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China's Rising Wages Propel U.S. Prices |
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2011-5-11
There's some debate about the impact and extent of these wage increases on foreign markets. The pace of inflation for U.S. imports is running around 7% this year, but it doesn't account for a big enough portion of spending to significantly affect overall low inflation rates of about 1.6%, Morgan Stanley's China strategist Jonathan Garner said. Still, with real wages stagnant for decades, many Americans who have grown dependent on cheap imported goods such as polo shirts or power tools could see their purchasing power decrease.
China still has cheap labor in its interior, away from its developed coastal cities, and productivity gains could mitigate higher wage costs. For example, Foxconn announced it was expanding operations to inland areas near Chengdu, Wuhan, and Zhengzhou, away from its coastal base.Li & Fung is encouraging its suppliers to invest more in their factories to increase worker productivity and raise the quality of goods.
There are limits to what those measures will achieve. Some analysts say that the wage increases will sharply outpace any productivity gains. Moving inland means lower wages, but higher transportation costs on China's crowded highways and railroads. Furthermore, locating the factories in China's hinterland puts them in a better position to service China's growing domestic consumer market instead of exporting to consumers in the U.S. and elsewhere.
Faced with rising wages within China, some companies are shifting resources elsewhere to keep costs down. Yue Yuen Industrial (Holdings) Ltd., the world's biggest shoe maker, has started moving manufacturing of low-cost shoes from China to countries such as Bangladesh and Cambodia. Li & Fung has been hired a prominent Chinese sneaker brand, Li Ning Co., to help it search for cheap production outside China.
But the wage gap between China and other developing countries will shrink, said Mr. Fung, echoing views shared by Boston Consulting Group, because "China was the thing that kept the price low," he says. "China was the benchmark. With the China price rising, everyone else wants to raise prices."
As factories relocate to other countries, local wages will rise faster than they did in China because the potential pools of surplus labor are smaller. In addition, because no other country can replicate the massive scale of China, logistics will become a larger part of costs as companies are forced to slice up their manufacturing over several countries, analysts say.
"Things will be more expensive and people will buy less," Mr. Fung warns. That means that the West will have to adopt new consumption trends.
Source:The Wall Street Journal
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