As China’s labour costs continue to rise, talk is again turning towards the “China-plus-one” sourcing strategies.
Every couple of years, the subject comes up. The rising cost of labour in China threatens the low-cost model and will force manufacturers to relocate to other, cheaper Asian countries, such as Vietnam, India or Indonesia.
The Foxconn suicides and the company’s subsequent pay rises of 65 percent, and Honda’s 24 percent wage increase, have moved the subject of sourcing in China up to the front page.
But it is not only at these two troubled companies that wages have risen. It has been across the board in the last couple of years. In 2008, wages went up 19 percent and last year they rose 16 percent for the estimated 150 million migrant workers.
In Shenzhen, where the Foxconn factory is situated, the minimum wage will be raised by 15.8 percent from next month. The percentage is hefty, but the base salary is so low that it in reality amounts to a couple of hundred yuan.
Still, if your manufacturing model is based on paying people as little as possible, and you have a factory of thousands of workers, the total quickly adds up. Foxconn, for instance, has a work force of 420,000. Give each worker an extra 200 yuan and the zeroes start to multiply quickly.
These rising operating costs are stoking the debate about manufacturers hitting the road and relocating. The reports make it sound as though a factory can switch off the lights in Dongguan and start the motors in Ho Chi Minh the following day.
In reality it is not that simple. Since joining the WTO earlier this decade, China has developed the infrastructure supporting its role as the world’s factory. The roads, rail, ports, airports, the regulatory regime, customs, VAT rebates and other incentives. Free trade zones, special economic zones, bonded warehouses, logistics parks.
As attractive as it may seem to move to Vietnam, there is no way the country will be able to fill the orders of the scale that are completed by manufacturers in China.
The issue is generally portrayed as a zero sum game, but in fact manufacturers are increasingly adopting the “China-plus-one” model that emerged a few years ago. That enables companies to spread their sourcing around without walking away from the world’s most efficient production line.