Rising industrial unrest in China

FROM THE ECONOMIST INTELLIGENCE UNIT

Strikes are becoming more common in China, as a result of increasing strains in the labour market. There is a shortage of young workers in coastal areas, partly as a result of stimulus programmes that have staunched the flow of inland workers to the coast, as well as increasing pressure on wages. For labour-intensive activities, this will be a problem, though for most manufacturers labour costs are a relatively small element of total costs. Moreover, labour productivity is rising fast and so cost-competitiveness is not being significantly eroded.

Two big manufacturing investors in China hit the headlines last month. Foxconn, a Taiwanese company that makes consumer electronics, attracted attention over a string of suicides and Japanese automotive company Honda suffered a production shutdown. Foxconn employs around 300,000 people at its sprawling factory complex in Shenzhen in Guangdong province, and the suicide of ten factory workers since the start of 2010 has damaged the company’s reputation. Terry Guo, the founder of Foxconn’s parent company, Hon Hai Precision Industry, was prompted to finally acknowledge the problem: the usually media-shy tycoon attempted to assuage the growing international outcry by inviting around 200 journalists to visit the plant in Shenzhen. Very few reporters have hitherto been permitted to enter the vast, fenced-off complex, in part because confidentiality is a selling point for contract manufacturers, whose customers count on them to shield their products and plans from competitors.

Mr Gou has denied accusations that the deaths were related to poor working conditions, saying that Foxconn is not running “blood and sweat factories”. Nevertheless, several high-profile clients of Foxconn, including a number of US-based companies, such as Apple, Dell and Hewlett-Packard (HP), as well as two Japanese companies, Nintendo and Sony, have reportedly launched investigations into working conditions at the factory. In response to the criticism, Foxconn has said that it will raise the salaries of its assembly-line workers by 30%. The company has also recruited hundreds of mental-health counsellors and installed safety netting around apartment blocks.

By contrast with Foxconn, Honda’s troubles were of a more routine nature: a dispute over pay. The Japanese firm was forced to suspend production for a number of days following a strike in May by employees at a components factory in Foshan in the southern Guangdong province. The Honda Foshan employees in question were demanding a 50% salary increase, but were persuaded to come back to work after being offered a salary increase of 24%. The strike was one of the most serious experienced by a foreign-invested company in China in over 20 years, not least because it triggered copycat action by workers at two other parts suppliers.

Is China running short of workers?

The recovery in overseas demand for Chinese exports has exposed a growing shortage of migrant labourers available to work in coastal factories. Although China is not running short of workers (unemployment still remains a huge problem in the countryside) it is running short of workers in the 15-30 age cohort, who are prepared to leave their villages across central China, and move to the coastal cities in search of work. Indeed, the labour shortfall in Guangdong province alone was unofficially estimated at 900,000 workers earlier in the year according to the Guangdong provincial government.

One of the main causes of the shortages is the government’s stimulus-led infrastructure boom. This is diverting workers inland, where the construction sites are often closer to home and wages stretch further because of lower living and travel costs. In order to combat these labour shortages–which first became apparent in 2004 but briefly disappeared in late 2008 and early 2009 owing to the slump in global demand–a number of provinces have increased their minimum wages. Jiangsu province, the municipalities of Beijing and Chongqing, and the city of Dongguan (the export processing hub in Guangdong province) have all recently raised the minimum wage rates in their respective regions to attract more workers.

Korea path?

For the time being, industrial unrest in China is much less serious than in neighbouring South Korea, where militant trade unionists are a constant problem for both foreign and domestic companies in the country. Nevertheless, the number of strikes in China is increasing. According to local press reports, industrial disputes in Guangdong province in the first quarter of 2010 were 42% higher than in the first quarter of 2008.

In part the increase in strikes and industrial action is the result of deliberate government action and a new Labour Contract Law which was introduced in January 2008. The new law, which was largely ignored during the downturn of late 2008 and 2009, aimed to improve workers’ contractual rights. The new law also formed part of the government’s commitment to a “harmonious society”, which aims to narrow social divides across the country, and so assuage some of the political dissatisfaction among the less well-off. The minimum wage has risen in 17 of China’s 31 provinces this year; average wages are expected to post a double-digit increase this year, compared with a gain of 5.7% in 2009.

What impact?

It remains to be seen whether the promise of higher wages will be sufficient to repair the cracks that are appearing in the model of mass production that depends on poorly paid migrant labour that has served China so well over the past 20 years. Amid growing reports of labour shortages, the new generation of workers from China’s interior are increasingly less willing to accept the kind of hardship that was endured by their parents.

Although the recent outbreak of labour unrest is a worry for the government, the overall economic impact is unlikely to be too severe. Labour costs in coastal factories typically account for a relatively small fraction of total production costs for the increasingly dominant electronics trade, and so a 20% increase in salaries is unlikely to make a huge difference to a company’s decision to invest in China. The situation is rather different for textiles and other labour-intensive activities, however. It is also important to remember that productivity is also growing very quickly, with the result that China’s overall competitiveness is not being undermined by big wage increases. In addition, higher salaries will help to boost consumer spending–supporting the government’s aim of rebalancing the economy towards domestic consumption.