Tags: US | Investors | Wages | China

US Investors Fret Over High Wages in 'Low-Cost' China

Monday, 26 Mar 2012 09:17 AM

 

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U.S. lawnmower manufacturer Briggs & Stratton is used to worrying about turnover — just not the human kind.

Like many foreign investors in China, the Milwaukee-based firm has been hit by a steady rise in wages — which puts it in the same boat as many U.S. businesses in China responding to a survey released on Monday by the American Chamber of Commerce.

After decades of aggressive expansion in China, foreign employers like Briggs & Stratton face a relative shortage of experienced, English-speaking engineers and managers, and find it increasingly expensive to recruit and retain good staff.

Rather than waiting around for extra digits on their paychecks, China's white collar workers are creating their own pay raises by jumping ship at the slightest temptation.

"Turnover is a huge issue for anyone in China. Our turnover is 9 to 10 percent," said Mark Plum, Asia president for Briggs & Stratton in Shanghai. He added that in Shanghai, turnover rates were generally around 18 to 20 percent.

"Anywhere else you'd say that was terrible. Here, it's not half bad."

On the factory floor as well, cheap labor no longer looks limitless, prompting manufacturers to consider moving from the country's prosperous coast to poorer, cheaper inland regions. Some are even taking their lowest-margin, most labor-intensive operations to other countries altogether, such as Vietnam.

Employees and wages now top the preoccupations of American investors in China, according to AmCham's annual business-climate survey of 390 companies.

"I think it speaks to the economic transition that China is in now that it will not be able to rely on cheap labor to drive exports into the future," AmCham Chairman Ted Dean said.

"Management-level human resource constraints" ranked as the biggest business challenge in the survey, cited by 43 percent of respondents compared with 30 percent last year. "Non-management level" constraints were ranked third.

labor costs ranked as the third greatest challenge, after an economic slowdown in China and the wider global economy.

Though 39 percent of respondents surveyed by AmCham said their Chinese operating profit margins were higher than their global margins, only slightly fewer firms — equal to a third — said their Chinese margins were actually lower. For the rest, Chinese margins were comparable with their global operations.

In a similar survey released by AmCham in Shanghai last month, 90 percent of respondents saw rising costs as a hindrance to businesses. About the same number said finding skilled labor was a challenge.

"There's been an absolute explosion of consciousness of this issue," said Kim Woodard, of consultancy InterChina.

"It's not just because the media have covered it but also in internal budgets they are seeing a 20 percent rise in wages."

Four Companies in Two Years

Government statistics show that average monthly urban wages rose by 13.3 percent between 2009 and 2010, although companies' actual cost structures can vary considerably.

As the number of adults flowing into the workforce slows, China can no longer attract manufacturing with the promise that an unending pool of rural migrants will keep its wages down.

China's population of 20-year-olds to 30-year-olds fell to around 200 million in 2005. It is expected to climb through 2015 but then fall off again, to below the 200 million mark by 2020, according to a presentation by China International Capital Corp.

That, plus competition for workers by expanded domestic and foreign-invested industries, should help shift more bargaining power to workers to get higher wages and better benefits.

InterChina used to build in simple wage rises of 5 to 8 percent a year when helping clients carry out feasibility studies for new operations in China, Woodard said.

That calculation is now a lot more complicated, with investors having to weigh China costs against Vietnam or India.

Rising Chinese wages will surpass those of Mexico in about five years, he estimated, giving Mexican factories an advantage when exporting to the U.S. market.

Unlike the supply of manual laborers, the number of college graduates is rising steeply. But companies often complain that graduates with the right skills and experience are hard to find, and expensive to keep.

An engineer with up to five years' experience can be hired for $9,500-$20,000 in China, says recruitment firm J.M. Gemini.

This doesn't mean that jobs will flow back to the United States: the average salary of a worker in Milwaukee is $33,140 a year, far above China levels.

While Briggs & Stratton's 3,000 employees in the United States are probably keenly aware that America's manufacturing base is shrinking, Chinese graduates often view their current job simply as a springboard to the next one.

"What happens here is that you get a young person who speaks pretty good English and has worked for two to four years. If the guy is under 30, he may have worked for four companies in just two years," Plum said.

"In the States, you'd never hire the guy because you'd say he can't hold down a job. Here you just have to say well, that's how it is."

Briggs & Stratton, which also makes snow-blowers and other small engines, employs mechanical engineers in China as well as people to figure out how to price and market products. It runs a factory outside Shanghai, one of five international facilities.

According to its website, "Briggs & Stratton believes there is an engine inside everyone that drives him or her forward."

In China, it is forced to fuel that engine with team-building exercises to keep employees loyal, such as taking staff to outdoor sports events or on overnight company retreats.

"As a company, we're not used to having to keep people entertained," Plum said.

"If you get laid off in Milwaukee, there's no jobs — so no one leaves the job they have. Here, if you get laid off or leave, there's a hundred jobs."

© 2014 Thomson/Reuters. All rights reserved.

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