- (A) Beijing-based delivery company, which fills orders for Chinese-made products for overseas buyers, has no choice (but to delay orders) since most of its employees have been heading to their hometowns for weeks now. “We have already received dozens of complaints from overseas customers after they learned that we would not be able to ship products for almost the entire month,” Zhang said.
Some in the west are throwing in the towel on China. For American and western firms with platform investments and source to think they can just replicate the Asian cost structure in the US without a big profit squeeze and inflation is whistling past the graveyard.
- The Container Store, a Texas-based retailer that sells storage products such as containers and bookshelves, has been waiting for a shipment for four weeks. One of its suppliers shifted all production back to the US because of the labour shortage in China, according to CNN.
Are the factory workers coming back after New Years?
- Huang He, vice president of the Jinghua Group, told the Global Times that his factories normally employ 1,500 people, but some 500 of them resigned last month to take a long break. Huang said all workers who take just the minimum seven-day holiday would receive an extra 500 yuan ($75), enabling such workers to earn 2,500 yuan ($379). However, only 200 people accepted his offer. “We cannot afford higher wages since the price of raw materials makes it hard for us to get a profit,” Huang told the Global Times.
Clearly China is smack in the middle of a Lewis Turning Point, which marks a time in the development of an economy when the surplus of cheap labour runs dry. In response, (surviving) employers push up wages and benefits, creating demand-push inflation. The nation is losing much of its original low-cost competitive advantage. China will be a much weaker growth story (if at all) under this evolving model; and customers, such the US, are facing diminished supply and rapidly rising prices on Chinese goods. From the Sini story:
- It is why many foreign business owners and importers in Europe and the US are being told they have to wait until a month to receive orders — news that some find hard to believe. “We have already received dozens of complaints from overseas customers after they learned that we would not be able to ship products for almost the entire month,” Zhang said.
This is now already showing up in prices in the US, such as the MIT billion-price survey, which is developing a steep up trend. This index was 100.46 six months ago, 100.90 three months ago, and 101.92 on Jan. 31. Three-month inflation annualized per this measure is running 4 per cent.
This Lewis Turning Point tendency over time can lead to more of a consumer and service economy in China, but it is not as simple as flipping a switch. The government is pushing through more worker benefits and modern-economy safety nets, but the ability to absorb this for those trying to practice under the old low-margin, cheap-labour model is extremely difficult, if not impossible, especially when there is a speculative capital flow mania layered over it and distorting the economy. One should expect a very high business failure rate, unless China can deal with it resource waste and down shift. From Reuters:
- It’ll impose tremendous pressure on the manufacturing sector, especially the labour intensive industries,” said Clement Chen, an honorary president of the Federation of Hong Kong Industries and a veteran industrialist in the region. “It’s not just Hong Kong firms, but Taiwanese, Korean and Japanese firms will all be facing these pressures.”
Speculative manias, such as this one in real estate, waste and misallocate resources and distort prices. At this point, inflation in China looks terminal and dangerous. This hamster-on-a-wheel scenario quickly mitigates any benefit Chinese labour is getting from the Turning Point: 20% wage increases against 50% higher rice prices.
More info out on the cost of labour in the service sector and express delivery businesses. This is good for labour, but it completely changes the cost structure of doing business.
- A director with ZTO Express says that in the past, labour costs for private express companies could be as low as 10 per cent of total operational costs. Now, labour costs make up at least 30 per cent. In addition to wage increases for couriers, the salaries for managers have also increased, from 60,000 to 100,000 yuan a year to 200,000 to 500,000 a year. Aside from the shortage of workers, government policies and social security policies have also contributed to rising labour costs. Since Jan. 1, the Beijing government ordered companies to provide insurance for medical treatment and work-related injuries along with pensions, and unemployment insurance, resulting in an average cost increase of 400 yuan or more per worker.
This article originally appeared at The Wall Street Examiner.