China's Labor

China has known for some time that growth based on mass migration of farm workers to faraway cities on the coast isn’t a sustainable model. As early as 1999, it introduced the “Go West” policy to encourage the relocation of coastal manufacturing to inland cities, allowing workers to work closer to home.

But a seemingly unending supply of low-cost labor and nearby seaports to ship goods off to the U.S. and Europe kept the system firmly in place, leaving the lion’s share of China’s economic miracle largely confined to a narrow strip of land running along the coastline. A renewed effort in the mid-2000s also failed to stem the tide of migrant labor or break the dominance of coastal manufacturing.

Today is an entirely different story. The Go West policy is taking hold as the supply of migrant labor dries up in coastal areas because of the reluctance of workers to accept poor living conditions and meager wages at a time when opportunities closer to home are expanding.

“The Go West policy is not new, but it is something that is starting to take flight now,” Pilar Dieter, a director of the Asia consulting firm Solidiance, told last week’s inaugural Journal of Commerce Container Shipping Conference in Shanghai.

This year, in one of countless similar examples, 70 percent of 4,000 workers at an assembly plant in Shanghai failed to return after Chinese New Year in February. Those returning are demanding and receiving significant pay increases in a trend that is only beginning; Accenture estimates private sector wages in China will increase 17 percent annually over the next five years.

Outsourcing giant Li & Fung agrees, estimating China wages will double in five years. A China think tank says demand for blue-collar workers in China in 2010 exceeded supply for the first time in a decade, with the labor shortage particularly acute for skilled blue-collar workers able to operate manufacturing equipment.

One reason container lines are warning of a possible equipment shortage later this year is container manufacturers’ lack of skilled labor to ramp up production to meet demand. “There has been a sharp lack of migrant workers after the last Spring Festival” in February, Yuan Zhigang, dean of the Fudan University School of Economics, told the Shanghai Daily last week.

The change has been noted at SIPG, the operator of the Shanghai port, whose strategy is built on the premise of westward migration of manufacturing and consumption.

A speech at the conference delivered by Yan Jun, SIPG’s No. 2 executive, was not focused on planned expansion of the Yangshan Deepwater terminal off the Shanghai coast, or on the future of the older Waigaoqiao terminal complex, but rather on the huge investments SIPG is making along the Yangtze River region to support and to bring in volume that will result from the inland migration of manufacturing. These include taking stakes in container terminals in Chongqing, Wuhan and Nanjing, among others ports, as well as ownership of a river barge line and various logistics enterprises.

“China will witness rapid growth in western and central areas, and this will become the new engine for the economic development of the Yangtze region,” Yan told the conference. Yan said Yangtze River traffic helps explain Shanghai’s much faster container growth this year versus ports in South China, which have been particularly hard-hit by labor shortages.

What is happening amounts to structural change in the model that flooded the U.S. with Chinese-made product and produced huge trans-Pacific container volume growth from the mid-1990s through the 2008-09 recession. Much labor-intensive product is fleeing China, while higher-end product is largely remaining in China but searching for a lower cost base, even though wages actually are rising faster (although from a lower base) in interior cities, Dieter told the JOC conference.

China’s share of the market for footwear and apparel is dropping as sourcing shifts to Southeast Asia and Central America, data from JOC sister company PIERS shows. Mainland China’s share of U.S. footwear imports dropped from 75 percent in the first quarter of 2010 to 73 percent in the first quarter of 2011, while its share of menswear imports dropped from 25 percent to 22 percent and its share of women’s and infants’ wear fell from 34 to 31 percent during the same period.

It’s part of what amounts to a worldwide search for low-cost labor. Bangladesh, where some China production has migrated, is “not a long-term answer,” Tommy Lui, senior vice president for Greater China at Li & Fung Logistics, told the JOC conference. “India at this stage, in terms of sourcing, will be a big power in the next few years,” he said. “The ultimate frontier of cheap labor is Africa, where we are looking at major manufacturing sites. This is the last place you can find cheap labor.”

Peter Tirschwell is senior vice president for strategy at UBM Global Trade. Contact him at ptirschwell@joc.com, and follow him at twitter.com/PeterTirschwell.

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