May 2, 2006    Volume 13, No. 9

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Good Luck Competing Against Chinese Labor Costs
Mfg. Job Growth In China Is Headed Up, Not Down;
109 Million Mfg. Workers In China Dwarfs Number In U.S.



BY RICHARD McCORMACK richard@manufacturingnews.com


Job growth in China's manufacturing sector is not declining, as was widely reported by the Conference Board last June.

If manufacturing jobs were declining in China, where manufacturing is growing, then it would not be so bad if they were also declining in the United States, economists and policy people have repeatedly argued. But that is not the case, according to a report commissioned by the U.S. Bureau of Labor Statistics.

"The renewed increase in China's manufacturing employment that began in 2002 or before is fueled by private corporations and businesses, both foreign funded and domestically own," writes Judith Banister. Manufacturing employment did take a dip in the late 1990s, due mostly to the downsizing of so many unproductive state-owned enterprises.

The number of people working in the manufacturing sector in China is also far higher than most analysts have estimated, according Banister, a consultant working with Javelin Investments in Beijing, China. At least 109 million Chinese are working in the manufacturing sector, far more than the 83 million reported last year. Banister says 109 million is a conservative number.

By comparison, there are 14 million manufacturing workers in the United States and 53 million in the G-7 countries combined.

Millions of migrant Chinese workers are not counted as part of 109 million manufacturing workers. Moreover, companies in China might not be reporting millions of other workers as a means to avoid paying taxes.

"Both foreign and domestic employers who are eager to keep down their labor costs and statistical reporting requirements may prefer that their export-processing factories be classified as rural or TVE (village and town enterprises)," writes Banister in a report titled: "Manufacturing Employment and Compensation in China." When classified as such, they fall under the jurisdiction of the Chinese Ministry of Agriculture, as opposed to its Ministry of Labor. "Under such classification, they need meet few, if any, requirements to pay social insurance and other welfare obligations for their hundreds or thousands of production and hand assembly workers," writes Banister.

The collection of employment data is also concentrated on the rapidly declining state-owned enterprises, "giving short shrift to the not-yet adequately collected or published statistics on the thriving, growing, dynamic private manufacturing sector."

There is no shortage of workers in China and a steady stream of people from the countryside means the country will have a low-cost labor force for decades to come. There are as many as 200 million "surplus" workers who are jobless in China's agricultural sector, says Banister's report. "As agriculture modernizes in China during the coming decades, hundreds of millions of agricultural workers will need other kinds of employment....Up to 500 million peasants are expected to migrate to cities in search of factory work over the next two decades." Moreover, there are plenty of unemployed workers in the cities seeking better jobs. The unemployment rate in China's rust belt in the northeast is 40 percent. Some estimate the true unemployment rate in China is 25 percent.

As a result, Chinese workers remain among the lowest paid in the world. The average total labor compensation for a Chinese manufacturing worker is 57 cents per hour, with many making far less than that, benefits included.

An average Chinese wage of $0.57 per hour -- or $104 per month -- is about 3 percent of the average U.S. manufacturing worker's wage, according to data collected by Banister. "Equally as striking, regional competitors in the newly industrialized economies of Asia had, on average, manufacturing labor costs more than 10 times those for China's manufacturing workers, and Mexico and Brazil had manufacturing labor costs about four times those for China's manufacturing employees."

The average hourly wage for a worker in a rural setting was $0.41 per hour, and migrant workers are making even less than that.

The average annual earnings for manufacturing workers in cities were $1,347 (11,152 yuan at the official exchange rate) for the year 2002. Manufacturing workers in the countryside averaged $837 (6,927 yuan) for the year. Urban manufacturing workers average 45.4 hours of work per week, "and it is...reasonable to assume that [rural] manufacturing workers average 50 hours of work per week in 2002," writes Banister.

There is a wide variation of pay among industries: textile industry workers averaged about 40 cents per hour (7,268 yuan per year), and garment workers outside of the cities "are paid less than that," according to Banister.

Medical costs are not included in the figures.

"By the end of 2002, the number of rural and small town workers with any social pension insurance was miniscule," according to Banister. "China's urban towns and rural areas have very weak or nonexistent social benefit systems for pensions, medical insurance, unemployment insurance, workers' compensation and the like. Pension and medical insurance systems paid into by employers and employees essentially do not exist in China outside of cities today."

Moreover, taxes are rarely paid, in part because of the legacy of the Maoist period from 1949 to 1978, during which time taxes were not collected. "Today, during the post Mao economic reform era, employers appear to have developed a culture of tax avoidance," writes Banister. "For example, when foreign and multinational companies come to China and attempt to acquire or set up a joint venture or merger with a (usually state-owned) Chinese company, the foreign company insists on engaging in a due diligence process to determine whether the joint venture, merger or acquisition is in the interest of its owners and shareholders. The auditors and accounting companies frequently discover that the target company has two sets of books...The 'tax ledger' is a set of employee and financial data reported to the tax and other authorities and the 'administrative ledger' records a more accurate picture of the number of employees, their actual earnings, the true costs and income of the company, its actual profit, and more. The tax ledger is designed to minimize tax exposure, particularly corporate income taxes, value-added taxes, personal income taxes for employer and employees and required social benefit payments. It is believed that non-public-sector domestic Chinese enterprises avoid taxation and social benefit payments to an even greater extent than the state-owned and collective-owned enterprises."

All of this makes for a highly competitive manufacturing enterprise that has turned China into a global juggernaut, Banister argues. Low-cost workers and tax avoidance are only a few of the advantages Chinese firms have over foreign rivals. The huge size of China's market is also driving growth. The country has a thriving middle class and people want to buy manufactured goods. China also has convenient logistics located in its coastal regions, and land prices are low.

"Many domestic manufacturing concerns in China never had to buy the land for their factories," writes Banister. Land prices are reported to have declined by 70 percent in major urban areas since 1993.

The country also offers financial and tax incentives, tax holidays and a favorable currency for export. Its political and economic systems are relatively stable compared to other developing nations.

The 98-page report is located at http://www.bls.gov/fls/chinareport.pdf.



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