High costs force Chinese firms to move to cheaper options

As many as 15 percent of Taiwan-owned factories have moved out of Dongguan, a major production base for footwear and furniture, in recent months, said Zhang Xifan, vice president of the Taiwan Merchant Association in Dongguan, a region of Guangdong province.

“The business environment has been very bad in the [Pearl River Delta] because of the rising prices of raw materials and tense competition, and the labor law has made it worse,” he said.

The manufacturers sticking it out in Guangdong are raising workers’ salaries to comply with local regulations and to tackle a labor shortage that has hampered production for the last two years.

“Labor costs are getting high and this is related to the new labor contract law. We have increased wages by 20 percent since the end of last year up from 1,200 to 1,500 yuan [$170 to $210] a month,” said Taiwanese businessman Robert Luo, who owns a shoe material manufacturing company in Dongguan.

Minggao Shen, a Citigroup economist based in Beijing, believes the trend of labor-intensive factories closing in Guangdong is necessary for China’s economic maturation.

“China can not keep all its firms, particularly those high-polluting ones. These factory closures are expected. Otherwise how can China improve the quality of its growth?” the economist asked.

“Even with the increases, China’s labor costs are still only 5 percent of those of the U.S. South Korea’s labor cost compared with that of the U.S. was at 5 percent in 1975, but 30 years later it was 50 percent. The question is how long will China take to reach the 50 percent mark? Because of the country’s size, I think it could take 60 years.”