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China's low income work force strikes, the genie is out of the bottle

Foxconn has in recent weeks raised worker salaries by %30 with the spectacle of international pressure looking down at them. Honda has had strikes, Toyota and a number of other supply chain companies have all been at the tail end of protests for better wages. With Foxconn's move to lift salaries, technologies such as the internet and mobile TXT messaging have created a frenzy of excitement that is spreeding around the low income workers of China. It has finally started, strikes and knowing that as a group able to do it and not feel so afraid. China's government and local governments for a long time have turned a blind eye to workers rights, but now the workers have enough confidence to take matters into their own hands. This is new and at this current time a real danger in many ways to China.

I can say for a fact that just about every worker I ever knew was unhappy with the extremely low wages they got, often I would also see many working late into the night, with little or no overtime. Total exploitation of what I like to call a SLAVE LABOR WORKFORCE is going to come back to haunt the very people that caused it.

Companies in China and foreign business are taking note, Foxconn in a way has set the stage and other companies are now shaking in their boots with the fact that they might  be next. I guess you could say the genie is out of the bottle.

The implications though for China could be hash. Labor in Vietnam is over %50 cheaper, and a number of other countires now have cheaper labor than China. China's advantage is a solid infrastructure, and skills that have been built up over the last few decades that some of these other low cost labor countries don't have yet. But that has never stopped business from moving to cheap labor countries. Workers can be trained up in no time (in fact Honda just keeps training people bringing them in as interns to cut on having to pay full rates)

I think over the next 10 years we might see a shift in manufacturing moving out of China slowly and into other emerging economies such as Vietnam. So what does China have to offer besides cheap labor?

I use to export mobile phones out of China, one interesting thing I noticed is just about all the factories seem to manufacture the same local 2 Dual Sim mobile phone, the color and size may vary a little but over all they are the same thing. I felt that factories just did not put anything into R&D, it was just a copy what the next factory was doing and undercut them.

In the financial crisis this costs factories dearly, as it will when these newer economies start to copy these products. The reason been that without R&D the only thing these factories can compete on is price, once they lose the advantage of low cost labor they have lost the game, even without foreign competition from cheaper labor a number of electronic factories went out of business with the down turn in exports because they just did not have innovation, so they all go into price wars with each other. Sooner or later they collapse.

The recent up rise with discontent could be a short victory for workers, a double edged sword. The reality is this, the only reason manufacturing is in China is because of a huge cheap labor force, once it gets expensive, or when transport costs get to high as we saw when oil was at $150 a barrel it hardly makes it worth it to stay there anymore. Because of little innovation/R&D many factories will face two choices for the future, move to cheaper countries or close. Even if they move, much of their local technologies are not high tech, and easy to copy, the emerging countries just like China has done will copy everything over time and we will see a shift out of China.

If we look a textiles, this is a good example, in recent years it has become very difficult for many factories to hold onto the number one position in China and a lot has been lost to newer low cost countries. Once countries like Vietnam, India, Africa and others get their infrastructure up to scratch it will gather momentum.




Disclosure: Currently no investments at all