China’s Industrial Base – Moving Inland?

In one of last month’s articles, we cited China’s rapidly increasing labor costs, one of the lynchpins of the country’s economic growth of the past 30 years. One of the many reasons that labor is becoming increasingly difficult to find, is often tied to China’s migrant workers, by far the globe’s largest migratory workforce, leaving for home during Chinese New Year, with increasingly fewer returning to their positions at factories along the coasts.

This begs a couple of questions, the first: why (perhaps how), in a country of 1.4 billion people is there a labor shortage? And the second and perhaps more important going forward: How will this affect China’s manufacturing and export industries?

The reality is that both the labor shortage and the resulting solutions are related. Over the past 30 years, as coastal cities have rapidly developed and been the primary beneficiaries of foreign direct investment and government assistance, they attracted massive numbers of migrant workers from elsewhere in the country. The best example of the scale of this migration is perhaps, Shenzhen, formerly a fishing village just 30 years ago, is now home to some 14 million people and is one of China’s primary economic hubs. Migrant workers will traditionally leave for home, bringing with them the majority of their savings to provide for family back home. As this trend has continued in tandem with increase government investment into China’s interior, the infrastructure required to facilitate industry has developed.

Rather than travel to far flung factories on the coast leaving their family behind in search of work, many former migrant workers are opting to find work closer to home; and industry has begun to follow.

This has resulted in massive competition for workers between factories along the coasts resulting in increasing wages both instituted by the factories themselves, as well as the municipalities in which they are located, with regional manufacturing hubs such as Beijing, Shanghai and Guangdong looking to attract migrant labor to their regions with mandatory minimum wage increases. So, while some of China’s industry has begun its own migration, other, higher value manufacturing remains near the coast due to intricate supply chains and more advanced infrastructure. This has not, however prevented some advanced manufacturing from moving.

Foxconn, with its massive workforce and plethora of clients has the ability to support much of its own supply chain, and while this has allowed them to move some manufacturing into the hinterland, to cities such as Zhengzhou, Chengdu and Wuhan, they have also added nearly one million robots to supplement their labor force in Shenzhen, to mitigate the increased cost of labor.

So what does this mean for businesses in the export industry? It will largely depend on what is being exported; while lower labor costs further inland may be attractive to manufacturers whose products lie lower on the value chain may move to benefit from these savings, those higher up the value chain in IT and more specialized industries derive much of their competitiveness from a robust supply chain, fueled by an experienced and skilled labor force currently beyond the reach of smaller inland cities.

What do you think?

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