CHINA LABOR SHORTAGE

The good news is that factories in China are increasing production after a siege of contraction, with exports in February up nearly 50% year-over-year. The bad news is that there aren’t enough workers to satisfy demand (e.g. limited LCD supply has become the biggest bottleneck for computers, monitors and TVs).

Estimates of the current shortfall in assembly labor fix the figure around 20%, late last year the government said Guangdong Province factories were short 500,000 workers, Fujian Province short 300,000. The problem may prove a permanent structural situation rather than a cyclical aberration, as suggested by discussions recently at the National People’s Congress addressing the labor shortage.

Various explanations for this situation range from the improved status of China’s rural population (as a result of government policy) making them less driven to leave home for the cities, increased career options for young Chinese (annual university graduates have increased from one million to six million over the past decade), higher-paying jobs for women (notably as waitresses and domestics), and adverse working conditions in factories (the manufacturer of Apple’s iPhone, for one, has come under heavy criticism).

Some think the government’s ‘one child per family’ birth control law has reduced the total population pool from which factory labor draws.

In addition, availability of productive capacity in China is likely to be increasingly constrained by the government’s increased attention to environmental considerations, which make it much harder to expand or build ‘high-polluting, water-intensive, low intellectual capital transfer’ facilities.

With the cost of business undoubtedly going up, “China can no longer be seen as the manufacturing hub of the world for cheap products,” notes consultant Shaun Rein, Managing Director of the China Market Research Group.

The impact of the immediate labor shortage and longer-term implications are likely to increase risk to companies dependent on Chinese labor:

· Low-end low-cost sourcing is likely to be situated elsewhere than China, notably Vietnam and, in the future, Africa (where the trade-off between pollution and employment is easier to make).

· Chinese factory capacity will increasingly become automated and move up the value chain to produce higher-value goods (rather than hand-assembled goods).

· Labor costs will increase, in part to attract labor and also through government policy designed to soften the toll of inflation on workers (in Jiangu, the third-largest exporting region, and Shanghai minimum wage has already been raised this year, on May 1 it will go up in Guangdong by 21.1%).

· Inventory control becomes more challenging.

The consequence of China’s current labor shortage has already registered downstream. “The biggest effect,” says Cisco’s Lance Solomon, Manger of Supply Chain Risk Management, “is that it impacts your ability to capture market transitions.” This has been apparent in the tech sector, where an unexpected increase in demand the past several months is putting considerable strain on under-staffed suppliers. “It’s gone beyond the normal delay in ramping up production,” observes Solomon, noting that the problems are compounded by the annual lunar New Year holidays.

While bigger companies appear able to find new sources of labor, smaller enterprises are being particularly hard hit. “Two years ago,” notes Solomon, “few were worrying about labor shortages other than normal planning for the annual lunar New Year holiday.”