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Chinese labor is cheaper, but probably not as cheap as you think

by Stephen Hawley Martin
for Virginia Business
August 13, 2007

Some people think industry in China is growing so fast the country will soon run out of factory workers willing to work for low wages.

There is no doubt industry in China is growing fast. The GNP has been up 10 percent a year recently. At some point wages should increase, but not dramatically in the foreseeable future. Presently, 24 million workers enter the labor market each year in China. That's 24 million jobs that must be created just to keep the unemployment rate steady.

In addition, while official reports of China's unemployment rate normally fluctuate between 4 and 5 percent, the Rand Corp. says that when allowance is made for "disguised" rural unemployment as well as "unregistered" urban unemployment, China's actual unemployment rate soars to an estimated 23 percent.

Workers will continue to be in abundant supply for quite some time into the future. On the other hand, upper and middle management slots are becoming increasingly hard to fill and so wages are increasing.

Colleges and universities in China graduate about the same number of students each year as American colleges and universities. The problem is that businesses are building factories rapidly, and new college grads aren't ready to run them. As a result, the demand for experienced plant managers, as well as high and midlevel executives, is quickly increasing.

My research indicates that a seasoned plant manager will now command a salary approaching that of his or her counterpart in the United States. As a result, many companies will need to reach deeply into the ranks of middle management to fill the top jobs. This has increased the demand for experienced managers at middle levels, inflating midlevel salaries as well. It has also led to the phenomenon of job hopping. People on the way up can often work their way into a top position within a few years by jumping from one position and company to another. One has to wonder, of course, if they are always ready to handle the bigger job.

The upshot is this. Companies moving into China need to have the cost of upper and midlevel plant management fully budgeted, or they may be blind sided. They should count on having to pay what they would have to pay in the U.S., plus additional perks that may not be required stateside. These perks may include an automobile, gasoline or the cost of continuing education. An MBA at a local university, for example, will cost about $25,000, and some of the classes may be held on company time.

A great deal of money can be saved on labor in China. Factory workers make from $300 to $400 per month. But their bosses don't come cheap. Plus, there's something else most westerners don't budget for. Employees in China expect a significant bonus at the Chinese New Year. My sources tell me to count on at least two months salary for everyone on staff, or you likely won't see those same workers the next New Year.

The bottom line is this. You can count on saving on labor expenses. But it may not be as much as you thought.

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Stephen Hawley Martin is a former principal of The Martin Agency in Richmond and the author of more than half a dozen books including his newest, Lean Enterprise Leader: How to Get Things Done Without Doing It All Yourself. He is editor and publisher of The Oaklea Press, a book publishing business dedicated primarily to helping business executives increase productivity.