Compete with Chinese labor? Yes you can

Senior Technical Editor Dan Hebert, PE, says the threat from cheap Chinese labor is exaggerated by the popular press because, like sex and money, fear and paranoia sell.

By Dan Hebert, PE, Senior Technical Editor

THE MAINLAND Chinese worker will work for a bowl of rice, so it is impossible for you to compete, right? Eventually all of us will lose our jobs to onrushing hordes drawn from an inexhaustible supply of cheap Chinese labor, right?

Wrong on both counts. The threat from cheap Chinese labor is exaggerated by the popular press because, like sex and money, fear and paranoia sell. After all, what causes more anxiety than the possibility of losing your job?

Chinese and U.S. labor costs are converging, and increased automation reduces the labor content in each manufactured product. Add in the cheaper cost of land, utilities and basic business services in the U.S. relative to China and many other countries, and you can see why our manufacturing economy remains a world-class competitor.

"If tasks are across departments, or if it means working in a team or trying to relate to others, Chinese staff still have a long way to go."

High manufacturing sector productivity is one of the main reasons why the U.S. can maintain such a low rate of unemployment despite headlines that constantly scream about the dangers of globalization and outsourcing.

According to a recent issue of the international newsmagazine The Economist, firms in southern China now complain that they cannot recruit enough skilled labor. As the economy grows and moves into higher value-added work, the challenge of attracting and retaining staff is rising as demand outstrips supply. The result is escalating costs for firms operating in China. “If you think that China is a cheap place for labor, think again,” says Vincent Gauthier of Hewitt Associates, a human-resources consultancy.

Pay and benefits are soaring. A Chinese middle manager at a foreign company in Beijing or Shanghai now can command total annual cash compensation (salary plus bonus) of $27,000-$32,000, says Hewitt. Senior managers receive between $46,000 and $54,000 and top executives can expect $80,000 to $90,000 or more. These labor costs were calculated before the inevitable upward move in value of the Chinese Yuan, which will further raise the relative cost of Chinese labor.

Bonuses, longer-term incentives, free housing and meals, and a mobile phone are becoming standard perks. More than one-third of 1,600 multinational firms surveyed by Hewitt now offer a company car. More holidays, maternity/paternity leave, more-frequent job rotation, and share options now are compensation components. Add in the big contributions that employers must make to China's national security fund system, and the total cost of an employee can be double basic pay.

Lai Kam-tong at the Hong Kong Institute of Human Resource Management says accountant salaries are rising 14% a year. Jürgen Viethen, general manager for F&G China Electric, a small Spanish-owned electrical switchgear-maker is, according to the Economist report, offering key employees raises of up to 50%—and still losing them.

Foreign firms now invest $1 billion weekly in China. As they expand, they increasingly need workers able to handle the complexities of multi-site operations. Staff shortages threaten these plans. In a recent speech, Arics Poon, managing director of Oracle  for South China and Hong Kong, said, “we need a group of strong, professional managers or we may fail to support our growth in China.”

Business plans for China rarely reflect the cost and time involved in recruiting and retaining local staff. Firms are finding that they cannot replace expensive expatriate staff with cheaper local hires (localization) as quickly as they hoped. Many underestimated the cost of local staff. Chinese graduates often have an inflated view of their own worth, complain some foreign managers. Multinationals also are competing for talent with China's domestic companies, which need to improve the quality of their people as their markets open to foreign rivals.

Recruitment, retention and localization of staff now is top of the agenda for firms in China. Paolo Gasparrini, head of China for L'Oréal, says, “to find good people in China is not easy. If the tasks are across departments, or if it means working in a team or trying to relate to others, Chinese staff still have a long way to go.”

None of this has slowed China's economic growth yet. Producing in mainland China remains cost-effective for many foreign firms. But the growing shortage of talent might make the growth assumptions in many business plans over-optimistic.

It’s a real struggle to compete with Chinese markets and, before we know it, new competitive problems will surface from the next under-developed-but-emerging third-world economy out there. But maybe things aren’t quite as dire as they seem in how we cope with it.

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