Article

China in Labour

Pramit Pal Chaudhuri January 11, 2012

Here’s an interesting claim.

The Boston Consulting Group has issued a report claiming that China’s labour costs are rising so rapidly that, combined with productivity gains in US manufacturing, many of the factory jobs outsourced to the Middle Kingdom will start to go in the opposite direction. Quite amazingly, the report claims that manufacturing salaries between the two countries will converge by 2015.

That time period seems a bit too short. And I am not sure if the US can expect to necessarily be the big gainer that BCG predicts. If the US and China are too expensive in terms of labour, surely there are other countries a maker of widgets can go to. India, obviously, is a probable place to go. But that is only if India gets its infrastructure into some decent shape over the next few years and, preferably, also relaxes its overly restrictive labour laws as well.

There is no shortage of options. What is interesting about a comparison of future labour costs in Asia is how many Asian countries are roughly at the same place when it comes to wages. An IMF comparison of Asian annual wage overheads show that India, Indonesia, Pakistan, Vietnam and, for what its worth, Laos all have the same rough wage costs – about $1,000 per worker. (See chart.)

And then there’s Africa and possibly even parts of the Arab world. China has built itself an excellent industrial infrastructure with some of the most efficient logistical systems and cheapest power in the world. This is partly compensation for rising labour costs. It also still has a lot of poor people in its interior provinces who work for less than their more affluent coastal counterparts. But ageing is probably cutting into this as well. China’s geriatric revolution, especially in the next 10 years is quite remarkable. (See.)

The stakes are large. China exported $ 1.58 trillion worth of goods in 2010. That’s a lot of capacity to start walking around the world looking for a new home.

The BCG report argues the US will get a large chunk of this prize because it will have the advanced systems to get a lot of the upper end stuff.

Again, this may be exactly where India will do best. After all, one of the more interesting phenomena of its trade profile is the huge surge in engineering goods exports. In April-February 2011, for example, the export of such goods surged over 80 per cent in India. I suspect auto components and intermediary manufactured parts were the bulk of this. Interestingly about 65 per cent of these goods went to the most competitive markets – the US and Europe. Perhaps these are indications that India is already in a good position to seize the moment, seize the market, as China prices itself out of the manufacturing trade?