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Wednesday, June 30, 2010

The rapid pace of change in China Jodie and I have spent the last week in China catching up with Vanessa and Qun and meeting with our suppliers in China to discuss how business is going and work on things like new shoe designs, leathers and materials.

For both of our suppliers, one of the most interesting things they had to say was that they experienced a 50% loss of shoe makers after Chinese New Year in February this year. To attract new staff they've raised salaries by 25% on what they were paying last year. That's a massive change year on year. Many of the shoe makers who work for our suppliers come to Guangzhou from Western China to work for a few years. The workshops provide them with food and accommodation so they're able to save a lot of their salary and generally their goal is to do this for a few years, then return home to Western China and buy a house or a farm and settle down.

Chinese New Year is the time when they all travel home to spend 2 weeks with their family and friends, and this year half of them chose to find work closer to home and not return to Guangzhou. It's normal to have a 20%-30% turnover each year, 50% is extremely high.

Other businesses in China have had a similar experience. Foxconn is a large electronics company based in Shenzhen, near the border with Hong Kong. Foxconn make a lot of Apple's products and employ 400,000 workers. This year they've raised salaries 25% to retain and attract the massive number of staff they employ.

Workers at a Honda factory in Zhongshan near Macau went on strike 2 weeks ago asking for higher pay and the right to choose a union to represent them.

Clearly China's massive economic growth is having an impact on wages. The country's 1.6 billion people are basically fully employed and 100's of millions of them have already moved from agricultural jobs into blue collar jobs in the countries rapidly growing cities. The supply of people is slowing down putting wage pressure on blue collar jobs. The Chinese government recently raised the prospect of allowing the Chinese currency, the renminbi, to float against the US dollar which is likely to see the value of the Chinese currency rise. One of the reasons the Chinese government gave for this is to encourage growth in higher value sectors of the economy like services. This will put additional pressure on wages for blue collar jobs.

This is all a good thing. The average annual wage in Chinese cities is around AUD$5,000 and the countries 1.6 billion people deserve a higher standard of living. That said, these sorts of changes are going to have an impact on our buying power in Western countries. So many of the goods we consume are manufactured in China, and the prices we pay for these goods aren't going to stay low if wages in China rise and the value of the Renminbi rises too.

This sort of change will pose challenges for businesses like ours who manufacture their goods in China. Fortunately we shouldn't face such a big impact given ours is a premium product, but our costs will still rise. Businesses operating at the low end will be severely impacted by these price rises. Hopefully the pace of change isn't so rapid that businesses don't have time to react, but it's something that we, and many other businesses are going to need to keep in mind over the coming years.

If wages can rise 25% in China in one year, the business landscape in 10 or even 5 years time is going to be very different from what it is today.
Posted by Michael Fox at 11:33 PM