The end of cheap Chinese labour?

FT.com

Deng Xiaoping said the price of getting market reforms going was to let some people get rich first. Three decades later, that has happened in China – and then some. Now, one way of closing the resulting income gap is to let some people do something else first: vote.

How would letting people vote help reduce inequality? Step forward Terry Gou, the Taiwanese chairman of Foxconn, the world's biggest contract manufacturer of electronics. Foxconn will, from this year, allow its 1.2 million workers to vote for what it says will be a genuinely representative union – this in a country where voting in TV talent shows is considered a dangerous democratic precedent. Foxconn's employees will elect 18,000 representatives by 2014. To keep things honest, the process will be monitored by the Fair Labor Association, a US-based group.

Gou's intention may not be to give his workers the wage-bargaining power that often comes with a unionised labour force. More likely, he hopes to improve the company's image, tarnished by a spate of suicides at his factories in 2010 and by allegations of poor conditions and use of underage workers. The company best known for making Apple's iPhones and iPads also had to halt production last September following a brawl involving several hundred workers.

Higher wages may not be the intention. But that is the likely result. Even without unions, factory wages have been rising at double-digit rates for years as the gloss of production-line jobs wears off and demographics become less favourable for employers. Real wages measured in 2005 dollars have risen 350 per cent in the past 11 years, significantly faster than in any other Asian country, according to HSBC.

That is only likely to accelerate. Last year, China's working-age population fell for the first time, by 3.5 million to 937.3 million. The decline, which came four years earlier than expected, shows China has just about exhausted one of the most important factors in its three decades of rapid growth: an endless stream of new workers. The head of the National Bureau of Statistics noted with suitable gravity: "We should pay great attention to this fact.”

In fact, higher wages fit the Communist party's aim of reversing rising income inequality. There is growing resentment against people, many of them party officials, who are seen to have grossly enriched themselves. This week, the State Council released a 35-point plan to redress the wealth gap. Among its goals was to lift 80 million people from poverty, to increase the minimum wage to at least 40 per cent of average salaries, and to force state-owned behemoths to give more of their profits back to the government for redistribution.

Though the plan is light on detail, it dovetails with the stated objective of Xi Jinping, due to become president next month, to crack down on corruption and official extravagance. The new leader has said his government will root out both "tigers and flies” – big and small-time crooks – and ban such items as shark-fin soup and expensive liquor at official banquets.

Much of this is grandstanding. But there is a serious economic point. If China is to rebalance its economy by generating more growth from domestic demand and less from investment and exports, it will have to put money into people's pockets. One obvious way is to allow the wages of ordinary workers to rise.

If wage increases do indeed accelerate, companies will have to make big productivity gains if they are not to lose competitiveness. That did not happen in the five years to 2011, according to HSBC, when wage rises outstripped productivity gains, pushing up unit labour costs by more than 100 per cent.

The end of cheap China could send some labour-intensive jobs – in textiles or low-end manufacturing – to neighbouring countries and beyond. There is evidence that countries such as Bangladesh, Vietnam, Thailand and Mexico have already benefitted.

Still, labour costs are not everything. For many manufactured goods, wages are only a small fraction of the cost. According to an investigation by The New York Times last year, if Apple paid American wages to produce its iPhones, it would add $65 to the cost of each unit. That might just be manageable given Apple's hefty profits margins. But Chinese competitiveness turns out to go well beyond price. More important are the huge clusters of components makers that are able to keep pace with the constant upgrades required by the electronics industry. Chinese factories are also legendarily flexible. The investigation related how, just weeks before iPhones were due to go on sale in 2007, Apple revamped the production line at Foxconn's factory in Shenzhen in order to fit the phones with glass screens instead of plastic ones. That turnround would have been impossible almost anywhere else.

Of course, if Foxconn really did allow a powerful union to take hold, it could jeopardise such flexibility. Yet a very strong union, say one that is prepared to strike, is not really on the cards. Nor are workers clamouring to cut back hours and introduce rigid working practices. In fact, a common complaint of those on the Foxconn shop floor is not that they work too hard - but that they are not given sufficient hours of overtime. Higher wages or not, China is likely to stay competitive for some time yet.

Copyright The Financial Times Limited 2013.