Rapidly rising wages in China and this summer's wave of wildcat labor strikes prompted a lot of questions about the future of manufacturing in China.
There are clearly significant changes under way for manufacturers, with industries that are labor-intensive, more polluting under intense pressure and expectations of more union organizing at companies.
But for many plastics manufacturers thus far, the changes are emerging more as challenges to be managed, rather than the beginning of the end for China as a preferred manufacturing spot.
“I think the media certainly jumped on this, especially back in Europe, basically saying manufacturing was doomed in China, especially in the Pearl River Delta,” said Alberto Vettoretti, chairman of the European Union Chamber of Commerce chapter in the PRD, the huge manufacturing zone, not far from Hong Kong.
But the reality is more complex, he said. Costs are higher and employee relations more complicated, but more-developed areas in China like Guangdong and Shanghai still have significant advantages with supply chains and workforce, compared with alternatives in and outside China, he said: “European companies are indeed looking around at alternatives … [but] we have not heard of many companies really effectively moving out [of the PRD].”
U.S. injection molder GW Plastics Inc., for example, has seen wages rise substantially at its factory in Dongguan, since the local government raised the minimum monthly wage 20 percent to about US$135.
“It's a situation the company has been able to manage, said General Manager Ed Boyden.
“It should have a small effect on our overall cost, but because we're automation-intensive, it did not have as big an effect as [on] somebody like Foxconn, which is very labor-intensive,” said Boyden, referring to Taiwanese electronics maker Foxconn International Holdings Ltd.'s decision to move tens of thousands of factory jobs from Shenzhen to cheaper inland Chinese cities.
Ben Bouchard, GW's vice president of international market development, said the stability of its workforce is more important to GW than strictly costs. It's the same approach the firm has in North America, where it ships parts to Mexico from its plants in Texas and Arizona, he said.
“Our market is not a market where we're chasing labor to Indonesia or Vietnam,” he said. “[Rising costs] did not have any impact on the viability of the organization and it did not require us to renegotiate with any customers.”
GW is looking at increasing its investment in China with a second factory near Shanghai.
Some large local Chinese processors also say they've adapted by automating and using other strategies.
China's largest plastic pipe maker, Liansu Group Holdings Ltd., has its headquarters and biggest production base in Foshan.
The company has seen the same salary hikes, but has managed them by automating, using its size to bargain on raw material prices and taking more than 1,000 of its lower-skilled workers off Liansu's direct payroll and having an outside employment agency provide people to fill those jobs, said Chairman Wong Luen Hei.
Wong said the labor-cost increases are less of a factor for companies focused on China's domestic market. Liansu also has some pricing power to pass on cost increases because of the booming construction market.
Total costs in places like Guangdong can be comparable to other places in China by factoring in the more efficient supply chain in well-developed coastal areas, he said.
More Challenges
Still, some companies are looking at new locations.
Singapore-based mold maker Express Tech Pte. Mfg. Ltd. opened a factory in Ho Chi Minh City, Vietnam, recently, in part because some customers don't want to depend entirely on China, where the firm also has a factory.
Express Tech also expects costs in China to rise significantly, even if for now there's not as much difference with Vietnam, said Managing Director Leong Yoke Ming: “Long-term, Vietnam will have an edge in terms of costs.”
Others, however, said they've looked at some lower-cost options and found them wanting.
Hong Kong-based Hoyu Tooling Ltd. studied whether it should put a mold-making shop in Yunnan province in Southwest China, but found the infrastructure there lacking, said Andy S.K. Chu, business operations director.
So the company is focusing on making its base in South China more efficient, after a 15 percent wage increase there this year, he said.
“Like in the U.S., we have more machines and less labor and we invested in new management software,” he said.
Hoyu employed about 1,000 people three years ago, but now it's down to 850. However, its sales are above 2007 levels, as the company has seen more business from North American firms looking to cut the costs of their molds, even in the economic downturn, he said.
Other export-oriented Chinese molding firms tell similar stories of shrinking workforces and more automation.
Hong Kong's Ultratech Mold Design & Mfg. Co. Ltd., for example, said sales have held steady in the last two years, but the company does that with 800 employees in its Chinese factories, compared with 1,000 before.
Many of those export-oriented Hong Kong plastics manufacturers have been hard hit by the economic downturn, with many factory closings.
Some of the increase challenges for manufacturers are also coming from environmental issues.
Environmental permits are becoming more difficult to secure in some South China cities, as governments try to clean up pollution, said the EU Chamber's Vettoretti. Over time that could push companies to relocate, he said.
“The environmental bureaus have been increasingly stepping up their efforts and it will happen that licensing and environmental approval will not be given in the locations where those companies are,” Vettoretti said.
The Chinese government has goals of encouraging development in interior provinces and upgrading manufacturing in coastal regions, trends plastics firms cannot ignore in the long-term, said Jack Yeung, CEO of Ace Corp. Holdings Ltd.
Hong Kong-based Ace recently invested in injection molding factories in Mexico and inland China, partly as a hedge against rising costs along China's coast.
Finally, the summer's unexpected labor strikes that began in the auto industry in South China foreshadow more-complex labor relations, observers say.
Jonathan Isaacs, a lawyer with Baker & McKenzie International in Hong Kong specializing in Chinese labor issues, said China's state-approved union, the All-China Federation of Trade Unions, was embarrassed that some strikes began independently by workers outside union channels. The union has goals of stepping up its own organizing activities, including at foreign-invested firms, he said.
He told a forum of the American Chamber of Commerce in July that McKenzie's analysis showed a “disproportionate” share of the labor actions this summer had been at Japanese and Taiwanese firms.
The Chinese government does not release figures but based on media analysis, he said, about 40 percent of the strikes and disturbances happened at those firms.
Still, labor relations are likely to get more complicated for all firms of all nationalities, and not just in South China.
For example, a wave of strikes this summer involving 70,000 workers at 73 factories in Dalian, China, ended after workers received 34 percent wage increases, according to the Hong Kong group China Labour Bulletin.
The rising wages are being driven in part by Chinese government policies to reduce the gap between the rich and poor and to boost domestic consumer spending power. The average factory worker in Guangdong makes about US$220 a month.
Governments are taking a stronger role in wage issues. One prominent Chinese government policy advisory body proposed 20 percent minimum wage hikes each year for the next five years.