whatever the reasons, labor unions are not being constrained by the authorities, and the Japanese companies have no viable alternatives. The fact that over time the labor demands may be bad for China does nothing to help foreigners today.

Douglas A. McIntyre