China faces labor shortage, rising wages
By Maria Trombly and Melissa Rollins -- Furniture Today, August 20, 2006
Beijing — — A plentiful supply of cheap labor, mostly rural migrant workers, has been one key force driving China's rapid economic growth in the past two decades. A comparative advantage in labor costs has turned the nation into a global manufacturing center and furniture-making powerhouse.
It's hard to believe that a country with a population exceeding 1.3 billion could ever have a shortage of labor. But in some areas, that is becoming the case.
Recent government policies and an improving economy have made it easier for residents of China's central and western provinces to stay home, reducing the flow of new workers to the booming coastal cities that are home to most export-oriented factories.
In fact, 20% of China's rural areas no longer have any surplus labor, reports the government-run Rural Economy Research Center.
As a result, wages are going up. According to the latest report from the country's central bank, average wages last year rose nearly 15%. Researchers expect this trend will continue.
In 2003, reported the official news agency Xinhua, job supply exceeded the number of available workers in the manufacturing center of Guangzhou. But by the summer of 2004, there were 20% to 30% more jobs than job seekers in Guangdong Province, where Guangzhou is located.
Today, the province has a labor shortfall of two million, the government reports.
Peking University economist Zhang Wang told the official Beijing-based China Daily that labor costs will rise 30% to 50% in three to five years.
In the furniture industry, as the number of factories grows, workers are finding it easier to switch jobs.
Some companies are raising compensation to keep workers. Joyce Zuo, an export manager with Guangdong-based Kangboa Furniture, said her company pays employees based on order volumes.
"This allows us to pay our employees more and not have problems finding workers," she said.
Jason Wang, spokesman for Guangdong-based Shuo Zhan Furniture Mfg., said his company takes care of its employees and offers a strong benefits package.
"There are people willing to work if you have the money to offer them," he said.
China's biggest labor shortages are in the skilled technical fields and in management.
Shuo Zhan, for example, says it has been unable to automate as much as it would like because of a lack of skilled workers.
"The manufacturing sector has become more automated," said Wang. "So this puts some pressure on us."
Some companies are finding creative ways to deal with the skilled labor shortage.
Zuo said Kangboa invited students from local technical schools to work and get hands-on training this spring.
Kangboa uses machinery to produce its metal furniture, though its sofas are all hand-made, Zuo said. The company employs about 500 people in three factories in Guangdong and exports to Europe, the United States, Canada and Australia.
Competition for workers is particularly intense for management positions, according to Joyce Jing, business development manager for GEN Enterprise Management Consulting, a Shanghai-based executive search company.
"Some management salaries have doubled within the last three years," she said. "The whole industry is short some talents, especially in the technical and upper-management positions. The manufacturing industry has grown so rapidly that candidates who speak fluent English and have technical experience are very much in demand. Especially in Shanghai and Beijing, salaries are increasing quickly."
Some companies wanting to lower their labor costs are moving to smaller cities, but that hurts their ability to lure top managers.
"Manufacturing facilities can relocate to small cities where labor is cheap and sufficient, but excellent management candidates from smaller cities tend to move to larger centers like Shanghai and Beijing, leaving the talent pool in the smaller cities rather depleted," said Jing.
According to international management consulting firm McKinsey & Co., China today has fewer than 5,000 managers with the skills needed by multinationals — and 75,000 jobs for such managers are expected to be created in the next five years.
"China faces a looming labor shortage that could stall not only its economic growth but also its migration up the value chain," says a McKinsey analysis by Diana Farrell and Andrew J. Grant. What's needed, the authors say, are reforms in the education system, including a greater emphasis on practical and language skills.
The Chinese government already has taken some steps to combat labor shortages. It has loosened the rules that prevent rural residents from moving to cities to work, and offered tax breaks to overseas Chinese who return to China.
So far, U.S. buyers haven't reported price increases because of rising Chinese labor costs.
"We haven't seen any increased production costs from our Chinese manufacturer," said Stephanie Maloney, owner of TMMSJM, an Arkansas-based importer of home office furniture and sewing machine cabinets from China.
But that's likely to change soon as Chinese firms start passing on increased labor costs to U.S. customers.
"We are likely to see a combination of higher prices and an unusually high rate of commercial failures in the next 18 to 24 months,'" said Richard Ellert, a Hong Kong-based director of consulting firm Alvarez & Marsal, which sources goods in Asia for U.S. and European companies.
Wages are one culprit, he said.
"Labor shortage in China is real," he said. "And the effect is dramatic on industries that rely heavily on hand labor. The furniture industry is one of them and certainly is feeling the effects."
According to Ellert, manufacturers are facing higher costs for both labor and raw materials, while customers continue to demand lower prices, higher quality and faster delivery.
"Many manufacturers are operating at a loss, tapping into reserves, borrowing money, and hoping for a drop in these cost factors," he said. "That's unlikely to happen any time soon."
According to a March survey by Hong Kong-based research firm Global Sources, 63% of mainland China manufacturers plan to raise export prices in the next 12 months. Most project price increases of 5% to 10%.
Meanwhile, furniture companies aren't curtailing their expansion plans. According to U.S. government statistics and Furniture/Today analysis, China's furniture shipments to the United States last year amounted to $10.9 billion, up 18% from 2004. The growth trend is expected to continue.
To keep increasing output, many Chinese companies are looking to automation to help solve labor problems and improve quality and turnaround times.
"We have recently purchased some land and are building a new factory next year," said Wang Gou Zhang, export manager at Hangzhou Red China Fir Furniture Co., which is based in Hangzhou. "Our new factory will give us the ability to increase our quality, buy high-tech technology and increase our exports. We hope to increase our exports from the current 30% to between 50% and 60% of our business in the next one to two years."
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