Labor Unrest Stirring in China

June 23, 2010
Chinese workers are defending their rights and demanding higher wages. How will this affect U.S. manufacturers?

Thirty years of pro-market reform and explosive economic growth made China into a manufacturing superpower. But now China may be facing the inevitable consequence of that economic ascendance: labor unrest.

With a workers strike stopping production at Toyota's car factory for the second time this month, coming right on the heels of a walkout at four of Hondas facilities, China is witnessing a new phase of worker activism, one that could have a global impact on manufacturers, including those in the U.S.

According to Wally Gruenes, national managing partner of consumer and industrialized products at consulting firm Grant Thornton, one potential result of increased worker strikes is Chinese suppliers passing along increased labor costs to their international customers. Work stoppages also pose the threat of disrupting the delivery of key supplies and components.

"Based on my discussions with some manufacturers, there was an expectation that over the last several years that labor costs would go up," says Gruenes. "There was no question of this."

Part of the recent unrest is a reflection of a confluence of social, economic and political trends occurring within Chinas workforce. The Chinese labor pool, Gruenes says, will begin shrinking noticeably in the coming years. This comes as a result of the massive wave of migrant workers, while had fled rural areas of the country in recent years for opportunity within the manufacturing centers, having been largely absorbed.

But just as importantly, the working age of the Chinese population -- in order words, laborers between the ages of 15 and 64 -- peaked this year at 71.9%. This birth bulge was a major reason that China instituted its One Child policy 30 years ago. However, with every passing year, the number of workers in that age group will shrink in size.

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"When the migrant workers are absorbed into the workforce, the wages increase," says Gruenes."And the population of working age laborers is going to shrink dramatically and it will really become noticeable within the next five years. You're going to see an aging population."

In many westernized countries, this might lead toward the familiar empowerment and tug-of-war between workers and ownership. But Gruenes believes Chinas single-party, centralized system allows it to withstand the brunt of market forces.

"The government can delay some of that impact through some form of intervention, but we're already starting to see some increased costs by producing in China," says Gruenes. "But we have to keep that in perspective. Some of the wages they're referring to -- such as in the Honda facility -- means they will now start making $400 a month. That's still not very much. It needs to rise a pretty good amount before the cost advantage they enjoy disappears."

Though the recent labor strikes have garnered worldwide attention in recent weeks, in truth, they have increased noticeably over the last decade. The question, says Gruenes, is to what extent the government and ownership will continue to engage striking workers and how much further they will attempt to satisfy labor demands.

"What we dont know is how [workers] will react to getting a significant salary increase or improvements in working conditions," asks Gruenes. "Would that quell the masses? Remember, these are people who really had nothing and now they have something. Its a political question. And so the really question becomes how does the Chinese government react to that? They're the ones that are calling the shots."

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