New Chinese Revolution: Worker Power Transforms World Economy

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09 June 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com.

Ever since Black September 2008, the United States political economy has been a mess

a situation that has not improved, sadly, with the supplanting of Cheney/Bush in the White House by Team Obama.

And while Europe has been in the doldrums for a while, it has been in full-blown “Euro-zone crisis” mode ever since the beginning of February of this year,

when it became clear the Greek government was on the verge of bankruptcy,

and would either have to be bailed out by one or several of its Euro-zone “partners”, or the whole Euro experiment could collapse

a dilemma that has yet to be resolved by now, early June.

Japan, of course, has been in a slow- or no-growth situation since the collapse of its real estate market in 1989, and the decision of its government to let its banks “hide” their losses –

a disastrous move that has not only created TWO “Lost Decades” for the Japanese economy through the creation of so-called “zombie banks” that are technically dead,

albeit still walking around and consuming valuable resources that could be used much more productively by other elements of the economy,

but also creating a terrible model that has been followed by BOTH the US and now Europe when THEIR banks got into trouble.

In this context, we have consistently argued that the real key to any hope of positive movement in the world economy lies in Asia, notably India and especially China.

But despite its respectable growth rates, India continues to be plagued by rampant corruption and a radically unequal distribution of wealth,

as well as a debt problem that rivals Greece, the UK, or any of the other “sovereign debt” crisis nations,

even though the vast majority is owed to either its own citizens or corporations,

which makes it somewhat different that

the global problems raised by the Greek / UK / Iceland etc situations.

 

All of which has left China.

But even with China’s continued outstanding growth, its future has been far from clear, with three broad scenarios dominating discussion about it:

continuation of its prosperity without any major problems;

a so-called “soft landing,” in which there is a perceptible slowdown, but without any sort of serious or long-lasting trauma, as in the case of Japan, or, it now seems, the US and Europe;

and, finally, the often self-proclaimed “bust” proponents, who argue

China has radically overheated its economy and is going to collapse in a radical way

 

that will make it impossible for both for it and much of the rest of the world to move forward again for many years.

Yet it now appears there is a fourth possibility, one to which few have given much thought,

but which has emerged in recent weeks with perceptible problems for significant Chinese factories in general, and foreign-owned ones in particular.

And ironically enough, given that China is, at least formally, still a “Communist” country,

THIS scenario might well be called “worker power”,

in which a major change in both the Chinese and world economies arises as a result of the –

admittedly unexpected, but nevertheless seemingly robust – anger and frustration of the "new" Chinese working class,

whose parents' hard work and strenuous effort have, in combination with low wages, made possible both the Chinese and global “economic miracles,”

but which now appear to have reached a height of anger, frustration and a point of no return –

with results for both China and the world that may be quite a bit different than anyone has been expecting.

The first sign that China’s workers were getting restive was a suicide that occurred at the end of January.

The body of a 19-year-old worker named Ma Xiangqian was found in front of his high-rise dormitory at 4:30 a.m.

Police investigators concluded that he had leapt from a high floor, and they ruled it a suicide.

His family, including his 22-year-old sister who worked at the same company, Foxconn Technology, said he hated the job he had held only since November —

an 11-hour overnight shift, seven nights a week, forging plastic and metal into electronics parts amid fumes and dust.

Or at least that was Mr. Ma’s job until, after a run-in with his supervisor, he was demoted in December to cleaning toilets.

Mr. Ma’s pay stub shows that he worked 286 hours in the month before he died, including 112 hours of overtime, about three times the legal limit.

For all of that, even with extra pay for overtime, he earned the equivalent of $1 an hour, according to this article in the New York Times.

Since Mr. Ma’s death, there have been 12 other suicides or suicide attempts — eight men and four women — on two Foxconn campuses in Shenzhen, where employees live and work.

The factories here, with about 400,000 employees, make products for global companies like Apple, Dell and Hewlett-Packard.

Most of the other suicide cases fit a similar profile: ages 18 to 24, relatively new to the factory, and falling from a campus building.

The rash of suicides has intensified scrutiny of the working and living conditions at Foxconn, the world’s biggest contract electronics supplier.

Responding to the clamor, Foxconn has raised salaries steeply twice in the last several days.

 

The company announced the latest increase on Sunday, saying that after a three-month trial period,

 

the basic salaries of many of its workers in China could reach nearly $300 a month,

 

more than double what they were a few weeks ago.

Sociologists and other academics see the deaths as extreme signals of a more pervasive trend:

a generation of workers rejecting the regimented hardships their predecessors endured as the cheap labor army behind China’s economic miracle.

Rather than take their own lives, many more workers at Foxconn — tens of thousands more — have simply quit.

In recent interviews here, employees said the typical Foxconn hire lasted just a few months at the factory before leaving, demoralized.

They complain about military-style drills, verbal abuse by superiors and “self-criticisms” they are forced to read aloud,

as well as occasionally being pressured to work as many 13 consecutive days to complete a big customer order — even when it means sleeping on the factory floor.

Although the legal limit in China is 36 hours of overtime a month, several workers interviewed here said they regularly exceeded that by wide margins.

“They leave so soon because they can’t adjust to factory life,” said Wang Xueliu, a production team leader who has worked at Foxconn for six years.

He, too, plans to leave soon, to join a new business with his brother making candles for export.

Many other manufacturers in China also struggle with high turnover.

 

Throughout southern China, the country’s industrial heartland, there is an acute labor shortage, 

 

as the legions of rural migrants who formerly journeyed thousands of miles from the interior provinces are now choosing other options.

 

Many seek positions in the service sector, or jobs closer to home.

“There’s no doubt about it: they don’t want to work on the assembly line,”

Jing Jun, a sociologist at Tsinghua University in Beijing, says of the young migrant workers moving into southern China.

“They have a different expectation. And once people’s attitudes about being in a factory change, other things will change.”

Sociologists say China’s new generation of migrant workers — many of them born in the 1990s — are better educated and more conscious of their rights.

And their ambivalence about factory life coincides with a demographic shift that has resulted in a decline in the number of young people entering the work force. 

While it’s usually not mentioned, we here at Economy Watch think this can only be seen as the beginning of a wave of changes affecting China’s labor force as a result of the “one child” policy.

 

Economists say the changes are already eroding some of China’s competitive advantages in the global economy

by raising wages, the cost of production and, soon, the prices of a wide range of consumer goods that China exports.

“The factory model has run into some serious limitations,” says Huang Yasheng,

a professor of management at M.I.T. and the author of “Capitalism With Chinese Characteristics.”

“Now, they have to find a new model and move to a more innovative economy,” Professor Huang said.

“The problem, though, is that those kinds of companies don’t create a lot of opportunities for young, migrant workers.”

Foxconn, founded by the Taiwanese industrialist Terry Gou, is a $60 billion manufacturer with a reputation for military-style efficiency that includes mapping out assembly line workers’ movements in great detail and monitoring tasks with a stopwatch.

The company is also known for the scale of its operations.

Foxconn has defended its operation, saying it treats workers with respect. But it also says that it intends to address management weakness and the ills of some of its workers, by adding counselors, hot lines and consulting monks.

Apple, Dell and Hewlett-Packard have already said they are looking into conditions at Foxconn —

although Apple’s chief executive, Steven P. Jobs, said recently that he was troubled by the suicides but that Foxconn was “not a sweatshop.”

But Foxconn is not the only foreign operation that is having major problems with its workforce in China –

so too is legendary Japanese automaker Honda, for whom the stakes, if possible, are even higher than for the Taiwanese Foxconn, according to this article in the New York Times.

The strike that crippled production at Honda Motor’s four factories in China has come as a wake-up call to Japan’s flagship exporters,

as they seek to remain competitive and push into China’s burgeoning market with the help of low-wage workers.

In Tokyo, the strike has driven home a salient point:

as Chinese incomes and expectations rise in line with the country’s rapid growth, while Japan’s own economy falters,

the two countries face a realignment that could permanently alter the way their economies interact.

To complicate the picture, Japanese companies see the Chinese as crucial consumers of their goods to make up for a shrinking and aging market at home.

Some of the most profitable Japanese companies, like Fast Retailing, which runs the budget clothing line Uniqlo, have relied on production in China since the 1990s to keep prices low.  

“Japan is starting to realize that the age of cheap wages in China is coming to an end, and companies that looked to China only for lower costs need to change course,”

 

said Tomoo Marukawa, a specialist on the Chinese economy at Tokyo University.

Despite the consequences for production costs, a rise in wages and standards of living in China would be welcomed by many Japanese exporters.

 

The same companies that produce in China have also moved to sell their wares there,

moving factories to the mainland to reduce costs further and meet the needs of local customers.

In Uniqlo’s case, as incomes in China rose, it followed up with local stores in 2002;

the company has opened 64 outlets in China and aims to open 1,000 stores there in the next decade.

As a clothing chain, this kind of move by Uniqlo is understandable and feasible. 

And yet, for Honda, prices of its cars in China may have to drop considerably before the company can truly tap into the market.

 

The strike by 1,900 workers at Honda’s Foshan factory came as a particularly big shock to Honda,

which had announced just days before that it would increase production in China to meet demand.

Honda’s chief executive, Takanobu Ito, had said the automaker would begin major expansions at two joint ventures in China,

Guangqi Honda and Dongfeng Honda, increasing capacity by 30 percent to 830,000 cars and minivans by 2012.

In April alone, Honda made 58,814 cars in China, a 28.7 percent increase from the same month the previous year and a monthly record.

Five of six Japanese car manufacturers with factories in China broke production records in April.

“The wave of motorization in China will not abate for the foreseeable future,” Mr. Ito said last week.

He said that Guangqi Honda would introduce a compact car intended especially for the Chinese market that would be produced there in 2011. 

The rise in output in China has been driven by a strong economic recovery in that country,

 

which is buoying auto sales more than in any other major market.

 

The rebound has been good news for Japanese automakers,

hard-pressed to cut costs as they seek to return to profit after a collapse in car sales because of the global economic crisis.

Auto sales in Japan have remained sluggish, and sales in the United States and Europe have not rebounded to precrisis levels,

conditions which we at Economy Watch think are only going to continue for the indefinite future,

making the Chinese market – if it can be sustained – all the more important to Japanese and other advanced manufacturers.

Honda’s least expensive model sold in China, the Fit compact car with a 1.3-liter engine, is priced at about 83,000 renminbi, or about $12,500.

A Chery QQ 1.3-liter minicar from the Chinese carmaker Chery Auto sells for about half the price of the Fit.

Given that the average monthly income in China is 2,050 renminbi, about $300,

the price of a Chery QQ is around 19 months’ salary, while the Honda Fit requires more than 40 months.

The Honda Accord 2.4-liter sedan, meanwhile, sells in China for about $35,000, far beyond the reach of most workers. 

For Honda, the promise of access to a huge, growing market in China was as much a factor as cheaper labor in luring it to open factories there.

 

A 25 percent import tariff on foreign cars is also a major incentive for foreign automakers to produce in China.

Besides complaining about their pay, Honda’s striking workers complain about a wage gap:

the company’s Japanese employees in China are paid about 50 times what local Chinese workers receive.

So where does this leave the labor scene in China today ???

A restive Chinese work force unwilling to accept the low wages and dehumanizing conditions their parents were quite happy to endure,

but whose pay level doesn’t yet make them potentially profitable consumers for high-, or even low- and middle-end,

 

products from more advanced economies for at least a generation.

So what are the global implications of this seemingly unexpected situation ???

“For a long time, China has been the anchor of global disinflation,” said Dong Tao, an economist at Credit Suisse,

referring to how the two-decade-long shift to manufacturing in China helped many global companies lower costs and prices.

“But this may be the beginning of the end of an era.”

Aside from the changes we have noted at Foxconn and Honda,

last Thursday, Beijing announced that it would raise the city’s minimum monthly wage by 20 percent, to 960 renminbi, or about $140.

Many other cities are expected to follow suit.

Analysts say the changes result from the growing clout of workers in China’s economy,

and are also a response to the soaring food and housing prices that have eroded the spending power of workers from rural provinces.

These workers, without factoring in the recent wage increases by some employers, typically earn $200 a month, working six or seven days a week.

But there are other reasons, according to this crucial article in the New York Times.

Analysts say Beijing is supporting wage increases as a way to stimulate domestic consumption and make the country less dependent on low-priced exports.

The government hopes the move will force some export-oriented companies to invest in more innovative or higher-value goods.

But Chinese policy makers also favor higher wages because they could help ease a widening income gap between the rich and the poor,

 

which, as we have pointed out MANY times in Economy Watch is the key to getting the world economy as a whole off the dead-center it currently occupies.

 

Big manufacturers are moving to raise salaries because

 

they are desperate to attract new workers at a time when many coastal factory cities are struggling with labor shortages.  

A Foxconn executive said last week that the turnover rate at its two Shenzhen campuses — which employ over 400,000 people —

 

was about 5 percent a month, meaning that as many as 20,000 workers were leaving every month and needed to be replaced.

Marshall W. Meyer, a China specialist at the Wharton School at the University of Pennsylvania, says that

demographic changes in China are reducing the supply of young workers entering the labor force and that this is behind some of the wage pressure.

“Demography will do what the Strategic and Economic Dialogue hasn’t: raise the cost of Chinese goods,” he said, referring to United States-China talks on Chinese currency reform and other economic issues. “There is no way out.”

Pietra Rivoli, a professor of international business at Georgetown University and the author of “The Travels of a T-Shirt in the Global Economy,”

says the effects of rising labor costs will vary by industry,

perhaps with lower-valued goods like garments being forced to move to western China or even to Vietnam and Bangladesh.

But she says high-end electronics like smartphones are likely to remain,

because they command high profit margins and because China has built a sophisticated infrastructure and quality-control system.

“Labor is such a small piece of the pie for them,” Professor Rivoli says of the electronics brands.

“The money’s all in the design, the marketing and the complicated distribution system, including retail outlets.

“Like with Apple, they have those rents in the shopping malls, fancy stores and all those hip people working there. That costs a lot.”

Still, salary increases are expected to affect many stages of the supply chain and force some companies to raise prices.

For many exporters who simply produce on contract for global brands, profit margins are already razor-thin, and raising prices could hurt business.

“They’re going to have to find a way to pass this on to the end user,” says Mr. Tao at Credit Suisse.

Economists say a necessary restructuring is under way,

 

one that should allow the nation’s huge “floating population” of migrant workers to better share in the benefits of growth and stimulate domestic consumption.

Rising labor costs here are not the end of cheap production in China, analysts say,

 

but they are likely to help change the country’s manufacturing mix.

 

“China isn’t going to lose its manufacturing base because it’s got a huge domestic market,”

said Mary Gallagher, director of the Center for Chinese Studies at the University of Michigan.

“But it will move them toward higher-end goods.

And that matches the Chinese government’s ambition.

They don’t just want to be the workshop of the world.

 

They want to produce high-tech goods,”

 

which is ALSO a trend we at EconomyWatch have pointed to again and again and again.

Talk about a Brave New World.

 

David Caploe PhD

Chief Political Economist / Editor-in-Chief

EconomyWatch.com

President / acalaha.com