The End of Cheap Labor in China

Rising wages are sending its manufacturing jobs to Cambodia, Vietnam, India — and the U.S.

By Bill Powell Sunday, June 26, 2011
    • Photograph by Stefen Chow for TIME

    A worker at Guangzhou Fortunique, where wages are up 50%

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    It's not. Ask Wu Dingli, a 24-year-old from Ziyang, a city in Sichuan, who for five years had been working in a small electronics factory in Dongguan, the huge, dreary factory town between Guangzhou and Shenzhen in the southeast. She was laid off in late 2008, when the global financial crisis temporarily crippled Chinese exports to the West. A year later, she found a job on the production line of a company that supplies electric cables to, among other customers, a Hewlett-Packard personal-computer plant in Chongqing. She says she's making "only a bit less" than she did before, "but life is much easier for me here because I'm closer to home. I much prefer this job to the old one."

    The changing economics of Made in China will benefit both the rich and poor world. Countries like Cambodia, Laos, India and Vietnam are picking up some of the cheapest labor manufacturing left by the Chinese. And according to a recent study by the Boston Consulting Group (BCG), there is already evidence of at least the beginning of a shift in manufacturing operations returning to the U.S. Last year, Wham-O, the company that makes inexpensive, albeit iconic, toys, announced it was moving 50% of its Frisbee and Hula Hoop production back to the U.S. from China and Mexico, a move that created hundreds of new American jobs.

    Toymaking, of course, along with footwear and textiles, was among the first industries to head to China as the cheapest source of reliable production. It's a labor-intensive, relatively low-tech industry — one that most economists assumed would be gone forever once it left. But a look at how the economics have changed over the past decade sheds some light on why companies like Wham-O are deciding to return. According to the BCG study, in 2000, China's average wage rate was 36% of the U.S.'s, adjusted for productivity. By the end of 2010, that gap had shrunk to 48%, and BCG estimates that it will be 69% in 2015. "So while the discussion in the short term favors China," says Hal Sirkin, senior partner at BCG and the author of the recent study, "the spread is getting down to a smaller and smaller number. Increasingly what you're seeing [in corporate boardrooms] is a discussion not necessarily about closing production in China but about 'Where I will locate my next plant?'"

    Perhaps the most important effect of rising wages in China is that they will put more money in people's pockets, which is something that's in the interest of everyone — most emphatically Beijing's major trading partners, who urgently need China to increase its consumption in order to reduce drastic imbalances in global trade. As much as higher wages may cut into the bottom line of exporters like Charles Hubbs and thousands of Chinese-owned companies across a wide range of industries, the process is the inevitable result of China's becoming a wealthier country with a stronger currency. "It's exactly what needs to happen," says Rosen.

    Many multinationals, meanwhile, have long since begun to focus their China manufacturing operations on the vast Chinese market. That HP factory in Chongqing produces its laptops only for the home market. In a survey eight years ago, the American Chamber of Commerce in South China found that 75% of its members were focused mainly on export markets. By last year, that number had flipped: 75% of 1,800 respondents now say their manufacturing operations in China are focused on serving the Chinese market. That's mainly because China's workers are steadily getting richer. For them, and pretty much everyone else concerned, that's the rarest of commodities in a troubled global economy: good news.

    This article originally appeared in the June 27, 2011 issue of TIME.

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