The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World (5 page)

Bob also highlighted a trend that I, too, had started seeing when interviewing Chinese families around the country. Women were starting to outearn men, changing family dynamics and the role of women in society. In Bob’s factories, women tended to make more than men because they could do the higher-skilled sewing of sofa covers, which took significant training, while men tended to do more heavy labor that required little training. Women also seemed more intent on working hard and beating manager expectations, Bob said.

When I asked Bob why he and other business leaders were not more publicly stating their case against Congress for their calls to let the renminbi appreciate, Bob said that the anti-China rhetoric and general frustration was so serious in America right now that he feared backlash from Congress or everyday Americans. It was better to keep his head down, he said, and lobby privately rather than publicly, in case someone decided to make an example of Laura and demonize them—even though China’s rise meant more job creation for Americans working for Laura.

Bob’s human resource situation brought home the clear, countrywide labor trends that are heralding the End of Cheap China. Chinese workers, no longer desperate for any job that will put food on the table, will not settle for low monthly wages or horrible working conditions. Compared to just a decade ago, there are now too many job opportunities available to them, and they are too confident about the country’s future. The government has also been pushing up minimum wages to better protect employee rights, and to promote a shift away from manufacturing to a consumption- and services-oriented economy. In 2011, 21 of China’s 31 provinces raised the minimum wage by an average of 21.7 percent; in 2010, Sichuan Province alone raised it by 44 percent. Cheap Chinese workers, one could say, are becoming as scarce as cheap, sexy prostitutes.

Relocating manufacturing operations out of China completely, however, is not really an alternative for many companies, since China’s skilled workers are more numerous and better than those in other countries, and it has an unrivaled, world-class infrastructure, as Laura’s experiences in Vietnam and Indonesia have shown. The result is soaring costs, which will erode margins for American companies unless they transfer higher prices to U.S. consumers, or enter new consumer markets to offset weakening U.S. and European consumer demand.

Ultimately, Bob and I developed the solution to convert half of Laura’s Shanghai factory to produce furniture to sell within China. After all, retail sales there have been growing 16 to 18 percent a year for the last five years, as incomes rise and millions of Chinese buy their first homes and move into livable housing for the first time.

By selling into China, rather than looking at it solely as a manufacturing base for export, Bob could not only tap into the wallets of China’s rising middle class, but he could price his furniture in renminbi. Even if the currency continued to appreciate as the central government indicated it would, he would not have to worry about raising prices or fear currency fluctuations. The other half of his factory would continue to produce for export from China, but Bob knew his real growth opportunities were going to come from selling to the domestic Chinese consumer. The market was evolving so rapidly that no furniture player had been able to consolidate market share across the whole country, which was his goal. Successfully penetrating the Chinese market would not only save jobs back in America for Laura, but also create new ones.

Bob’s story at Laura Furniture is far from rare. Over the past three years, as America muddles through a jobless economic recovery, more and more brands have been converting their factories in China from producing mostly export goods to making products to sell within China.

Jacob, the Asia-Pacific marketing head of an international office products firm, told me, “It is just not viable anymore to produce cheaply in China, but it is also impossible in the short-term to replace China as a main manufacturing hub. Other countries simply do not have the infrastructure, skilled workers, and mid-management needed to replace China completely.” He told me he had decided to keep all of his manufacturing facilities in China, but was converting his sales forces to try to sell within China. He was hiring new employees to oversee development within China and signing deals with sales-channel partners all over the country. So far, his initiatives had become profitable. As Jacob left my office, he said, “It will take other countries another generation at least before they can truly rival China in manufacturing prowess. They just don’t have the workforce or infrastructure to compete.”

Labor pool changes are disrupting China’s manufacturing sector and forcing business models to evolve. Newer firms, like the ones run by the entrepreneurs I met at the Okura Garden Hotel, are building new brands that can charge a premium for their products and services and be sold to consumers who are not price sensitive. Other firms like Laura Furniture are able to adapt by converting factories to sell within China. Yet thousands of smaller Chinese factories, including many furniture makers, have closed down in the last three years due to paper-thin margins and an inability to tap credit lines. The industry is consolidating; smaller producers are unable to make money as the appreciating renminbi decimates their margins, and profits become dependent upon volume and production efficiency rather than low price.

Massive, efficient players like Foxconn, the Taiwanese electronics manufacturing behemoth that makes many of Apple and Dell’s products, are leveraging economies of scale to shore up market share and grab even more. The scope of some of their operations is hard to imagine.

In the last two years, Foxconn has relocated 350,000 of its factory workers from Shenzhen in southern China to a massive new factory in Henan Province, in the central part of the country. This move is comparable to moving the entire population of New Orleans (343,829 in the 2010 U.S. Census) to New Mexico. They have more employees than the entire population of Iceland (319,062, according to a 2009 World Bank estimate).

Foxconn has been rumored to be investing billions of dollars in setting up factories in South America to find cheaper options, but it has relocated its manufacturing in China to other places in country rather than shifting out completely. To combat rising labor costs, it announced plans in 2011 to install one million robots in its Chinese factories to replace workers over the next several years.

They are more like midsized American cities than factories, and they dwarf Laura Furniture’s facility. In addition to factories, companies such as Foxconn have to establish local dormitories, hospitals, and leisure areas.

Foxconn was compelled to improve conditions and raise salaries after a public firestorm in 2010 surrounding 18 attempted worker suicides at its Shenzhen factory, which resulted in 14 deaths. Foxconn faced heavy criticism, not just from international groups but also from Chinese media, academics, and ordinary people who commented on online forums about harsh working conditions. Foxconn responded by increasing worker salaries by 66 percent in the months following the controversy. Around the same time, Honda raised salaries at its plant in Guangdong Province by 32 percent after workers began striking.

The companies with the best-designed and best-operated compounds, and the most comfortable living conditions for their employees, will be the winners in attracting and retaining talent as the labor pool continues to tighten. This also creates a more expensive labor-cost landscape that boxes out factories unable to afford higher costs.

America’s economic growth for the past three decades can be largely attributed to the willingness of Chinese laborers to slave away, underpaid, in factories that make the products Americans love—Apple computers, Nike shoes, and Gap khakis. Low wages have generated massive profits for U.S. firms that chose to relocate to or source from factories in China, like Walmart, and have made consumer electronics and clothes affordable for everyday Americans. This process fueled America’s addiction to consumption while keeping inflation low, despite loose U.S. monetary policies and an unhealthy addiction to debt that traces back to the Reagan years.

For decades, this arrangement was seen as win-win for all involved, when the American business community and free-trade economists prevailed in their argument to reduce tariffs to promote outsourcing. Middle-class Americans filled their homes with product after product for stunningly low prices, while Chinese workers earned enough to eat and have basic shelter over their heads. But this arrangement started to unravel during the financial crisis.

As more Americans lost their jobs, China came to be viewed as a scapegoat for U.S. unemployment, rather than for the real reasons: poor regulation of Wall Street; a bickering political system; and average Americans’ addiction to debt, which went on for far too long. Now one hears the constant refrain from politicians and commentators on TV that China is stealing U.S. manufacturing jobs and that Americans should only buy products made in America. For these talking heads, China’s rise is a zero-sum game with the United States.

While such arguments appeal to patriotic pride, giving in to these sentiments hurts Americans more than it helps them. Without China, many American families would not be able to afford quality furniture or the latest technology. If businesses like Laura or Apple were forced to bring their factories back to America, their prices would rise tenfold, causing rampant inflation and further hurting consumer sentiment and it is even doubtful these jobs would build consumer confidence if they came back. Few Americans are willing to work for low wages in factories, as their forefathers did in the textile and footwear mills of New England.

Even at the height of the financial crisis with 24 million Americans unemployed, with Occupy Wall Street protests erupting across America, thousands of farm jobs in America have gone unfilled, because so many Americans don’t want to work in those conditions. However, the Obama administration has deported a record high of nearly one million illegal immigrants—the very people who were willing to take those jobs. Aside from plentiful jobs causing Chinese wages to rise, there are simply fewer workers, because the one-child policy implemented in 1978 has resulted in an aging population today. The magazine
Science
found that 22.9 percent of the Chinese population was under the age of 14 in 2000. That number dropped to only 16.6 percent in 2010. Unless the government eases population control laws soon, or allows workers from neighboring countries like Myanmar and Vietnam to work in China, it is doubtful that the labor pool will grow anytime soon.

Economists like Cai Fang of the Chinese Academy of Social Sciences, and Ross Garnaut of the Australian National University, have suggested that China has reached the Lewisian turning point, named for the Saint Lucian developmental economist Arthur Lewis, who won the Nobel Prize for Economics in 1979. Lewis claimed that once the supply of surplus labor in developing countries diminishes, industrial wages begin to rise quickly.

Fewer and fewer Chinese employees are willing to work in factories, as they too want to enjoy an American-style lifestyle of consumption, and seek more comfortable jobs closer to their families. Changes to the Chinese labor pool are, for the most part, healthy for the economy and a sign of growth. Better-paying jobs and more efficient factories will help reduce the all-encompassing pollution that seems to plague the country, and will help China overcome the mid-income gap many countries hit when the average per capita GDP hits $6,000. For China to avoid ending up economically like Mexico, where income gaps between the rich and poor are getting wider, it must continue to push for higher-paying jobs and a greater dispersion of wealth.

All these changes have created a confident labor pool that is forcing companies to deal with rising labor and real estate costs. Some companies cope with the End of Cheap China by building brands and charging more for their products, as the billionaires at the Okura Garden Hotel have done; others by consolidating market share and becoming a volume player, such as Foxconn; and still others by converting factories to sell within China and other emerging markets. It is doubtful that rising costs will send manufacturing jobs back to the United States. What is more likely is that China’s economic rise will create more job opportunities and profits for American companies that can evolve with the new status quo instead of holding onto the past. History is littered with examples of companies and countries that were unable to adjust to new conditions.

As I looked around at the workers in front of me at Laura’s factory, I wondered what, aside from a shrinking labor pool and more job opportunities, had made all these workers seem so optimistic. Nearly every Chinese person I have met brims with confidence and an expectation that life will get better for them and their children. They are not blind. They see problems like corruption or pollution in society every day, but overall they perceive their lives getting measurably better, and expect them to continue to do so.

This confidence did not come into being overnight, or just because salaries increased in the last few years. Their optimism and satisfaction with life are the culmination of 30 years of opportunities and political reforms, which have created a freer and healthier society than China has ever seen. In order to see why China’s labor pool is so confident, why the economy is growing so well, and why the government implements the laws it does, it is important to look at China’s recent past.