This column originally appeared in Forbes
China's factories are starting to hum again, and the country's exports were up 46% in February over a year before. But a problem is emerging. As hard as it may be to believe, those factories can't find workers. At the National People's Congress in Beijing last week, government leaders discussed the labor shortage afflicting Guangdong, nicknamed the factory of the world. Some of its factories are unable to run full-steam. How is that possible? Doesn't China, with its billion-plus people, have a limitless supply of cheap labor? Aren't those poor masses of Chinese people dying for jobs?
As I've written before, China can no longer be seen as the manufacturing hub of the world for cheap products like Nike (NYSE:NKE) shoes and Mattel (NASDAQ:MAT) toys. Over the past five years the government has been trying to spur domestic consumption and ease pollution by making it increasingly difficult to start or expand high-polluting, water-intensive, low intellectual capital transfer businesses and has been pushing for greater investment by high-tech companies like Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT).
Even at the height of the financial crisis, high-polluting businesses weren't getting the green light. One of my clients wanted to invest in a billion-dollar factory but couldn't get the approval. I spoke with someone at the very highest level of government and was told, "No one can get a high-polluting factory approved." If that person couldn't help me, no one could. (See my article "Three Myths About Business in China.")
China is moving up the manufacturing value chain, and as that happens some key changes are taking place that businesses need to be aware of.
First, younger Chinese are no longer willing to work in factories. They are far too optimistic about their career options and see no need to work for low wages hundreds of miles from their families. The number of university graduates has soared from 1 million in 2000 to more than 6 million this year, decreasing the pool of potential young laborers. Even lower-skilled workers are staying closer to home in China's inland provinces like Hunan and Sichuan, rather than traveling to Guangdong to work for wages they increasingly see as insufficient. Their hesitancy to work in faraway factories is another sign that China's growth is real and that there isn't a bubble emerging that could threaten China's economy on a systemic level. Real incomes are rising far faster than most economists estimate, as I wrote in "Jim Chanos Is Wrong: There Is No China Bubble." Those rising incomes will continue to drive demand for residential real estate, where demand already outstrips supply.
Second, female migrant workers are starting to become major breadwinners. This is a trend that has been little noticed by sociologists but is changing family dynamics in China. Women can easily make $200 to $400 a month as maids or legitimate masseuses in cities, while men are left laboring for $100 a month as construction workers. In fact, many men are starting to stay at home in the countryside to work at odd jobs and take care of the kids with the grandparents while their wives go to Shanghai and Beijing and send money home, quitting their jobs every few months to return to visit the family. It's easy for women to find jobs as waitresses in China's gray economy. That's one reason women are starting to fuel China's consumer product boom, and why they remain the single most optimistic segment of China's population. (See my article "China's New Purchasing Powerhouse: Women.")
The changes in China's economy and family dynamic will have huge repercussions not only for government policy but also for multinational companies' future planning in China. Companies like Foxconn, the maker of Apple's (NASDAQ:AAPL) iPhone, that have come under heavy criticism for their treatment of Chinese workers, will have to invest much more to recruit and retain labor. If they don't, the supply chains of many foreign businesses will suffer. Rising labor costs will help fix the imbalance of the exchange rate between the Chinese yuan and the U.S. dollar without an actual appreciation, which could destabilize the global recovery. Already China's trade surplus is going down as domestic consumption rises.
For companies looking to produce low-end, low-cost products, I generally recommend looking at places like Vietnam, where 70% of the population is under 30 and the government is rolling out the welcome mat to any foreign investment. Africa may eventually become a place to look as well. Chinese Premier Wen Jiabao is even pushing for the establishment of special economic zones for Chinese-owned factories to relocate to. Poor African countries may, like China in the 1980s and 1990s, find a little more pollution preferable to hunger and sickness if it means more jobs.
However, despite the changes in the labor force and regulations, exports are unlikely to drop much below the 20% of China's economy that my firm estimates they account for now (most analysts think the level is 40%). What will change are the kinds of products China produces. Expect to see Chinese factories become more automated to produce higher-value goods instead of cheap hand-assembled toys.
Although there has been--rightly--much criticism about quality control in Chinese factories, the fact is that many of them turn out very high-quality precision equipment. The airframe maker Airbus, for instance, has its most advanced manufacturing operations in the world in Tianjin. The rising quality of manufactured goods in China is one reason the country surpassed Germany to become the world's largest exporter. The Germans themselves are shifting some of their high-tech manufacturing capacity there.
As the cost of doing business in China goes up, companies need to be mindful not only of the effect of increasing labor costs and standards but also of the opportunities created by the manufacturing sector's increasing sophistication, and by a higher-earning, more demanding consumer base.