Is The United States A China Business Alternative?
China is gradually shifting away from its position as the worlds default production base for manufacturers
. In this country, factor costs are surging and government incentives for foreign investors are diminishing, forcing more and more companies to seek new and attractive destinations where they can relocate their factories. While emerging Asian countries boasting low overhead costs such as India, Vietnam, Thailand and Indonesia are undoubtedly attracting mounting attention, the United States is also growing back into an increasingly reasonable option for manufacturing, according to an intensive study conducted by the U.S.-based advisory firm The Boston Consulting Group (BCG).
The BCG report, which suggests manufacturers take a hard, fresh look at the United States, pointed out that Chinas manufacturing cost advantage over the United States is shrinking fast due to Chinese labor becoming more expensive and local currency gaining value while productivity is not catching up as rapidly. When making their investment decisions, investors should take total costs rather than only labor costs into consideration and choose manufacturing locations based on product-by-product analyses.
While Chinas cheap labor force used to be the countrys major advantage attracting foreign manufacturers, it is not exactly the same story today. Although starting at a low base, wage levels in China have been skyrocketing over the last decade. Between 2000 and 2005, compensation packages for Chinese factory workers rose by 10 percent annually on average, and from 2006 through 2010, the annual wage growth rate accelerated by an average of 19 percent. In contrast, total pay and benefits for U.S. production workers over the past five years only increased by 4 percent a year.
Chinas legal system for labor rights protection is also growing stronger, with the Labor Force Law and Employment Contract Law enacted in 1995 and 2008, respectively. Employers have no option but to increase payrolls, not only because Chinese labor organizations are gaining a greater ability to demand higher wages, but also because the legal requirement for additional benefits such as mandatory social welfare and worker severance compensation has added to the total labor cost. In 2010 alone, minimum wages across China increased by around 20 percent to 30 percent, and a companys social welfare expenses could be as high as 37 percent on top of the salaries paid to employees. Furthermore, with foreign employees now to be included into the countrys social insurance scheme and with a potential removal of the cap on social welfare contributions looming on the horizon, China is growing more and more distant from the low-cost option it once was.
Chinas rising labor costs are also being spurred on by the increasing scarcity of production workers. With living costs surging in many of the countrys coastal cities, an increasing amount of young people no longer find it an economic option to work for manufacturing companies in those regions. A recent commentary on the Financial Times predicted that the supply of young workers in the industry is set to drop by roughly one-third between 2010 and 2022.
BCG research projects that the labor cost gap between China and the United States will grow even smaller over the next five years. The fully-loaded cost of workers in the Yangtze River Delta the region with the highest manufacturing output in China will grow by an annual rate of 18 percent to about US$6.31 per hour. Such wage levels will be equal to around 25 percent of the salary earned by skilled workers in the manufacturing states of the southern United States, while the pay gap was as large as 1:25 only 10 years ago.
by: Dezan Shira & Associates
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