A recent wave of e-mails have asked us to comment on the labor controversy surrounding an iPad manufacturer from China. Another employee from the Guangdong providence, working for a subsidiary of Foxconn Electronics Inc., plunged to his death from a dormitory, bringing the total number of work related suicides at this facility to 10. Employees are insisting on better conditions and higher pay and, in an effort to appease the rank and file, Foxconn decided to increase salary levels by 20 to 30%.  

Increases in labor strikes throughout China have been reported at manufacturing plants affiliated with foreign companies. Toyota and Honda Motors suspended production at some of their car assembly plants after employees for parts suppliers walked away from their jobs in an effort to increase wages. Most foreign companies with operations in China were forced to increase salary levels significantly at these plants. Manufacturing costs in China continue to increase at rapid rates, pushing the RMB to higher levels. This currency appreciation will drive up export costs for foreign manufacturers.

A recent news report from China reported on comments from a high-ranking government official when asked about the labor disputes and currency appreciation. He down-played the worker rebellions and stated that they are part of normal economical activities. He also said the rising salaries for Chinese workers will increase their buying power and stimulate both the domestic and global economies, while a strong RMB increases China's import power and will balance international trade. His comments probably represent the political direction of the government.

He offered no comments or sympathy to the foreign companies that moved their manufacturing operations to China because of the low labor costs. That's the only reason they are in China--low labor costs--especially for circuit board and EMS companies. Manufacturing is the only activity for these companies; they can not compete with domestic manufacturers in terms of price and try to sell and market products. The average consumer in China prefers low price to high quality and the home-grown manufacturers cater to this market.   

Increased wages do not necessarily mean that expected consumer spending will return to employers in the form of purchases, especially to foreign manufacturers. The Chinese Government has a hands-off approach to solving labor disputes at foreign company plants, so these corporations must act accordingly, without government assistance. This same scenario played out in Taiwan, and listed below are four possible scenarios for operations to continue in China:

1. Increase selling prices.
2. Relocate the factories from coastal areas to the inland parts of China.
3. Move operations to other low labor cost countries, such as Vietnam and Indonesia.
4. Return to Taiwan and invest in plant and equipment and increase productivity.

Customers do not like price increases, so plan number one is eliminated. Plan number two and three will have short-term success; however, similar labor disputes will arise in a couple of years. The only plan with a long-term solution is number four. The only problem is the return on investment will take years, and may need even more investment in the future.

American and Japanese companies have fewer choices to solve labor issues when compared to their Taiwanese counterparts and cannot rule out shutting down operations in China. The situation in China is viral and decision makers must move quickly. It could be a gloomy summer vacation for those workers with this looming overhead.

One final note: The publication department for DKN Research will enjoy a much-needed four week vacation. Our next newsletter will be sent at the end of August.

Dominique K. Numakura
DKN Research, www.dknresearch.com