Actions are what really count in China. Words are cheap.The biggest action in China now is all about strikes. When I first read about them I wondered if my eyes were playing tricks on me. Labor unrest in China is nothing new but organized strikes at high-profile firms are rare.Even rarer is official tolerance of strikes.
What are these actions telling us?
The financial press has paid little attention, but strikes have been disrupting China’s auto industry since May. Three Honda plants have been shut down by periodic strikes. And a major Toyota plant was forced to close when its parts supplier was hit by a strike.
We all know that Beijing tolerates very little in the way of public dissent. Just as important to China’s leadership is the smooth operation of the economy. But Chinese authorities allowed this wave of strikes to disrupt the operations of key foreign manufacturers.
Events at the legendary Foxconn factory sent another signal of change in the economy. If you haven’t heard of it, Foxconn is an incredibly vast factory in southern China which produces millions of electronic devices including many of Apple’s (NASDAQ:AAPL) famous iPods, iPads and iPhones.
It has about 270,000 employees, and houses many of them in dormitories. No, that was not a typo. It actually employs more than a quarter of a million workers in Shenzhen alone!
Recently there was a spate of suicides at Foxconn. At least ten workers took their own lives during May and June.
The response to these events has been anything but business as usual.
A Tip from Henry Ford
Instead of smothering news of workers suicides and breaking the strikes, company managers and the government have surprised everyone.
Foxconn stunned the tech world by announcing that it would more than double the pay of workers at its Shenzhen factory. The company parent, Hon Hai Precision (OTC:HNHPF) of Taiwan, said it would extend the same benefits to its 800,000 workers at factories across China.
Foxconn says it will pass on the added costs to clients, which include the stars of the consumer tech world. As well as Apple, the firm serves Sony Corp. (NYSE:SNE), Dell (NASDAQ:DELL), Hewlett Packard (NYSE:HPQ), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Cisco (NASDAQ:CSCO).
The strikes which hit Honda and Toyota also resulted in wage hikes for the workers.
There were more than 500,000 labor disputes in China last year. Labor shortages are also cropping up more and more often in China. Rising wages are inevitable.
All of this has some wondering if China will price itself out of the market. Will the “world’s factory” move to even lower-wage countries like Vietnam?
I believe we are not witnessing the early signs of the end of industrial China. We are seeing the first signs of transformation.
It was Henry Ford who first came up with the notion that his workers should be well paid. He knew that was the only way they would be able to afford the cars his factories produced.
China has learned from Ford and from its neighbors.
A Little Bit of Seoul
China has embraced economic revolution for decades, and it hasn’t stopped changing. Beijing doesn’t see the Chinese mainland continuing as the world’s factory floor forever. The Chinese are looking to South Korea and Taiwan as models of the future.
Beijing is always searching for ways to move its industrial colossus up the value chain. A truly wealthy China won’t rise from armies of ill-paid assembly-line workers. The economy of the future needs more value-added jobs of the sort we take for granted in the west.
Giving workers more pay is also essential to revolutionizing China’s economic model. As long as China continues solely as an exporter of low cost goods, it will be at the mercy of western demand. In fact, lower-wage countries are already attracting foreign investment in new factories.
The U.S. and China agree completely on one thing. The Chinese must consume more of the goods they themselves produce. That’s a sustainable model for the new China. But it does mean better wages for the workers.
It also means breaking the old Chinese habit of tucking every spare yuan in the bank. Right now the Chinese are the world’s greatest savers. They have to be.
With almost no social safety net, the Chinese have learned to save everything they can in case of emergencies like ill health. Once again, Beijing is moving to provide workers with a sense of security so they’ll become free spenders.
In January of last year, China announced that it planned to spend $123 billion to set up a universal health care system for its 1.3 billion people by 2011.
What it Means for Us
As investors we can expect continuing growth in the booming auto industry. That means more income for foreign automakers who are partnered in China. They include GM (NYSE:GM) and Ford (NYSE:F). Chinese auto parts makers which trade under the symbols CAAS and SORL should also continue to do well.
The Chinese middle class also loves to buy luxury goods. That means continuing expansion for the likes of LVMH Moet Hennessy Louis Vuitton SA (OTCPK:LVMUY) and other high-end brands.
We’ll follow this expansion of Chinese consumerism closely in coming years and keep you up to date on where the dollars and yuan are flowing.
Disclosure: no positions