Vietnam is the New China Globalization's Victors Hunt for the Next Low-Wage Country

What can Western companies do when China's factory workers start demanding better wages and conditions? Easy -- just transfer production to a cheaper country. China's loss is Vietnam's gain.

By Alexander Jung and

The world's manufacturing powerhouse needs new low-wage workers, which is why the man in the dark suit is talking himself hoarse. "Do not delay," he calls out to the people gathered around him, pressing his mouth to the microphone. "We will handle everything in minutes, and you'll have work right away."

The man, whose name is Zhou Liang, works for a private employment agency, which has its office in a bus terminal in Shenzhen, the southern Chinese industrial center. Buses are constantly arriving at the terminal from all across China, bringing in fresh supplies of young migrant workers.

But Zhou, the employment agent, sounds desperate, like someone trying to hawk a product no one wants. Posters on the wall advertise some of the lowest-paid jobs in the world. A wide range of factories are seeking workers, but they pay only the minimum monthly wage of 750 yuan, or about €70 ($107), and that for an eight-hour day, five days a week. But by working overtime and on weekends, Zhou calls out, hoping for takers, workers can easily earn twice as much.

He has finally managed to drum up 40 applicants, and he asks them to line up in three rows. One of them is 20-year-old Zhong Xia from Sichuan province. Her luggage consists of a suitcase and a plastic bucket. The bucket is so she can wash her clothes in the factory dormitory where she is likely to be living soon, sharing a room with several other women.

The young woman is given a job assembling electric components, including cables and plugs. It's a start, and better than nothing, she says quickly before her group is led away to a waiting row of minibuses that will take the workers to factories. The entire process is designed to happen as quickly as possible, to deter workers from changing their minds at the last minute. Labor has become a scarce commodity in China these days.

There is a shortage of 2 million workers in the Pearl River Delta alone, China's industrial zone abutting Hong Kong, where companies from Adidas to Mattel have their products manufactured. The manufacturers there compete relentlessly for labor, fighting desperately for each worker. This struggle marks a new chapter in the history of globalization.

For a long time, it seemed as if China, with its 1.3 billion people, offered the world an inexhaustible reservoir of low-wage workers. It was the basis of the recipe for success that reformer Deng Xiaoping prescribed for the country 30 years ago. Foreign companies would outsource the production of simple products to China. And the communists would provide them with the workers they needed.

Everyone benefited from the arrangement. About 300 million Chinese were liberated from deep poverty, and China transformed itself into a principal supplier for the industrialized countries. Consumers in the West were pleased they could buy cheap T-shirts and sneakers.

But now this symbiotic system is no longer working as smoothly as it did in the past. A booming economy in the country's poorer western provinces has caused the influx of migrant workers to subside, as many Chinese prefer to look for work closer to home. This in turn has forced businesses to completely revise their assumptions.

Graphic: Average annual wages in China

Graphic: Average annual wages in China

Costs are on the rise everywhere. The labor shortage has made production more expensive, as workers can now command higher wages. A more stringent labor law, more expensive raw materials and the revaluation of the Chinese yuan against the dollar have also contributed to rising costs. Inflation recently climbed to 8 percent. China's role as the ultimate low-cost production location is fast becoming history.

German investors, once lured to the Far East by low costs, have recently begun to realize that the financial advantages of outsourcing production to China have all but vanished. "Turning a profit is becoming increasingly rare," reports consultant Wilfried Krokowski, who specializes in helping German companies enter the Chinese market.

As result, production regions like the Pearl River Delta are experiencing a veritable exodus. According to a survey by the US Chamber of Commerce in Shanghai, one in five companies are already considering pulling out of China. Many are taking their factories to places where wages are now lower, like Vietnam, Bangladesh or India.

Or they shut down completely, like the Boji Company. Until recently, Boji was one of the world's largest producers of artificial Christmas trees, employing 20,000 people. Now its complex of buildings in Shenzhen is abandoned and its factory stores closed. "We want our money," angry suppliers have scrawled on the walls.

In December and January alone, more than 1,000 companies left the Pearl River Delta. Most were from Taiwan or neighboring Hong Kong. But they are merely the tip of the iceberg. According to Stanley Lau, the deputy head of a Hong Kong federation of businesses, 10 percent of the up to 70,000 small and mid-sized manufacturers in the area will likely close up shop this year. About 4,000 companies in the shoe industry, says Lau, have already shut down.

What is most surprising about this exodus is that no one in China is concerned about the departure of these sweatshops. There have been no major protests or desperate appeals from politicians. On the contrary, the change is intended.

China's planners know that their country has no future as a low-cost producer. Following in the footsteps of Japan and South Korea, they are converting their industrial base, hoping to catapult Chinese industry to the high-tech level. It is a change that Beijing's communist strategists are promoting as energetically as only dictatorships can.

Beijing recently eliminated some incentives for foreign investors, including exemptions from corporate income tax and tax discounts for many export goods. As a result, it has become nearly impossible to turn a profit exporting certain products, like shoe leather.

At the same time, Beijing seeks to promote the social "harmony" that Communist Party leader and President Hu Jintao constantly touts. It is a campaign meant to counteract growing dissatisfaction in the People's Republic. Beijing's subjects are becoming aware of their rights and are no longer willing to be exploited.

Every few days, workers at Clever Metal & Electroplating in Shenzhen suddenly stop working. Wearing blue uniforms with yellow numbers attached to them, they squat on the side of the road, looking harmless enough -- almost as if they were having a picnic. But the mood is tense.

The workers say that they have been waiting for their pay for two weeks. They speculate that the company's managers are running out of money, just as they are gradually losing patience. "I spray-paint metal frames for up to 12 hours a day," complains one worker, "and even the thin mask I wear doesn't keep out the stench."

Conditions still haven't improved significantly in many Chinese factories. The employers pay starvation wages, neglect to give credit for overtime hours and ruin the health of their employees. A worker with Taiway, a supplier to the sporting goods industry, describes how rough life is behind the scenes in a Chinese factory.

Using a device only slightly larger than a toothbrush, she spends up to 10 hours a day applying glue to shoe soles. The stench is terrible and she often suffers from headaches. Although the company has distributed face masks, the worker says, they are so ineffective that hardly anyone wears them -- except when the inspectors visit.

Every night, she falls into bed, exhausted. She shares a room with six other women in the company-owned dormitory. There are no showers for the workers, who must carry hot water in buckets to wash themselves.

In the past, the Chinese would have quietly tolerated such conditions. But now they are no longer willing to accept them, and they can even expect support from the very top. The new labor law, introduced at the beginning of the year, provides employees with improved protections against dismissal and higher settlement payments. It also drives up costs for companies, especially low-wage producers.


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