Chinese pay rises encourage move to cheaper provinces

Financial Times:

Foxconn's shock announcement this month that it would double base pay for some of its workers may not hurt consumers but it is likely to lead to a fresh round of labour relocation within China.

"We frequently have double-digit percentage swings in the price of D-Ram [chips] or [LCD] panels, and those are the ones that matter," says Kevin Chang, ac Citigroup analyst. "The impact from the recent labour cost changes is going to be minimal [on consumers]."

That is because Chinese labour accounts for just over 3 per cent of Foxconn's total cost of goods sold, and for an even lower percentage of the final retail price of products such as Apple's iPhone.

But inside China, the labour woes that have shaken the country's main export manufacturing hub are pushing crucial changes on its economic map, and Foxconn is at the forefront of those adjustments.

"The labour cost increases will be dealt with by increasing productivity, passing on to customers and moving production to inland China," says Manish Nigam, head of Asian technology research at Credit Suisse. "And the relocation within China will be the most important force."

The move away from the coastal locations of the Pearl and Yangtze river deltas, still China's main manufacturing hubs, to other locations is not new.

Some Taiwanese contract manufacturers started diversifying their locations on the mainland as early as a decade ago, and many now have factories in scattered provinces such as Jiangsu, Jiangsi, Sichuan, Shandong and Liaoning.

That can make a big difference. In Jiangsu, wages are 86 per cent of the level in Shanghai, according to a research report from Credit Suisse. In Shandong and Shanxi provinces, where Foxconn already has big manufacturing facilities, the wage levels are 82 and 76 per cent, respectively. In Chongqing, the metropolis in central China on the upper reaches of the Yangzi River, wages are 61 per cent of Shanghai levels.

Chongqing is the new frontier for the electronics industry. HP, which announced as early as 2008 that it was building a new manufacturing site there, is expected to start production next year. All its major manufacturing partners have followed.

Posted via email from Jim Nichols