China Now Has Third Highest Labor Costs in Emerging Asia

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Op-Ed Commentary: Chris Devonshire-Ellis

Jan. 19 – An average worker in China costs more than the average worker in any other emerging Asian economy, save Malaysia and Thailand, when considered in terms of combined salary and welfare payments, China Briefing has found.

Conducting a review of minimum labor costs, determined by the legal minimum amount stipulated in 15 different countries, and added together with the pertinent mandatory welfare payments due, it is apparent that since the introduction of the revised labor law in 2008, China’s workers are now amongst some of the best paid in Asia.

The survey, conducted in-house, took samples of minimum wage levels from each of China’s provinces and 40 cities, and based its figures on the mean average. China’s minimum wage varies both on a provincial and an urban basis. This was then compared with similar data from other Asian countries. The results look like this:

However, it is expected that China’s next five year plan will see mechanisms put in place to double the country’s minimum wage by 2015. That will raise the Chinese figure to $3,000 plus welfare of 50 percent, assuming the latter payments remain the same. This provides a total minimum salary overhead of $4,500. In reality, most salaries will be far higher. That will make China’s average labor cost second only to Malaysia and significantly more expensive than any other Asian country.

This represents mixed fortunes for foreign investors in China. It signals that an exodus of export driven manufacturing may occur, principally to competing, lower-cost Asian nations for China’s residual export driven manufacturing.

According to figures released by China customs, the country’s export manufacturing trade reached US$1.58 trillion in 2010. It is to be expected that a significant percentage of this will relocate elsewhere purely to maintain economic viability for export manufacturers. While that is a huge amount China stands to lose, if it can genuinely develop a sustainable domestic consumer market, then the impact of losing this amount may be lessened by the impact of a greater collection of domestic taxes, both in VAT and profits taxes. However, that is a balancing act the government needs to get right if they are not to be left with a huge fiscal income gap.

The good news is that such salary increases should manifest themselves into a massive rise in Chinese consumerism as significant wealth and disposable income is created. This follows on from plans revealed last year by several large scale manufacturers such as Bayer and Adidas, both of whom signaled their intentions to increase sales in China’s domestic markets by establishing additional manufacturing units in several inland cities. Growth for them, it appears, would be coming from new wealth being created inland and elsewhere within China’s own emerging markets.

The scale of movement of the China demographics as concerns its working population is undervalued. Businesses involved in China must now start to take these figures into consideration for their businesses, or face either losing a burgeoning domestic market, or failing to adapt to lower pricing from competitors who have relocated elsewhere in Asia. Low prices for cheap commodities such as computers, toys, and other mass produced items will remain the driver for markets in the United States and European Union, meaning export driven  manufacturers must begin to look at emerging Asia to ascertain which country is suitable for housing facilities for such demand.

Chris Devonshire-Ellis is the principal of Dezan Shira & Associates, a foreign direct investment practice covering Asia. For assistance with country cost comparisons or details on the legal and tax environment, please contact the firm at info@dezshira.com or download the firm’s brochure here.

Correction: February 18, 2011
In an earlier version of this article, the “Wage Overheads in Emerging Asia” chart incorrectly defined the figures as being in U.S. dollars. The figures are in international dollars.

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19 Responses

  • Wow, a doubling of China’s minimum wage in 4 years – that would be pretty extraordinary. Can you share who are the people expecting it to happen?

  • Chris Devonshire-Ellis says:

    @Michael – have a look at this and also the accompanying links showing a national trend as described. Its a policy decision: http://www.china-briefing.com/news/2011/01/21/guangdong-to-lift-minimum-wage-standards-once-again.html
    Thanks – Chris

  • Terry says:

    I have been involving with workers’ wage in China for 10 years but I can’t figure out the stated 50% avg. mandatory welfare. With all the mandatory and voluntary benefit added, a worker in Shanghai would get up to over 50% of her salary. But the mandatory portion is 27% on top of a worker’s salary only. Most factories in the coastal regions would not pay all the benefits required. I really want to learn the breakdown of this 50%?

  • Chris Devonshire-Ellis says:

    @Terry, it varies from city to city, we took the average. Bear in mind such payments include pension, medical insurance, unemployment, maternity, occupational injury and the housing fund. Shanghai as a total is 44% of salary, not 27%. We published a complete breakdown of mandatory welfare payments amongst 20 Chinese cities in this issue of China Briefing available here: http://www.asiabriefingmedia.com/store/index.php?main_page=product_info&cPath=97_94_99&products_id=409
    Thanks – Chris

  • Siri Polgolle says:

    I was visiting couple of Chinese textile and lace manufacture plants in south china.
    It was comment average labour cost is usd 350 – usd 400 per month.
    Can it be right figures???
    It is almost double above wage analysis.

  • Chris Devonshire-Ellis says:

    @Siri, South China is huge and of course there are differences. The further you get out, the lower the wages, but to counterbalance that the higher the logistics cost. The figures we produced were a Provincial average for Guangdong – we have three offices in that Province alone and know the costs well. You also need to remember that welfare needs to be added on top of salary costs to get the true picture – in Guangdong its close to an additional 50% of the salary. Plus Guangdong Province has awarded two mandatory increases of minimum salary levels payable within its borders twice over the past 12 months, both at 20%.
    I’m sure you can find pockets of smaller towns in Guangdong with lower costs. But that may not be sustainable and there is always a downside when looking at remote areas. However good luck with your search for lower overheads. Best wishes – Chris

  • Chris Devonshire-Ellis says:

    Total salary costs are set to rise by another 2% across the board if China implements the new “Trade Union Tax” on all companies in China. See: http://www.china-briefing.com/news/2011/05/04/beijing-government-issues-circular-on-collection-of-union-fees.html

  • EddyHolland says:

    Michael Walker, actually salaries already have doubled the past 6 years! At least in manufacturing they have, for high skilled operators, but office staff as well. I am in Suzhou, I set up the firm in 2004, left end of 2010.
    In 2005 if you wanted operators, accountants, loads of people would show up for an interview. Nowadays you get 6 potential operators at the door in stead of 50; and 2 accountants in stead of 15 5 or 6 years ago!

    An apartment in Suzhou SIP cost you 6500RMB/m2 in 2006; they go for 17-18000/m2 today!

    And don’t forget inflation: 6% yoy.
    Moreover: a pack of milk will cost you 9.5RMB for 1liter, in Germany and Holland we pay 5RMB max! So China is double the price of EU and yes, both countries are heavily subsidized! So who is fooling who and who is profiting big-time here?

    I purchase fabrication parts and sub-assemblies to export to the EU and I visit suppliers and manufacturers all over China. They all face the same problem that staff keeps asking for wage increase every week! No matter in Shenzhen, Wenzhou, Ningbo, Suzhou, Shandong.

    China cheap? No way!!!

  • EddyHolland says:

    @Siri:
    They are right. No less than 2500RMB/month for moderately skilled operators. More trained staff as CNC-operators demand 3000-3500RMB/month.
    Waiters in a restaurant can get 1600-1800RMB/month, this used to be 1000-1200, and 800 rmb for beginners! those days are gone.

    One thing: Small Chinese companies do not pay any social securities for their staff! It’s only ALL the foreign firms (and bigger Chinese firms) who get audited annually and have to register about anything you can think of!

  • Chris Devonshire-Ellis says:

    @EddyHolland – Companies must pay social insurance/welfare to all Chinese staff. That’s why its called “mandatory welfare”. Some may break the law, but Chinese workers are increasingly aware of their rights these days. – Chris

  • Chris Devonshire-Ellis says:

    The policy over social welfare is also being expanded to include foreign employees in China. As employers also have to contribute, it will raise operational costs still higher. See: http://www.china-briefing.com/news/2011/06/14/china-clarifies-foreigner-participation-in-social-insurance-scheme.html

  • Steven says:

    I am very surprized at the very low ‘mandatory welfare’ cost in all other countries, while you apply 50% for China. I lived and worked for almost 10 years in the Philippines, and from my experience the benefits and social security amounted to 35-40% of basic salary (the 9.4% seems very low). Is this really an apple-to-apple comparison ?

  • Chris Devonshire-Ellis says:

    It varies from region to region and from country to country Steven, and we published the legal minimum. In many cases good HR policy to retain staff will pay more. Thanks – Chris

  • bob shenzhen says:

    @EddyHolland
    A lot of small Chinese companies pay only very basic social securities for their staff!

    my shenzhen blog

  • Chris Devonshire-Ellis says:

    Companies need to abide by the law, and that means compliance with local government policies – these dictate social welfare amounts due, and they vary across China. We’ve written about these differences here: http://www.china-briefing.com/news/2011/10/07/social-insurance-law-implementation-differences-across-china.html
    Whether companies abide by the law or not is another matter, however I can assure you that workers in China are generally pretty astute when it comes to knowing their rights.
    Thanks – Chris

  • Rick McCoy says:

    Wal-Mart pays assistant buyers 4,000yuan per month english level 6
    legal staff / freshman expect 4,000yuan per month english level 6
    legal staff 2 years exp expect 6,500 per month english level 8
    legal staff 5 years / 10,000 plus
    engineer / electrical 5-9,000 per month no english – english level 4
    sales / untrained freshman 2,500 starting
    designers / 4,000 per month

    these do not include taxes
    shenzhen rates
    hope you guys will keep this up to date more frequently

  • Robert says:

    The conclusion: Move your company to Myanmar?

  • Girish says:

    @Robert

    No,
    move to India, with cheap labour cost, English speakers, skilled people and huge market in itself.

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