Recruiting in China

When demand exceeds supply, costs are bound to rise.

China’s economy is slumping. According to the China National Bureau of Statistics, China’s economy grew 7.7 percent during the first quarter as reported by the Wall Street Journal (April 14). This is supported by government subsidies, but much less than our Federal Reserve Bank’s bond buying.

With last year’s growth of just under 10 percent, these high continued growth rates have dramatically impacted the country’s labor force, causing the government to worry about inflation.

Giant wage increases
Jobs within the government had an 11.9 percent wage increase over 2011 — rising to yuan 46,769 ($7,543 nominal). That followed a 2011 increase of 14.4 percent over 2010. Adjusted for inflation, the percentages are 9.0 and 8.5, respectively — nearly 18 percent in just the last two years.

These wages increased 71 percent in the past four years.

Wages at privately owned companies rose even more — up 18.3 percent over 2011 (nominal). Adjusted for inflation, 2012 was up 14 percent and 2011 was up 12.3 percent.

Productivity doesn't keep up
China’s productivity, while improving every year, is insufficient to match wage escalation. During the past four years when wages increased 71 percent, productivity rose just under 36 percent.

Most countries would be pleased with an average annual productivity increase of almost 9 percent, but it doesn’t appear impressive when compared against double-sized wage increases.

While garment workers in China make less than the $7,543 average government pay, those garment workers in Bangladesh are being paid about $40 a month, according to the Wall Street Journal (May 12).

Labor is bifurcated
Unskilled Chinese workers are losing their jobs to much lower wage countries such as Bangladesh, Cambodia and Vietnam, but a shortage exists for skilled labor.

Zhaopin.com, one of the largest Chinese recruitment websites, advertised in April for 24.6 percent more jobs than a year ago (Wall Street Journal, May 16).

China suddenly finds itself between a labor rock and a hard place. They are losing unskilled jobs to the Southeast Asian countries; at the same time, they cannot find enough skilled labor.

They are paying the price of a three-decade one-child policy, which will only become more severe.

Labor in China is now a seller’s market. Samsung and Hewlett Packard report that bargaining with employers has started. Although unions are illegal in China, both companies say that workers are starting to achieve success in winning concessions (New York Times, Feb. 8).

A new strategy
It is becoming clearer that China’s economic model is unsustainable. This is resulting in two strategic changes:

1) Emphasize and increase the domestic service sector of the economy, and

2) Initiate a significant penetration of the U.S. auto market.

As is the Chinese style, they have a long-term plan which will be very slowly implemented so as to avoid resentment or rejection by American consumers.

Their strategy starts with both auto parts exporting and with the acquisition of U.S. auto parts manufactures. The New York Times (May 12) reported that last year, the Chinese quietly exported $13 billion worth of parts to the U.S.

Those exports seem like a drop in the bucket compared to the quarter-trillion dollar U.S. auto market. But, China views it as a foot in the door. China is way behind — compared to when Japan started — in exporting cars to America. Back then, the Japanese auto industry not only knew what size engines or brakes were required for a given size car, they also knew how to manufacture them. China is still learning.

President Obama has filed a formal complaint with the World Trade Organization claiming the Chinese government wrongfully subsidizes the Chinese exporters of parts.

A hidden agenda
Their actions look way beyond exports, as Chinese companies are repeatedly acquiring American parts manufacturing companies.

This is done quietly, but the practice is gaining traction to supply U.S. auto assembly plants with original equipment parts. They are using this approach to learn what is required — quality, price and delivery — in the American market.

After gaining know-how from former American-owned parts plants, you can expect to see Chinese cars being sold here within a decade.

Scamehorn is Ohio University’s executive-in-residence emeritus and former president of Diamond Power.