Friday, March 28, 2008

New Challenges for Foreign Producers: ‘China’s Manufacturing Competitiveness Is at Risk’

The recent sharp rise in China’s inflation rate sent a fresh wave of concern through the country’s manufacturing community, because even before that, the costs of running a factory in China had been steadily increasing. The consumer price index jumped 8.7% in February, year on year, the biggest increase in almost 12 years. Speaking at the closing session of the National People’s Congress, Premier Wen Jiabao called inflation the country’s most serious problem, and admitted that the target rate of 4.8% for 2008 would be difficult to meet.

For factory owners, inflation raises operating costs, as raw materials, transportation, energy, labor and land become more expensive. And for those owners, the timing of the inflationary surge could not have been worse. As the Chinese New Year ended, the workers returned to their jobs with more strident calls for higher wages. In China, the end of the Lunar New Year holiday is when workers negotiate and sign new one-year contracts. The rising prices of key goods – food prices rose 23% in February, led by pork at 63% – fuelled a renewed urgency in the workers’ demands.

“At New Year’s time, the workers went home, compared notes and discussed new opportunities,” says the American owner of a factory in Pudong who asked not to be identified. His factory has 35 employees, most of them from Anhui province. “They came back and dissatisfaction with our wages erupted. Two [men] came in and said, ‘You have to give us more money or we’re going to leave.’ They influenced all the other workers in the factory, who came to us and [issued] an ultimatum [to give] them more money, which we had to do.” Overall, he says, wages have risen 30% to 40% for skilled workers, and almost 50% for unskilled workers, since he opened the factory in mid-2004. Because there is such great China-wide demand for low-level factory workers, unskilled laborers have received bigger increases in more

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