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Higher base pay not a salve for labor shortage

Raising minimum wage levels is not likely to curb worker deficit, nor is it a big concern in China's export manufacturing industry. But other factors are.

The persistent shortage of labor in China's eastern manufacturing provinces has led suppliers and local governments alike to implement various measures to fill the empty positions. One of the loudest policies is the push to raise basic monthly salaries across the major export hubs along the coast to attract workers from inland provinces. This step, however, may not alleviate the shortfall as a tight labor market has already inflated actual wages.


Higher base pay not a salve for labor shortage

Many factories have been offering higher-than-minimum wages to their workers, whether skilled or entry-level. At some companies, the current monthly salaries are still more attractive than the new base levels would be after the pay rises take effect. For instance, the minimum wage at several furniture makers in Dongguan, Guangdong province, ranges between 1,000 and 1,300 yuan ($146 to $190). The anticipated increase in base pay for the city is 920 yuan ($135). In some industries, monthly salaries even reach 1,500 yuan ($219).

Even so, many plants continue to remain short of hands. This comes despite offers of free board and lodging on top of a 1,500 yuan basic salary. The high cost of living in the coastal cities has made migrant workers reluctant to accept jobs there. In many cases, employees allocate 80 to 90 percent of their income for rent, food and other daily expenses. Skilled personnel at garment and textile factories in the Pearl and Yangtze River Delta regions generally take home 1,800 to 2,200 yuan ($260 to $330) a month, including overtime pay and other extra forms of compensation. Back home, however, they can earn as much as 1,500 yuan ($220) but spend roughly 20 percent less on living costs.

Higher labor expenses will push up export prices in the months ahead, but only marginally. Rising raw material outlay is a bigger concern. In addition, speculation is rife that the yuan will be allowed to appreciate by 2H 2010 and that export rebates will be cut. Unlike increasing labor and raw material costs, the effects of a stronger currency and a lower VAT refund are more immediate and difficult to absorb.

For the most part, suppliers in the consumer products export industries such as auto parts, garments, textiles, sports and leisure, tools, lighting, and general hardware will be capping upward price adjustments at 5 percent. A large number even intend to keep quotes stable through June. The latter is also true for many finished electronics and components companies.

Perhaps the only significant price increase may come from toy manufacturers, some of which are likely to boost quotes 15 percent. The move has more to do with efforts to ensure the safety and performance of products, and minimize recalls, than with escalating expenses.

Minimum wage in Guangzhou

Makers absorb extra costs, but a caveat

The small impact of minimum wage increases on export prices, even when compounded with other factors that contribute to total outlay, is due largely to companies' preference for cutting profit over risking losing price-sensitive clients. Many are able to do so because there is still some room to reduce margins.

A sizeable number of manufacturers are also implementing various cost-cutting measures to be able to shoulder the additional expenses. These include decreasing wastage and enhancing management efficiency.

But there are numerous small factories across the country that do not comply with the labor code, including mandates on the minimum wage. As the combined effects of higher labor and material costs, a stronger yuan and lower rebates push up production outlay, these businesses are likely to cut corners in order to keep prices competitive.

Several candle makers in Zhejiang province, for instance, said they will raise export prices only if the cost of paraffin goes up 10 percent. Some of the smaller plants, however, are only able to keep quotes stable because they are using lower-cost alternatives.

Paraffin wax currently costs from 9,000 to more than 10,000 yuan ($1,300 to $1,500) per ton. Palm wax stands at just 7,000 to 8,000 yuan ($1,000 to $1,200). Candles are normally made from an 80:20 ratio of paraffin and palm wax. But to save on expenses, a few of the diminutive factories use less of the paraffin in the mix, often resulting in a 60:40 ratio. These versions burn faster and melt more rapidly under high temperatures.

Such suppliers are able to get away with this because they know many buyers will not bother having each candle sent for inspection. With most manufacturers releasing more than 150 new designs each year, testing all of them raises costs significantly.

Minimum wage in Zhejiang

Lead times extended, orders refused

Most companies believe the labor situation will ease by April. By then, they are hoping many of the migrant workers would have returned to their former jobs in the eastern coast or found new employment there.

In the meantime, production is being affected by the lack of workers. Several businesses, even smaller ones, are investing in computerized machinery to maintain output despite the shortage. But such a measure is not feasible for all export manufacturing sectors, including the outdoor furniture industry. Automation, for example, is not a viable alternative to weaving plastic strips manually.

Patio furniture maker Ningbo Top Green Enterprises Co. Ltd raised monthly wages 10 to 20 percent in recent months. Even so, it is still in need of workers, a situation that is prevalent among the industry's suppliers in Zhejiang. Because there are not enough employees to complete orders on time, lead times are being lengthened by two to four weeks.

Shenzhen Baobaolong Technology Co. Ltd adopts the same tactic. The children's toy supplier has already informed clients that delivery will be delayed by a few days. It has also declined a number of orders because of the labor shortage.

Fuzhou Oceanal Star Bags Co. Ltd now focuses only on large-volume transactions and no longer accepts smaller quantities. Presently, only half of its job vacancies have been filled.

The MOQ is likewise increasing. In the PVC key rings industry, for example, suppliers used to accommodate a minimum of 3,000 pieces for a customized design. A few makers also allowed trial requisitions for as low as 500 pieces. Now, some companies are refusing to accept even 5,000-piece orders.

Minimum wage in Shanghai

Minimum wage to go up 10 to 20%

City and provincial governments announced a round of pay rises a few weeks before the Chinese New Year holiday, with adjustments ranging between 10 and 20 percent.

Jiangsu province was the first to take the plunge, lifting the highest minimum wage level 13 percent to 960 yuan ($140) on Feb. 1.

Shanghai and Beijing are expected to follow suit, with a 15 and 10 percent increase to take effect on April 1.

Monthly salaries in Guangdong will be raised by about 20 percent to 1,030 yuan ($150) on May 1.

Zhejiang and Sichuan provinces are mulling over lifting minimum wage levels as well.

Workers' base pay is normally adjusted every two years. But the global financial downturn led China's Ministry of Human Resources and Social Security to freeze wage hikes, which is one way to alleviate the cost pressure on manufacturers. Before Jiangsu increased the monthly minimum salaries in the province, workers' base pay across the country ranged from 580 to 1,000 yuan ($85 to $146).

Even then, many factories were already doling out higher compensation to their employees. Depending on the industry, workers carrying out manual assembly received 800 to 1,000 yuan ($117 to $146), while those in the packaging lines were given 900 to 1,100 yuan ($132 to $161). Salaries for technical staff were from 1,200 to 1,500 yuan ($176 to $219), production line leaders 1,300 to 1,600 yuan ($190 to $234) and SMT operators, at least 2,000 yuan ($293).




Note: This article "Higher base pay not a salve for labor shortage" was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.

All price quotes in this report are in US dollars unless otherwise specified. FOB prices were provided by the companies interviewed only as reference prices at the time of interview and may have changed.

Disclaimer: All product images are provided by the companies interviewed and are for reference purposes only. Those product images featuring products with trademarks, brand names or logos are not intended for sale. We, our affiliates, and our affiliates' respective directors, officers, employees, representatives, agents or contractors, do not accept and will not have any responsibility or liability for product images (or any part thereof) which infringe on any intellectual property or other rights of a third party.

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