After an unprecedented strike logjammed Honda's China production line, Japanese firms in the country may need to redraw their plans in a growing market that has emboldened low-wage workers, analysts say.

As China's economy surges, demands for higher wages are posing a headache for Japanese companies facing higher costs but could also be a boon for others banking on rising incomes to spur demand for high-quality goods.

Japan's number two carmaker on June 2 restarted operations at its auto parts factory after offering a 24% pay rise to placate staff who had walked out on May 27. But Honda's Chinese assembly joint ventures, Guangqi Honda Automobile and Dongfeng Honda Automobile, remained closed due to a lack of key components, the company said. Honda produces 650,000 vehicles per year in China but it has lost thousands of units because of the shutdown.

"We never expected something like this would happen," said Tokai Tokyo Research Centre auto analyst Mamoru Kato. After the Honda strike "Chinese workers will likely be encouraged to start making more demands and such situations will inevitably increase production costs there," he added.

According to the All-China Federation of Trade Unions, nearly a quarter of Chinese employees have not had a raise in five years.

Labor issues in China have come to the forefront in recent weeks after suicides at Taiwanese high tech maker Foxconn, which counts Dell, Sony and Panasonic among its clients, forced it to give staff a 30% rise. The unrest has raised questions about working conditions for the millions of employees in China's factories, sparking calls for better oversight from those who benefit from Chinese labor and a ban on unions.

"As the Chinese economy grows and people's income rises, companies are now facing the need to review their strategies," said Mizuno Credit Advisory auto analyst Tatsuya Mizuno.

Yang Lixiong, professor at School of Labor and Human Resources of Renmin university in Beijing said opportunities at foreign companies are limited for Chinese staff. "In the case of Honda, the management is mostly Japanese. It's very hard for local staff to work their way up. In addition to that, salaries are very low and working conditions are not good," he added.

To curb the effects of rising wages Japanese businesses are harnessing economies of scale that would effectively bring down unit costs. Nissan chief executive Carlos Ghosn recently announced plans to ramp up production to more than one million cars a year in China by 2012. Honda sold 576,223 vehicles in China last year, up 23% year-on-year and Toyota saw sales rise 21%.

But rising wages are not necessarily bad as richer consumers have more purchasing power, analysts said. Japan, with its reputation for craftsmanship, "can only compete in the high-end market as it has already lost out to local rivals in terms of affordability," Okasan Securities strategist Hirokazu Fujiki recently said. "Japanese companies need to win out by targeting the mid-to-high level consumers. They can stay ahead of the competition by rolling out new and advanced technologies."

They must also address Chinese resentment against Japanese workers due to their long and tense history. Honda's Chinese staff complain Japanese workers in the same factory earn 50 times more than them. "Chinese workers seem to have a strong sentiment of being discriminated by Japanese employees," said Mizuno. "This may become a more emotional, fundamental issue, which could potentially develop into a political problem," he warned.

Copyright Agence France-Presse, 2010