Rising Wages Dent China's Auto Industrial Structure in Many Ways

GM, Ford and Honda plan to relocate production inland

Reports are that labor wages have been raised since the beginning of this year in China, seemingly initiated by Foxconn to appease the uproar caused by the spate of suicides at its plant, having even set a likely record at its Shengzhen production lines by doubling wages. Most manufacturing industries in the coastal provinces have raised wages by 10% or more so far this year, with some lifting pay by over 20%.

The recent round of wage hikes this year is regarded as merely making up lost ground, where wages had been frozen in China since the global meltdown in 2008.

Estimates are that China's per capita GDP will double within five years given an annual wage hike of 15% or so. China's CPI (consumer price index) rose 2.6% in the first half of this year, and 3.2% in May alone.

Raising wages in Chins has far reaching effects. Besides enabling workers to raise living standards, higher pay also impacts hiring practices. A recent TV report showed Chinese workers snubbing employers offering jobs at unacceptably low pay. Also raising wages, especially in remote areas where minimum pay is relatively lower than those in bigger cities, will slow massive migration to coastal and industrialized hubs as has been the case in China.

Another obvious impact of higher wages is the way countless export-oriented suppliers in China will have to tweak their business and pricing to offset the diminishing price advantage. After all, foreign buyers order from Chinese suppliers generally for lower prices, based largely on cheaper wages.

Carmakers Hit

Sharp wage hikes indeed sideswiped some automakers in China. Honda Motor and Toyota Motor both have suspended production in China due to labor strike this year.

Honda Motor, which shocked the auto industry with a sudden wage raise of 24% for its parts supplier in Guangdong province earlier this year, was distressed by another labor strike at an engine parts supplier, Atsumitec Auto Parts Foshan Co,. in mid-July.

Honda's transmission factory was struck by the biggest labor action ever in China to a foreign enterprise, with nearby satellite parts suppliers' work stoppage halting production at its three Foshan-based production lines.

Local media reported that workers asked for a raise of between 500 to 1,000 yuan to their current monthly wage of 1,500 yuan or so for working hard to support booming sales over the past couple of years.

Another point that lit the fuse of discontent is the huge salary gap: Japanese colleagues sent from the parent company are reportedly paid 50 times more than Chinese workers at the same job level.

Also existing workers saw job postings offering 2,000 yuan per month at the same Honda plant, another point of dissatisfaction. Eventually the Honda transmission factory raised wages by 24%.

The strikes occurred right after Honda's Guangdong plant announced raising annual output by 25% to 830,000 units by 2012, with the labor action causing Honda to report a loss of 3 billion yuan in the first half, as well as leaving behind uncertain impacts to its operations.

Over 10 labor strikes hit parts suppliers of Japanese automakers—Honda Motor, Toyota Motor, and Nissan Motor—in the summer, which all ended with the carmakers offering concessions to minimize interruption to production in the world's largest auto market.

Blessing in Disguise

Higher wages may work against Japanese carmakers in terms of elevated cost; but such may be a blessing in disguise, because Chinese workers would wield greater spending power, enabling them to better afford Japanese cars.

Toyota, despite production suspension due to labor strike by parts suppliers in Tianjin since June, reiterated its confidence in China's auto market at the Changchun Auto Show 2010, where it was the largest exhibitor displaying nearly 30 Toyotas as well as concept cars to be developed for China.

A Toyota executive at the auto show said that the carmaker had been planning a wage adjustment mechanism to deal with the long-term uptrend in wages in China.

Prior to the Tianjin labor strike in June, Toyota had agreed to raise wages by 20% in addition to a monthly bonus of 200 yuan for parts suppliers in southern China who do not miss work.

Industrial Restructuring

Tapping more potent spending power held by the middle-class in China fueled by rising wages, Honda, hit hardest by labor strikes among all automakers in China, plans to launch several new small cars exclusively targeted at the local market.

Meanwhile, some automakers as General Motor, Ford Motor, as well as Honda are planning to relocate production lines inland, where wages are relatively lower, to cope with rising cost of car-making. Such strategy will reverse the erstwhile out-migration to bigger cities.

The recent wave of wage hikes in China, however, is widely seen as inevitable in light of unreasonably low pay in the nation. Statistics show that the ratio of laborer- income-to-GDP in China is even lower than those of many emerging economies like India and Brazil, made possible due to the abundant supply of rural labor in China after the nation steered towards market economy. Such resource, however, is gradually becoming rarer as the current generation of workers are much more demanding, refusing to be exploited as assembly line workers as their predecessors.

This wave of wage hike also reflects rising job opportunities and wealth in inland provinces in China, whose people have not been filling the jobs in the coastal cities, hence causing labor shortages since the fourth quarter last year. This is why Honda offered higher wages to new workers that stoked protest among existing, experienced workers. While labor shortage continues, a survey says over 60% of companies in Guangdong plan to relocate production lines.

Rising wages in China will be passed onto to consumers, whose willingness to buy may be dampened, which economists expect to be a solution to curb over production of low-priced products. An easy generalization to make is higher pay brings greater wealth to more people, as well as raising China's GDP and living standards.

However, raising wages may not transform China's export-oriented economy to one driven more by domestic consumption; for the labor strikes occurred only at foreign businesses that make highly-sought after goods in China and abroad. Unless China develops indigenous technologies on par with foreign ones to turn out world-class cars for example, local buyers will be unwilling to pay more for China-made, generally lower-quality goods to drive domestic consumption significantly.

Wage Regulation

China's government, however, is cautious towards the wage issue. To prevent labor wage from soaring too high and too soon, Beijing is to announced a new package of labor wage regulations at the end of this year, saying both labor and management will be looked after.

While higher wages may negatively influence China's export, Minister of Commerce Chen Deming is optimistic about its long-term effect, saying higher-priced but same quality goods cannot compete, so the trend will force China-based companies to upgrade quality, added-value to elevate the nation's manufacturing caliber. Also building higher-value-added goods will help labor-intensive industries to wean themselves off large orders, which is generally the survival tactic for many China-based suppliers.

Rising wages, coupled with an appreciating yuan, also accelerate Chinese enterprises' motivation to look for business prospects overseas without having to rely on cheap labor. On July 14, China's CPM, an auto parts maker, signed an MOU (memorandum of understanding) with GM to acquire its Nexteer, a parts maker.

Scheduled to be completed in the fourth quarter, the deal, valued at US$450 million, will be the largest overseas acquisition for China's auto parts industry.