Labor movement in China

The spat of suicides at a leading OEM supplier (for Apple, HP etc.) Foxconn has attracted most of the media attention, but it’s the other labor related unrest that will have greater impact over the long term. Or perhaps these are two sides of the same coin.

Media reports tend to focus on Foxconn’s alleged harsh working conditions. The truth is that Foxconn is far from a sweatshop, evident by its having no problem attracting workers in this age of labor shortage. It’s suicide rate, horrific as it seems, is no worse than the national average. But does this mean all’s swell at Foxconn?

The first suicide in this recent string was committed by a worker that lost Apple’s super duper secretive iPhone prototype, and apparently faced a lot of pressure from the management. Scribblings from the other victims seem to point to many vague uncertainties in life, things that do not seem dire enough to push people to the brink. Things that might just blow over had they had someone to talk to.

Foxconn employed about 400,000 people in the vicinity of Shenzhen, large enough to be its own town in a sense. But among all these masses of uprooted migrant workers, there’s no official organization of association. In fact, any form of liaison among workers is actively discouraged, for fear of fostering labor movement. Without a proper support network, vague disappointments in life often turn deadly.

But management’s fear is not unfounded. Just ask Honda China, which has been hit with a strike that paralyzed its four auto plants in China. After 2 weeks of standoff, Honda is now offering 24% raise in a bid to end the strike.

China’s official “union” basically works for the government and businesses in suppressing labor movement. No I’m not kidding. The union actually got into a scuffle with the striking workers over the weekend. The strike is led by second generation migrant workers in their twenties. Compared to their forefathers, they are better educated, more assertive in advocating their rights, and more media savvy. Coupled with a tight labor market, and the fact that Honda China sells mostly domestically (hence cannot move the production offshore under Chinese law), the workers have much higher bargaining power.

What’s more important is the demonstrative effect this strike has in a country that’s already been plagued with labor unrest. 5000 workers have been blocking a textile factory in Henan Province for about half a month. Labor demonstration also broke out in Beijing over the weekend. Honda workers have taped their deeds and post on the internet in an attempt to generate public awareness and support. Their success will embolden a true labor movement in China in the future.

Migration changes drive labor shortage in China

China National Statistical Bureau came out with a new report on the migration pattern and offers quite a bit of insight on the recent labor shortage story.

The report estimated that total migrant workers increased by 1.9% to 230 million (yes, this is China after all) in 2009. So why do we keep hearing this labor shortage thing? Well, it seems that the reason these are migrant workers is that they…ahem…migrate. And now the trend is to go west rather than the traditional eastern coastal cities. Total eastern bound migrants dropped by 9%, and Guangdong was hit especially hard with a 26% (!) free fall. Given this background, Guangdong’s announcement on Wednesday of a 21% pay raise isn’t so surprising anymore.

So what have these people been dong in western China? Isn’t Chinese wealth concentrated in the East and the West is just some rural backwater?

Apparently the massive “Go West” project that the government has been promoting over the past decade has finally borne fruit. Between high tech MNCs like Intel and Applied Materials setting up labs to take advantage of amply available cheap engineers and Chinese government’s push for massive infrastructure project that soak up unskilled labor,  western China is finally catching up. So much so that migrant pay in western China is only 10% less than that in the East now. Given the tremendous difference in cost of living between the regions, is it any surprise that the migrants are telling eastern sweatshops to take a hike?  Plus, they get to visit their loved ones a lot more now being employed closer to home, and the eastern city-dwellers generally treat them with contempt. With these social benefits thrown in, it’s almost a no brainer. The effect is so dramatic that Hong Kong Trade Development Center reported recently that more than half of Guangdong’s factories are experiencing labor shortage.

Over the longer term, these changes in migration pattern are unlikely to reverse. The provincial government of Guangdong is planning to upgrade its economy a la South Korea, i.e. by moving up the value chain. The lower end manufacturing is likely to ship out, with Vietnam as a prime location. What does this mean? It means that in a few years, rather than Samsung and Kia making the news, it might be Meide and BYD. And the folks there might finally embrace shopping as a hobby.

China will see slower growth in the future

The current debate is largely on the B word, bubble that is. The common perception is either China is a gravity defying economic miracle or it’s a complete fraud that will collapse and burn to cinders in no time. Both camps are clueless.

About 40% of China economy is export dependent. To expect it to be immune to the global downturn that is going to last several years (yes, the worst ain’t over yet) is plain stupid. It will see recession, perhaps even rather severe one, but it will fair a lot better than the developed world, simply because it’s a late comer to industrialization. It hasn’t seen peak productivity yet, unlike the west or Japan.

Going forward, it will look increasingly inward for further growth. Yes yes yes, I know China has been talking about this since…1998? But this time around it’s likely to be serious, as there’s no other choice. Its customers are bankrupt and protectionism in the the developed world is inevitable. While focusing on its domestic market will ensure a more balanced and sustainable economy in the future, growth rate will be a lot slower, which is why China has been putting off this change until now, when it really has no other choice.

And my proof that China is serious this time around? The newly launched Caijing National Weekly (which btw, has official backing and targets straight at the influential Caijing, the leading financial magazine in China) ran a story on policy changes for the 12th Five Year Plan (yup, China’s still a command economy and things planned usually got carried out) that is being drafted now. A major difference from previous plans is the omission of explicit GDP target. In fact GDP growth is not even treated as priority. Rather, the focus is on balancing the economy. So policies aiming at increasing household income and expanding social safety net come naturally.

Xinhua, the state news agency, also ran stories on similar theme, including increases in minimum wage in key manufacturing provinces. The officials of Inner Mongolia, which enjoyed regional GDP growth of 18.7% annually from 2000-2009, have stated publicly that it will calm down a bit going forward to pursuit “higher quality” growth, whatever that is.

Scholars at the Chinese Academy at Social Science, which is a key government think tank, have openly called for slower growth target of around 6%. It was widely believed that China needed 8% growth at the minimum to absorb the amount of labor entering the market every year. I don’t know where this number came from and I have not seen the actual number crunching, but it was widely cited so we’ll just leave it at that for now. However, given the change in demographics (see here), there’s less pressure on creating new jobs now. So China can actually afford a slower growth to the benefit of other objectives now, liking increasing consumption power of the people and cleaning up the environment.

How long will this process take? A decade at the least will be my guess. So if you are hoping that China will pull the world economy out of this depression (and it’s worst than the last one), you will be grossly disappointed. On the other hand, if you are wishing the collapse of China to prove the superiority of democracy, you will have to wait…and wait…and wait. It will come eventually, like all other developed economies in the world, just not this time.

Labor shortage in China

Hiring in China

Yes, you heard right. The world’s most populous nation is experiencing labor shortage.

Migrant workers traditionally return to the various coastal manufacturing cities after the Chinese New Year to look for new opportunities. This year all the talk is about difficulty to attract workers, or more precisely low-skilled workers which built the reputation of China as the world’s work shop. So what’s changed this year?

Several factors probably compounded to work towards advancing the bargaining power of migrant workers. First and foremost is simply demographics. With the rapid industrialization of China, there simply aren’t as much surplus rural labor as before, reaching the so-called Lewisian Turning Point.

Increased subsidies for agriculture and the development of the inland cities also serve to depress supply of rural labor. Both make working in far away coastal cities where people speak different dialects and have different customs and generally treat migrant workers with contempt a lot less attractive.

Demographic change within the migrant worker population is also an important factor. Most of the current migrant workers are born after the Reform. Hence they are better educated and are a lot more demanding in other workers’ rights than their forefathers. Sweat shops face increasing difficulties in attracting them despite increases in pay.

Since all these factors are not likely to revert trend, China’s labor shortage problem will only get more severe as time goes. Its manufacturers will either have to move up the value chain, or move out, to inland provinces or other countries like Vietnam. The bad news for the developed economies is that their manufacturers will face more competition higher up the value chain, the good news is that China’s domestic market will grow substantially given the higher growth in wages in the coming years.