Op-Ed Commentary: Chris Devonshire-Ellis
As wage increases in China continue to rise – along with the comparatively high national welfare costs – increasing comment is being made as to the legitimacy of the “China Plus One” scenario. Coined some years ago, this theory – in reality, more of a shrewd observation – suggests that future manufacturing capacity will be placed both in China and externally in another location by the same manufacturer.
In fact, this has been going on for years, most notably between China and Vietnam. The recent anti-Chinese riots there have even prompted Hong Kong Shippers’ Council chairman Willy Lin Sun-mo to state that Hong Kong manufacturers based in the Pearl River Delta are running out of alternative, low-cost factory locations with ample labour following recent instability in their two preferred destinations, Vietnam and Thailand. I wrote about the Vietnam and Thai issues – along with a risk analysis for doing business in the rest of Asia – and China, earlier this week here, in this article “Anti-China Vietnam Riots a Passing Phase,” and Willy Lin’s comments can also be construed as a mild political point to Beijing that placing oil rigs in disputed waters hurts Hong Kong manufacturers.
But beyond the recent China-Vietnam clashes, what is the real deal behind the China Plus One issue? Why haven’t thousands of China-based factories closed in face of increasing costs? Where is the economic point at which China wages become non-competitive? And is China’s superior infrastructure the reason why manufacturing will stay in China? These are all important strategic questions for both the China based manufacturer, and the foreign investor to be asking. I will deal with these issues as follows:
How High in Comparison to the Rest of Asia are China’s Wages?
This is not such a simple question to answer. Firstly because China is a large country with a considerable variables in costs of labour on a national basis. Secondly because the cost of employing staff in China usually involves an additional expense in mandatory social welfare contributions – as is also the case in other countries. But to get a handle on this, we can look at indicators – and in this case, compare the average minimum wage in China as against the other primary manufacturing destinations in Asia. I have taken the main ASEAN manufacturing nations as well as India to compare.
Note that this figure is average. That means that it combines lower minimum wage levels in China with more expensive minimum wage levels – which tend to be precisely where manufacturing labour is required. The average China figure then is actually a bit lower than it would be should we just take minimum wages around the manufacturing hubs of Guangdong, Zhejiang and Jiangsu.