Wednesday, May 18, 2011

The China Effect Continued

My May 05 posting on “The China Effect” was interesting in that it hinted at China losing its competitive advantage. In fact, China has become a victim of its own success as the world’s leading manufacturer of labor-intensive consumer goods. The rush of investment in factories has driven down profit margins and driven up prices of everything from raw materials to labor to power.

The gap between China’s wages and the rest of the world’s means that manufacturing pay in China is likely to remain lower than in the US or Europe for years. But the gap is shrinking fast. David Dollar, the World Bank’s country director for China , has estimated that wages in China are growing two to three times faster than in other low-wage Asian economies (Source: Dominic Ziegler, “The Export Juggernaut,” Economist. A Special Report on China and Its Region, March 31, 2007, p 9). My concern is on wages. I suspect that as China’s wages rise, Malaysian wages have been pretty much stagnant.

China’s manufacturing sector is transforming. Besides rising wages and material costs, greater demand for unionization, a higher risk of litigation, a dwindling supply of cheap workers, calls for better product quality and safety and substantial downward pressure on margins are shaping this new manufacturing landscape.

And so, some factories will try to mitigate these “changes” by moving up the value chain into design, research and development, and by creating their own brands. Others will look to acquire rivals and increase economies of scale. Some will go out of business. And still others will move their operations overseas. To Malaysia, for example.

Secretary K Veeriah of the Penang chapter of the Malaysian Trades Union Congress (MTUC) highlighted that the average worker in Penang had not experienced any benefit from the reported RM12.2 billion flow of foreign direct investments (FDI) into the state. He said some workers in the Bayan Lepas Free Industrial Zone were still earning as low as RM500 a month. “How much longer must our workers wait for the FDI inflows to translate into better paying jobs? In the meantime, they are grappling with the rising costs of living” (Webpage, posted May 05, 2011). I maintain that Malaysians should earn a living wage. And a responsible government must legislate to ensure this.

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