Chinese Employees Labor Cost in the Mainland

The Cost of Labor in China

The Chinese economy has entered into a time of transition. The day of China being the “go to” labor cost in chinamarket for cheap labor has come and gone. That doesn’t mean the Chinese economy will shrink. It just means that the international flavor of the manufacturing sector will be shifting more to domestic production with the international and foreign manufacturing community looking for cheaper labor elsewhere in Asia such as Vietnam and Cambodia, for example. The value of doing business in China will rest with gaining a greater market share of their domestic consumer market vice manufacturing goods for export from China. The chart that follows shows the rise in the cost of labor in China over the past twelve years. The fact of the matter is that places like the United States are fast approaching parity with China in the cost of manufacturing goods. In a recent story aired on CNBC on November 22, 2016, and reported in more detail at this link, a Chinese billionaire has been refurbishing and repurposing an abandoned General Motors assembly plant to house his manufacturing operations for glass products and already employs over 2000 workers in Moraine, Ohio.

He cites the fact that Chinese labor costs have tripled in the past four years as the motivation for his move. The shortage of specialized labor skills in critical positions is fueling the rise.

White–Collar Job Competition by Region

Competition for white-collar jobs was more intense in the fourth quarter of 2016, revealing an average of 41 applications per vacancy across China. That was an increase from the 37 and 36 reported in the two previous quarters.  The average monthly salary rose slightly from RMB7531 in the third quarter of 2016 to RMB7606 in the final quarter of 2016.  Beijing had the highest pay of RMB9835/month, followed by Shanghai at RMB9720, RMB8640 in Shenzhen and Guangzhou at RMB7853. Software & Internet development including system integration was the most competitive occupation at 145.1 applications per job vacancy.

The salary rankings per month are shown across all Chinese geographic regions by city in the chart below courtesy of freshnews.com:

Salaries China

From the economic viability perspective, there is a clear indication that Chinese labor rates have priced themselves out of the market for increased international investment. The recent history of American businesses licensing or selling their Chinese operations to native Chinese companies is strong. Reality has set in with American companies that the native Chinese businesses have a decided advantage in the consumer marketplace from the consumer trust and government support points of view over the foreign-owned firms.

American Point of View 

The cost of labor in China along with the difficulty of doing business in China and the resulting increase in investment required has led a reversal of American companies setting up shop in China. According to Siva Yam of the Chicago-based U.S.-China Chamber of Commerce,

“We have seen a lot of U.S companies struggling [with] their China” operations, said Siva Yam, president of the Chicago-based U.S.-China Chamber of Commerce on December 8, 2016. “The market is much more mature. We have seen a significant drop of U.S. companies going to China. … On the contrary, they are coming back here.”

An annual report from the American Chamber of Commerce in China found last year that 32 percent of member companies surveyed do not plan to expand investments in China, a percentage that’s higher than during the financial crisis in 2009.

One-quarter of the respondents have moved or plan to move business operations out of China, and of that group, 38 percent are relocating to the U.S., Canada or Mexico, according to the survey, published in January.

Major US asset sale announcements in China since 2014

DivestorTargetAcquirerDeal value $BDate
Advanced Micro Devices – AMDAMD Technologies (China) / Advanced Micro Devices ExportNantong Fujitsu Microelectronics (52.37% / 47.63%) / Semiconductor Manufacturing International – SMIC0.370.37Oct-15
Anadarko PetroleumKerr-McGee China PetroleumBrightoil Petroleum (Holdings)1.11.1Feb-14
BlackRockShopping Centers (Galleria, Chengdu)CapitaLand Retail China Trust0.230.23Aug-16
Cap-Con Automotive TechnologiesCap-Con Automotive Technologies (ARC Automotive business)Yinyi Investment Holding0.490.49Oct-15
Cathaya Capital International Finance Corp-IFCAsia Pacific Medical (Majority %)Bain Capital0.150.15Mar-16
Citigroup (20%) / International Business Machines Corp – IBMChina Guangfa Bank (23.686%)China Life Insurance3.573.57Feb-16
Coca-Cola*Swire Beverages (12.5%)Swire Pacific0.180.18Nov-16
Coca-Cola*Coca-Cola (Beverage manufacturing business in China)China Foods0.420.42Nov-16
Coca-Cola*Coca-Cola (Guangxi) Beverages / Coca-Cola (Yunnan) Beverages / Coca-Cola (Hubei) Beverages / Shanghai Shen-Mei Beverage & FoodSwire Pacific0.440.44Nov-16
ExpediaeLong (62.4%)Ctrip.com International / Keystone Lodging / Plateno / Luxuriant0.670.67May-15
Hertz GlobalCAR(23.97%)UCAR Technology0.680.68Mar-16
Hewlett-PackardH3C Technologies (with server, storage and technology services businesses)Unisplendour3.13.1May-15
International Paper*International Paper (Asia) (Corrugated packaging business in China and Southeast Asia)Shenzhen Bridge Capital Management0.140.14Mar-16
Kingston TechnologyPayton Technology (Shenzhen)Shenzhen Kaifa Technology0.110.11Jun-15
KKR /CDH China Growth Capital ManagementSuccess Diary IIChina Modern Dairy Holdings0.250.25Jul-15
Advanced Micro Devices – AMDAMD Technologies (China) / Advanced Micro Devices ExportNantong Fujitsu Microelectronics (52.37% / 47.63%) / Semiconductor Manufacturing International – SMIC0.370.37Oct-15
Anadarko PetroleumKerr-McGee China PetroleumBrightoil Petroleum (Holdings)1.11.1Feb-14
BlackRockShopping Centers (Galleria, Chengdu)CapitaLand Retail China Trust0.230.23Aug-16
Cap-Con Automotive TechnologiesCap-Con Automotive Technologies (ARC Automotive business)Yinyi Investment Holding0.490.49Oct-15
Cathaya Capital International Finance Corp-IFCAsia Pacific Medical (Majority %)Bain Capital0.150.15Mar-16
Citigroup (20%) / International Business Machines Corp – IBMChina Guangfa Bank (23.686%)China Life Insurance3.573.57Feb-16
Coca-Cola*Swire Beverages (12.5%)Swire Pacific0.180.18Nov-16
Coca-Cola*Coca-Cola (Beverage manufacturing business in China)China Foods0.420.42Nov-16
Morgan StanleyProperty Portfolio (Sandhill Plaza)Mapletree Greater China Commercial Trust0.310.31Jun-15
Uber Technologies*Uber ChinaXiaoju Kuaizhi – Didi Chuxing77Aug-16
Waste ManagementShanghai Environment Group (40%)Shanghai Chengtou Holding0.160.16Jan-14
Yum BrandsYum China Holdings (95%)Existing shareholders9.539.53Oct-16
Source: Dealogic

Final Thoughts on Cost of Chinese Labor

The Chinese labor cost issue is one steeped in the local power of the provinces and labor unions that control how things work at the local level. The PRC has no laws regarding the minimum standard wage. Provincial and municipal governments take into account inflation and cost of living indexes. Unusually high inflation and a rising cost of living were just a few of the factors contributing to the rise in labor costs.  The Chinese Twelfth Five-Year Plan gave provinces and local jurisdiction the motivation to continue increasing wages from year to year.

As the Chinese economy continues to mature and labor unions gather more power and influence at the local level, these labor costs will continue to impact international investment in China.