Minimum wage in 18 provinces of China has gone up with effect from the 1st July. The wage hike amounts to an average of 20%. Several other provinces and municipalities are expected to follow suit in the coming months.
Minimum wage increase should at least partially address the problem rising discontent among low wage workers who have resorted to industrial action demanding higher wages.
What should companies do? An emerging trend indicates that companies are tempted to move their manufacturing further deep in the mainland where wages are still low and local governments are eager to roll out a red carpet to attract investment. Some are even planing to move out of the country.
But moving inland also means all the hard work done by multinational companies to improve working conditions in their supplier factories will be undone. They will have to start all over again at the new location. Interior mainland locations are also less accessible and away from the media and NGO glare.
Local governments will be willing to turn a blind eye in order to get investors come and set up operations and add to local economy. This is what happened 20 years ago when the coastal provinces competed with each other to win favours with foreign investors.
Responsible companies therefore need to prepare a blue print clearly identifying the new social and environmental risks that the migration of factories will create.
Migration, by the way, is not a bad thing. Provinces which have not benefited from China's boom can now look forward to new factories which will generate employment and improve the local economy. This is also necessary to reduce the widening income gap in China. But a more responsible handling of such migration by companies will be required to avoid a repeat of exploitation.
The best practice for companies however would be to focus on improving productivity rather than switching to a low wage town. This is an opportunity for companies to invest in human resources to upgrade their skills. Higher productivity will make it possible to pay higher wages.
Companies should also note that China is no more about cheap labour alone. China is now also about a huge market and a well developed supply chain infrastructure which no other city on earth can offer. Not at this time.
Apple iPhone supplier Foxconn is relocating the main plant to a cheaper province in Northern China rather than trying to improve working conditions in the existing plant in Shenzen in South China.
Foxconn has been hit by a spate of suicides by workers allegedly frustrated by harsh working conditions in the factory. After 13 incidents of suicide this year, the company announced 66% raise in wages. However, reports now say that the company has told workers that only those who shift to the new plant in Tianjin will receive the raise.
Media reports today suggested Foxconn is planning to relocate the main plant from the more expensive Shenzen to Tianjin where labour cost is relatively lower.
Minimum wage in Tianjin is 920 yuan ($132) while the minimum wage in Shenzen, where Foxconn plant is currently located, is 2000 yuan ($295).
Foxconn will shift 300,000 out of the total 420,000 workers in the Shenzen plant to the Tianjin plant.
Foxconn shares are down 44% so far this year. The company has warned that its first-half losses may swell due to weaker pricing.
The labour strike in China has spread from Honda to Toyota halting their production, the two biggest Japanese carmakers.
Toyota was affected by strike at one of its suppliers located in Tianjin, near Beijing. The strike has forced Toyota to shut the night shift in its main plant which manufactures the Camry and Yaris.
A series of strikes have been reported at other suppliers for Toyota and Honda.
A key feature of the labour strikes in China in recent weeks is that they are not targeted at western multinational companies' local plants who have relatively better labour practices.
Strikes so far have affected mostly Taiwanese and Japanese companies, both laggards in corporate responsibility. They usually have top down authoritative management styles.
Western automakers however face a different kind of risk. While they may have good industrial relations in their own plants due to better labour policies, their business may suffer due to potential labour unrest at their Chinese business partners. An example is a labour dispute that has broken out at Yanbao, one of the largest BMW dealers in China. Yanbao employees want a pay rise complaining current wages are low.
This means multinational companies now much chose their business partners very carefully and pursuade them to adopt responsible labour practices.
While workers are forcing companies to increase wages, the new Yuan policy is likely to make their exports more expensive. A double whammy.
In China, labour discontent over low wages and working conditions is under the spotlight. Angry workers have gone on strike in a number of factories owned by Taiwanese and Japanese companies.
There are worries that the labour unrest can potentially snowball into a major social crisis for the government as well as the industry. The issue has become so hot that China's premier Wen Jiabao has urged better treatment of particularly migrant workers.
Here are some of the stories doing the rounds in the local and international media:
Honda, which was hit by labour strikes in its China plants, says the company was surprised by the strike and that it needs to improve communication with employees. Honda's rival Japanese car maker Toyota says that it regularly talks to workers for better understanding of each other.
This story says that Taiwanese companies which have been at the core of Chinese industrial development over the last 30 years, are not heading home as labour unrest in China heralds an era of rising labour costs.
A New York Times story says that the current labour movement is China is independent of government-controlled unions, a trend with hugely political dimensions in a country where organising labour outside the government-controlled union is prohibited.
Honda workers are even demanding the right to form their own union, an unprecedented situation in China's labour market.
And this report predicts that the days of cheap labour in China are numbered now.
And this report suggests that rising labour costs will ultimately force factories to move closer to labour sources, and working conditions will become more humane. The report quotes a local expert as saying: "The biggest losers will be coastal governments that side with the factories to protect their revenues, if they refuse to change."
And this newspaper report in India hopes that China's loss will be India's gain.
Wall Street Journal reports that rising labor costs in China are forcing U.S. apparel and accessories retailers, such as AnnTaylor Stores Corp. and Coach Inc., to consider relocating at least some of their production to countries with cheaper work forces.