Rising China Wages Prompt Nissan, Foxconn to Boost Automation

Hon Hai Group's Foxconn plant in Shenzhen
An employee works on the assembly line at Hon Hai Group's Foxconn plant in Shenzhen. Foxconn Technology Group said it is investing in factory equipment to reduce its reliance on labor. Photographer: Qilai Shen/Bloomberg

New minimum wage laws, a looser yuan and worker strikes like those affecting Honda Motor Co. and Toyota Motor Corp. are raising costs at plants in China’s Pearl River Delta, leading to increased automation of assembly lines.

Foxconn Technology Group, Nissan Motor Co.’s Chinese venture and VTech Holdings Ltd. said they are investing in factory equipment to reduce their reliance on labor. Wages in the region called the world’s factory floor increased 17 percent in the past six months, according to a survey by the government-backed Hong Kong Trade Development Council.

Factory owners in China face declining profit margins from a rising yuan as the government drops a two-year policy that curbed the currency’s gain. Labor costs will probably bloat to 30 percent of gross domestic product in the next decade from 15 percent now, Morgan Stanley estimated this month. Higher wages in urban areas may cost companies about $1.5 trillion by 2015, according to Credit Suisse Group AG.

“Factories need to think seriously about how they produce more with less,” said Ian Spaulding, Hong Kong-based managing director at INFACT Global Partners, which advises plant owners on China work practices. “Factories need to begin to enhance their productivity so that they are in a position to remain competitive.”

‘Improve Efficiency’

Sales per employee at companies on the Shanghai Composite Index are one third of companies on the Standard & Poor’s 500 Index, according to data compiled by Bloomberg.

VTech Holdings, a Hong Kong-based maker of cordless phones for AT&T Inc., last month raised wages by about 20 percent in China, where it employs almost 20,000 people, Chief Financial Officer Shereen Tong said. The increase, which came after the local government raised the minimum wage, may reduce net income by 5 percent, a Credit Suisse report said last week.

The company expects its headcount to increase this year as sales rise, though it will use more machinery on its assembly line to curb the growth of its workforce, she said.

“We are trying to increase automation and ensure our processes will rely on fewer workers,” Tong said. “For products that need to be manufactured in high volumes, automation will help improve efficiency.”

5 Billion-Yuan Plant

VTech plans to install more surface-mount technology machines, costing more than HK$1 million ($128,500) each, that connect electronic components to circuit boards, Tong said. It also will ask engineers to design machines for bolting and putting on screws, she said.

Nissan, Japan’s third-largest carmaker, said it wants to boost productivity as costs increase. Its venture with Dongfeng Motor Group Co. makes the Teana sedan and Tiida hatchback in China and sold 756,000 vehicles last year.

The venture is building a 5 billion-yuan ($732 million) plant in Guangzhou that will be more automated, Nissan spokesman Mitsuru Yonekawa said. The factory is scheduled to open in 2012.

“The automation rate in China is on the rise, as it’s still lower than at our domestic factories,” Yonekawa said.

The venture also owns Zhengzhou Nissan Automobile Co., which makes sport-utility vehicles. It spent about 1 billion yuan adding a second production line with the latest equipment at its Zhengzhou factory.

Passing on Costs

“We need to boost productivity in China,” Chief Operating Officer Toshiyuki Shiga said. “Just because labor costs are higher in China, we won’t be leaving.”

Foxconn, the world’s biggest contract manufacturer of electronics, said this month it will double base salaries in China after at least 10 employees committed suicide this year.

More automation and improved labor efficiency will help offset those higher costs, with the company needing two to three months to assess the cost of the wage increases, Chairman Terry Gou said June 8. Its handset unit, Foxconn International Holdings Ltd., will pass the higher costs on to clients “as much as possible,” Chief Executive Officer Samuel Chin said this month.

More than 20 Chinese provinces and cities, including the manufacturing hub Shenzhen, raised minimum wages this year to help companies recruit workers and to boost domestic consumption, the city government said this month.

Toyota, the world’s biggest automaker, said today it halted production at its car plant in Guangzhou, China, after a supplier was hit by a strike. The carmaker has suffered at least three strikes in China this month after workers at Honda won wage increases.

‘Lot of Unfairness’

China’s central bank said June 19 it will allow increased “flexibility” for the yuan, abandoning a peg to the dollar that was adopted during the global financial crisis to shield exporters.

“The wage increases are leading many manufacturers to turn to their clients to negotiate price increases,” said Edward Leung, chief economist at the Hong Kong council. “China’s cost advantages are being eroded.”

Ju Teng International Holdings Ltd., a Taiwanese maker of casings used in Hewlett-Packard Co. and Dell Inc. laptops, awarded annual pay raises of between 10 percent and 20 percent in recent years, and this year’s increases may be “a few percentage points more,” said Raymond Tsui, chief financial officer.

“The question comes down to whether the price for the end-product ought to be increased,” Tsui said, adding that the company hadn’t reached a conclusion.

Heavy Burden

Workers say the pay increases are necessary to help keep pace with the rising cost of living in the world’s most populous nation. Inflation accelerated to an annual pace of 3.1 percent in May, the biggest increase in 19 months. Property prices in May jumped 12.4 percent across 70 cities from a year earlier, the government said June 10.

“We carry a very heavy financial burden,” said Yang Li, 40, who works at the Honda Lock (Guangdong) Co. plant in Zhongshan, where employees went on strike June 9 and returned June 15 pending the outcome of pay negotiations.

Honda agreed last month to raise pay 24 percent for workers at a parts plant in Foshan after a strike shut down all four of its China car factories. Another Foshan parts supplier was shut June 7 to June 10 by a walkout.

“There’s a lot of unfairness going on,” Yang said. “We hope that this will have an impact on other workers across China.”

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