HONG KONG — New minimum-wage laws, a looser yuan exchange rate and worker strikes like those affecting Honda and Toyota are raising costs at plants in China’s Pearl River Delta. They’re also boosting plans to increase automation of assembly lines.
Foxconn Technology Group, Nissan’s Chinese venture and VTech Holdings say they’re investing in factory equipment to reduce their reliance on labor. Wages in the region called the world’s factory floor increased 17 percent in the past six months, according to a survey by the government-backed Hong Kong Trade Development Council.
Factory owners in China face declining profit margins from a rising yuan as the government drops a twoyear policy that curbed thecurrency’s gain. Labor costs will probably bloat to 30 percent of gross domestic product in the next decade from 15 percent now, Morgan Stanley estimated this month. Higher wages in urban areas may cost companies about $1.5 trillion by 2015, according to Credit Suisse Group.
“Factories need to think seriously about how they produce more with less,” said Ian Spaulding, Hong Kongbased managing director at INFACT Global Partners, which advises plant owners on China work practices. “Factories need to begin to enhance their productivity so that they are in a position to remain competitive.”
Sales per employee at companies on the Shanghai Composite Index are about one-third of those on the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. The comparison highlights continuing increases in U.S. productivity rates, and China’s new automation efforts bring to mind what’s happened in the United States in recent decades.
VTech Holdings, a Hong Kong-based maker of cordless phones for AT&T, last month raised wages by about 20 percent in China, where it employs almost 20,000 people, Chief Financial Officer Shereen Tong said. The increase, which came after the local government raised the minimum wage, may reduce net income by 5 percent, a Credit Suisse report said this month.
The company expects its headcount to increase this year as sales rise, though it will use more machinery on its assembly line to curb the growth of its work force, she said.
“We are trying to increase automation and ensure our processes will rely on fewer workers,” Tong said. “Forproducts that need to be manufactured in high volumes, automation will help improve efficiency.”
VTech plans to install more surface-mount technology machines, costing more than $128,500 each, that connect electronic components to circuit boards, Tong said. It also will ask engineers to design machines for bolting and putting on screws, she said.
Nissan, Japan’s third-largest carmaker, said it wants to boost productivity as costs increase. Its venture with Dongfeng Motor Group makes the Teana sedan and Tiida hatchback in China and sold 756,000 vehicles last year.
The venture is building a $732 million plant in Guangzhou that will be more automated, Nissan spokesman Mitsuru Yonekawa said. The factory is to open in 2012.
“The automation rate in China is on the rise, as it’s still lower than at our domestic factories,” Yonekawa said, referring to Japan.
The venture also owns Zhengzhou Nissan Automobile, which makes sport utility vehicles. “We need to boost productivity in China,” Chief Operating Officer Toshiyuki Shiga said. “Just because labor costs are higher in China, we won’t be leaving.”
Foxconn, the world’s biggest contract manufacturer of electronics, including for such U.S. companies as Apple Inc., said this month that it will double base salaries in China after at least 10 employees committed suicide this year.
More automation and improved labor efficiency will help offset those higher costs, with the company needing two to three months to assess the cost of the wage increases, Chairman Terry Gou said June 8. Its handset unit, Foxconn International Holdings, will pass the higher costs on to clients “as much as possible,” Chief Executive Officer Samuel Chin said this month.
More than 20 Chinese provinces and cities, including the manufacturing hub Shenzhen, raised minimum wages this year to help companies recruit workers and to boost domestic consumption, the city government said this month.
Toyota, the world’s biggest automaker, said Tuesday that it halted production at its carplant in Guangzhou, China, after one of its suppliers was hit by a strike. The company has suffered at least three strikes in China this month after workers at Honda factories won wage increases.
“The wage increases are leading many manufacturers to turn to their clients to negotiate price increases,” said Edward Leung, chief economist at the Hong Kong council. “China’s cost advantages are being eroded.”
Workers say the pay increases are necessary to help keep pace with the rising cost of living in the world’s most populous nation. Inflation accelerated to an annual pace of 3.1 percent in May, the biggest increase in 19 months. Property prices in May jumped 12.4 percent across 70 cities from a year earlier, the government said June 10.
“We carry a very heavy financial burden,” said Yang Li, 40, who works at the Honda Lock (Guangdong) plant in Zhongshan, where employees went on strike June 9 and returned June 15 pending the outcome of pay negotiations.
Honda agreed last month to raise pay 24 percent for workers at a parts plant in Foshan after a strike shut down all four of its China car factories. Another Foshan parts supplier was shut June 7-10 by a walkout.
“There’s a lot of unfairness going on,” Yang said. “We hope that this will have an impact on other workers across China.” Information for this article was provided by Stephanie Wong, Naoko Fujimura, Mariko Yasu, Maki Shiraki, Tim Culpan, Wendy Leung and Liza Lin of Bloomberg News.
Business, Pages 73 on 06/27/2010