Collective bargaining hard work in Chinese industry

• Source: Global Times
• [21:24 March 30 2010]
• Comments

GT: Does the current lack of labor in the Pearl River Delta and other South China areas imply that China's low labor costs are providing a shrinking advantage?

Zheng: No. What has happened in Shenzhen highlights the problem of government mismanagement, a lack of policy commitment rather than the superficial labor supply.

Migrant workers choose not to stay in Shenzhen for several reasons. The central government is offering more preferential policies to the inland region, which is making the inland economy prosper faster than the past and its demands for labor more compelling.

Then there is the soaring cost of living in Shenzhen, compounded by the inefficiencies in the social welfare system. Migrant workers cannot resolve the problem of education, accommodation, and healthcare on their own. Therefore, they cannot build a life there, especially for those working in labor-intensive firms.

The labor crunch is also due to more incentives being offered by local governments. A Taiwanese friend of mine recently set up a factory in Wanzhou, Chongqing. The Wanzhou government offers a bunch of incentives to attract this kind of investment. The government paid for factory buildings and promised that the investors could acquire ownership of the physical investment after several years of sound management, as long as the companies pay a certain amount of taxes.

The price of water and electricity was set to civil-use standards rather than the much higher industrial standards. The costs of employees' social insurance and housing funds would be fully subsidized by the government.

GT: There seems to be a paradox in China's economic development. The reasons for China's prosperity lie in low labor costs. However, to stimulate domestic demands for consumption and to further restructure the economy, it appears to be necessary to boost laborers' income.

Zheng: What you have said was absolutely right in Shenzhen before 1995, but after that Shenzhen's low labor costs were already losing their comparative advantage. Our developing Asian neighbors have been following China's pattern, and the transfer of industry has taken place since then.

I think the government should have predicted this trend, preparing well for the urban transformation. Even if Shenzhen had been a city depending on R&D and commercial activity, the government would still have needed to comprehensively consider Shenzhen's future development, and especially the needs of its residents.

Shenzhen has a far larger migrant population than permanent residents. There were 1.8 million permanent residents in Shenzhen in 2002, but the population was 18 million. This is imbalanced.

The government should also examine Shenzhen's population structure, and issues of employment and housing around it.

GT: The past 30 years have created a manufacturing economy, but other Asian countries such as Thailand and Malaysia are now following China's lead, with even lower labor costs. Do we need to be better prepared for this challenge?

Zheng: China needs to do what Western countries did before. We need to gradually transfer labor-intensive business to other developing countries, make our businesses more profitable, create leading brands, and boost our R&D to secure long-term growth.

We don't have to do this in exactly the same way as the West. Actually this shift has already taken place. Now the labor-intensive business seems to prefer inland areas, but in the long run inland businesses may have to confront the same economic plight the coastal areas now face.

The mechanism here seems to be inevitable: Incoming business invigorates the local economy, raises the residents' income as well as their cost of living and the labor cost, and finally the business itself is no longer competitive and tries to leave.

GT: Is it time for the whole of the coastal area to abandon labor-intensive industry?

Zheng: We can take the Japanese case as an example. Japan's labor-intensive industry was mostly developed in its urban areas at a early stage. As time went by they all moved to rural areas, small cities or abroad. But this process was never entirely managed by corporations. The Japanese government also played a certain role.

The Shenzhen government also should take some responsibility in helping with this transfer. We could keep our headquarters in Shenzhen, where the healthy commercial environment will continue to contribute to our business.