By announcing their intention to relax the country’s one-child policy, China’s leaders hope to placate the public’s widespread desire for change. But loosening population-control measures may not be enough to reverse a trend that poses an even bigger long-term challenge: The country known as “the world’s factory floor” is running out of workers.
For three decades, a seemingly endless supply of cheap labor helped lure foreign manufacturers to set up shop in southern China to churn out tens of millions of
T-shirts, toys, electronics, and more—which in turn helped drive China’s rapid economic growth and put low-cost “made-in-China” goods on the shelves of Wal-Mart (WMT) locations worldwide. From 1979 to 2012, Chinese merchandise exports (PDF) ballooned from $14 billion to $2.1 trillion. Foreign investment began to surge in the early 1990s; in 2011, foreign-invested enterprises in China accounted for 53.4 percent of exports. In her 2008 book The China Price, journalist Alexandra Harney showed how low wages and low regulatory standards “[have] redrawn the global manufacturing map and laid the foundation for the next economic superpower.” But the book’s final chapter hinted that this era wouldn’t last forever. And now that well of cheap labor is drying up.
The absolute number of people in China’s working-age population declined for the first time last year. From factory owners’ point of view, what’s most important is the number of young people, who most often take jobs on assembly lines. From 2008 to 2010, the number of 18-year-olds dropped by one-fifth. What’s more, college enrollment tripled, from 2.2 million to 6.6 million, between 2000 and 2010. The result is a suddenly squeezed labor market. In 2000, China had 22 million 18-year-olds not in school and entering the workforce; in 2010 it had 15 million. A tight labor market drives up wages quickly, as Nobel prize-winning economist Arthur Lewis explained in his formulation of the “Lewis turning point.” In their new book In Line Behind a Billion People, authors Damien Ma and Bill Adams argue that China’s dividend has given way to a “demographic hangover.”
It’s not only demographics but also attitudes that have changed quickly. “The young generation doesn’t want to work in factories—they want to work in services or the Internet or another more easy and relaxed job,” Foxconn (2354:TT) head Terry Gou told press at the recent Asia-Pacific Economic Cooperation forum in Bali. “In the manufacturing sector, total demand [for workers] is now more than supply.”
In Beijing’s suburban Daxing district, where several garment factories are located, young workers now flaunt smartphones and sport embroidered jeans, permed hair, and painted fingernails—a far cry from the standard work wear of a decade ago, when many strolled around factories in slippers and pajamas. Garment worker He Xiaoje, 21, who resembles a heavily moussed-up young John Travolta and earns 3,000 yuan ($492) per month, seems incredulous that anyone was ever content with just a dumb phone. “If it’s not a smartphone, who will use it?” Like many of China’s migrant workers born after 1980, he has higher aspirations than his predecessors.
“The first generation of migrant workers generally had no chance to get a good education; they didn’t have adequate knowledge or skills to seek better jobs,” says Huang Leping, director of the Beijing Yilian Legal Aid Center, which often assists migrant workers. “But those born after 1980 are different. They have a strong desire to be integrated into city life, and they focus on whether their career can provide social security and other benefits to root them in the cities.” In short, they expect more.
Gone are the days when simply posting a job notice on a bulletin board could bring a wave of fresh applicants to a factory gate. John Liu, the owner of Harderson International, a Dongguan factory that applies paint and decals to glass and ceramics, says he understands why assembly-line work has lost its appeal. “Living conditions in China have improved quickly. Young people now don’t have to work so hard to earn a living, and many have parents who will support them.” As China’s service sector has grown, a range of new employment opportunities have opened up, affording more choices. “A lot of those born in the 1990s can’t stand this kind of repetitive [factory] work, so they choose to stay home or do very simple cashier work,” Liu says. “It’s getting harder to find workers.”
In many ways, the changing profile and fortunes of Chinese workers is positive: It’s certainly good for the workers, who now command higher wages and have more bargaining power. Many economists argue it’s good for the overall Chinese economy, which policymakers want to steer away from investment- and export-led growth toward domestic consumption. With more money in their pockets, factory workers could become customers. But these largely inevitable trends also pose some potential challenges to multinational companies and to consumers, who’ve benefited from China’s supply of cheap manufacturing labor.
Some manufacturers are now shifting labor-intensive light industry out of China. Nike (NKE) now sources more of its products from Vietnam than China, for instance. Others are relocating plants from China’s high-cost coastal provinces to cheaper inland areas. In 2011, Foxconn announced it was moving much of its 350,000-worker production facility in Shenzhen to central Henan province. Chairman Guo has also spoken of a plan to install 1 million robots to automate parts of the assembly lines; already 20,000 robots are in place.
All these moves have limitations. While wages inland lag behind those in coastal China, they are also rising quickly. Automation requires significant upfront capital investment. Countries like Indonesia, Vietnam, and India lack key infrastructure such as roads and ports to match China’s, and “worker efficiency is lower in those countries—there are more product defects,” says Shaun Rein, managing director at China Market Research Group in Shanghai and the author of the recent book The End of Cheap China. Manjula Wijerama, who runs vendor management for Horizon, a U.S. wholesale company that works with Michaels Stores, Target (TGT), and other large chains, says that established clusters of component production still give China a big advantage. “For the crafts business, you’ve already got everything here—plastics, wood, paper, glue, and paint. Our product mix is quite complex, so it’s a challenge for us to get the same kind of reinforcing value we get here from elsewhere.”
The upshot is that no other country will offer manufacturers the same sweet deal as China circa 2003—the last year the cost of exporting from China declined in U.S. dollar terms, according to UBS (UBS) Investment Research. “For a decade or more, China exported deflation, bringing low prices to Western consumers,” says Tom Miller, a research analyst at GaveKal Dragonomics in Beijing. Now prices are rising rapidly in China. Thus far, companies have endured lower margins and haven’t transferred higher costs to Western consumers, but at some point “changes in China will lead to consumer prices going up abroad,” Miller says.
As for China itself, the leadership team of President Xi Jinping and Premier Li Keqiang has repeatedly called for “rebalancing” the economy—aiming for a lower percentage of GDP coming from fixed investment and low-end manufacturing and a greater percentage from domestic consumption, services, and higher-value manufacturing. While the central government might not shed tears over small factories with low margins going out of business, that doesn’t mean there’s an adequate safety net in place to ease the inevitable dislocation and creative destruction that will accompany the restructuring of China’s manufacturing sector. And while Chinese policymakers want to see a country with fewer blue collars and more white collars, the economy hasn’t yet produced enough professional jobs to absorb the annual ranks of college graduates, leading to significant discontent. Despite the reforms unveiled by Communist Party leadership last week, the task of modernizing China is far from over.