Chicken or egg

Chicken or egg

The government increases the minimum wage by 27.5 percent in one "giant" step. Overtime for hourly workers is limited to 432 hours per year. Workers begin leaving soft goods factories to work in high-tech industry plants.

Sounds like events that took place in 1950-60s New England, doesn't it? But I am talking about the Pearl River Delta region of China in 2005.

How quickly things change!

The first industries to arrive in this southern China region were the apparel and footwear manufacturing plants barely a decade ago. They scooped up all of the local labor and then needed more. The government stepped in to help these plants by providing recruiting services to bring more workers from inland locations to the region to meet the ever-increasing demand. Factory owners were more than happy to construct dormitories, cafeterias and health-care facilities to house these workers and to meet their customers' demands by adding more manufacturing facilities. That, of course, created a need to bring still more workers to the area.

Slowly, at least at first, the government of China began to set minimum-wage levels and then increase them bit by bit. Buyers, some on their own volition and others under the public-relations pressure of nongovernmental organizations and the press, initiated work rules and living conditions. These steps helped the worker and, while they increased costs somewhat, Southeast China remained the place to manufacture labor-intensive products.

Than came high-tech. Within the Pearl River Delta region alone, there are more than 50,000 plants that produce high-tech equipment or components to support their manufacture.

The infrastructure of the region can no longer support the number of workers that are needed to keep existing plants running at full capacity, along with the additional plants that are under construction or being planned. Workers' salaries have continued to climb, and many workers no longer want to live in dormitories where they must adhere to rules imposed by the plant management. They get together and look to rent apartments to share outside the factory grounds.

Bicycles, long the standard mode of transportation even in densely populated sections of China, are disappearing and are being replaced by other ways to get around. Factory owners now need to add electrical outlets in dormitories so their employees can charge their cell phones and plug in their hair dryers as the workers move to becoming consumers as well as production workers.

Soft-goods manufacturers are losing workers to high-tech manufacturers that, by the nature of their product, provide a cleaner and less stressful work environment.

A major reason for the government's action last March 1 to drastically increase the minimum wage and restrict the allowable overtime hours in this region is to provide an incentive for plant owners, current and new, to consider construction of plants at inland locations where the work force is readily available and to keep down the movement of the population to this overtaxed region.

Unfortunately, the "which came first, the chicken or the egg?" scenario is now kicking in. While the land and labor are certainly available inland, the ability to efficiently move raw materials in and finished goods out does not exist.

The infrastructure - road, rail, airport, power supply, etc. - is insufficient, and the government is very slow in spending the needed money to improve it. Private investment is looking at this as an opportunity of their own but just that - looking, while they wait to see what actual location is first selected to build major plants.

Nothing of significance has actually been done, so the pressure on the Pearl River Delta continues and plant owners are finding they need to develop programs that provide incentives for the workers to stay and perform.

It may be my imagination, but this looks very much like New England in the 1950s and 1960s when manufacturers headed south because their workers found new industries that were cleaner and provided higher incomes while the soft-goods manufacturers could no longer afford to meet wage requirements even if they could find people to come to work.

Where to, next?

Herb Rothstein is vice president and director of Global Trade Systems Inc., a supply-chain consulting group. He may be contacted at (978) 535-2513, or at herb.rothstein@globaltradesystems.com.