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Energy-Hungry China Sees Rise in Labor Costs

With wages increasing and strikes engulfing the country, the massive cheap labor force that has helped fuel China’s economic boom by underselling its competitors may be coming to  an end, reports suggest.

The game right now is to move factories deeper into the interior of the country or to other developing countries where labor is cheaper. The alternative is an uphill battle to maintain profitability, but so far the government’s “interior China” plan has not been given enough incentive.  

Labor costs in China have been climbing to the tune of around 15% annually since the onset of a 2008 labor contract law that prompted greater workforce awareness and led to countrywide strikes.

Related article: On G20 Sidelines, China Interested in More Russian Natgas

In 2012, minimum wages across China rose 22%. Still, wages for Chinese laborers remain very low compared to the West. Regardless, though, this wage increase could double—at the least—the cost of manufacturing in China by 2020.

In the meantime, Beijing is pushing foreign firms to invest in areas that would be most beneficial to China—such as advanced technology.

But investors are uncertain. Not only are wages increasing, but the costs of land, water, energy and shipping are on the rise as well. China has grown more expensive that Mexico, India, Vietnam, Russia or Romania, according to a study by Alix Partners.

Plenty of countries, too, will find it challenging to adapt to the changing Chinese market, according to a report  by Kline & Company.  

"Once-certain profitable projects and formerly acceptable margins are now way out of line in China. It is no longer the cheap labor, export-driven country that it was, but it is now a consumption- and services-oriented country, driven by the emerging middle class," notes Ian Butcher, Senior Vice President and Managing Director of Kline's European office.

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For Southeast Asian manufacturers, though, the changing Chinese market is likely to be a boon. Hundreds of foreign companies have already left China for greener grass elsewhere. The hot new destinations for cheap production are Vietnam, Indonesia, Cambodia or Malaysia. Manufacturing wages in Vietnam are now what they were on China’s coast a decade ago.

However, the drawback is that these countries don’t have China’s massive workforce, nor do they have the infrastructure or market reach—and many of them face, or will face, the same labor problems. So this may be the end of cheap Chinese labor—and for now, there is no ideal to replace it.

By. Charles Kennedy of Oilprice.com



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