Op-Ed Commentary: Chris Devonshire-Ellis
Sept. 3 – One of the issues that crops up time and again in China is of course the labor law, which has had the effect of marginally increasing salaries, but more importantly, locking businesses in to retaining their workers. That’s a typical socialist political move – workers rights, and also suits the one-party State system – keeping people employed keeps them busy.
The general opinion is that as a result of the impact of labor law, it is expensive to terminate staff. However, is this really true? The answer to that question lies not so much as the current incurred cost, but in the comparison of that with the salary expectations in other markets. Then, a benchmark can be drawn and sensible comparisons made.
In attempting to demonstrate this on a basic level, we have compared the basic expenses (salary, welfare and factory rental) of a typical Chinese factory in Dongguan in southern China with similar factories in Chennai in southeast India and Ho Chi Minh City in southern Vietnam. These particular cities were chosen as they each attract similar investments in small-medium scale manufacturing, have relatively well developed infrastructure, and are all proven export focused locations for foreign investment.
Individual businesses differ so much however that it would be foolish for us to try and calculate the precise costs of relocating an entire factory, but we can look at the differences in wage structures between China, India and Vietnam and work out a financial scenario as concerns a plausible relocation from China to these other markets. I’ve assumed a medium sized factory of 300 workers.
Dongguan, 300 workers, monthly overheads
Average Wages: RMB3,549 per month x 300 = RMB1,064,700 (US$156,573)
Mandatory Welfare Costs: Between RMB887 and RMB1,448 multiplied by 300 workers = between RMB266,100 and RMB434,400 with a mean average of RMB350,286 (US$51,512)
Factory rental, 5,000 square meters: RMB50,000 (US$7,352)
Mean monthly overheads, Dongguan
Salary and welfare: US$208,085
Salary, welfare and rent: US$215,437
For Dongguan specifically, we are looking at the relocation costs, of which a large amount relates to employee termination. When it comes to this, the amounts vary considerably depending upon each worker’s specific length of time with the business, and this can become complicated in each case. To simplify matters for the purpose of this exercise, we’ll assume an average of four years employment with the company.
Employee termination costs
Dongguan takes the average monthly salary and multiplies by each year of service as severance (this calculation varies slightly from city to city)
RMB3,549 x 4 (years) x 300 (employees) = RMB4,258,800 (US$626,294)
Now we can compare this with the costs of a similar factory in Chennai
Chennai, 300 workers, monthly overheads
Average wages: Rs.3,600 per month x 300 = Rs.1,080,000 (US$23,400)
Mandatory welfare costs: Rs.864 (fixed 24 percent of wages) x 300 = Rs. 259,200 (US$5,640)
Factory rental, 5,000 square meters: Rs.250,000 (US$5,416)
Mean monthly overheads, Chennai
Salary and welfare: US$23,400
Salary, welfare and rent: US$28,816
In terms of the salary, welfare and rental comparisons, Dongguan is over seven times more expensive than a similar operation in Chennai. In the basic scenario we have demonstrated, the business would save over US$2 million per annum by moving to India purely on salary, welfare and rental costs. In fact, the savings is so huge that the Chinese employees’ termination costs would be covered in less than four months through savings generated by moving the operations to India.
There are also trends to consider. In Dongguan, the salary level has been increasing at a rate of about 15 percent per annum for the last three years. In Chennai, the rate has been increasing by about five percent, widening the gap still further between the cost of employing staff in China and in India.
We recognize of course that there are other costs associated with relocation, not least the shipment of machinery and so on to another location. Other factors, such as worker training and competence also need to be taken into consideration. However, infrastructure, certainly in India’s coastal cities, is no longer so much of an issue. Accordingly, on the basic level of the businesses highest expenses, salary and welfare, the exercise in relocation from China to India looks feasible.
We can also make a comparison with Ho Chi Minh City in Vietnam, again a similar city and with similar infrastructure.
Ho Chi Minh City, 300 workers, monthly overheads
Average wages: US$116 x 300 = US$34,800
Mandatory welfare costs: US$23 x 300 = US$6,900
Factory rental, 5,000 square meters: US$12,500
Mean monthly overheads, Ho Chi Minh City
Salary and welfare: US$41,700
Salary, welfare and rental: US$54,200
Ho Chi Minh City is more expensive than Chennai, but still represents a considerable saving over the Dongguan scenario. Like Chennai, the savings associated with relocating to Ho Chi Minh City would also cover the severance costs of the Chinese employees in less than four months.
The results demonstrate that, in essence, the termination costs of staff in China should not be a deal breaker when it comes to relocation. It’s not the cost of China labor or termination expenses that is the issue, although they have been bandied about as being excessive. The real issue is the cost of comparable staff elsewhere, and it is becoming increasingly obvious that China is starting to face serious regional competition. While China represents a great market to sell to, and the economy is moving towards encouraging spending, international manufacturers looking at margins and maintaining lower operational costs should now be incentivized towards comparing the costs of China with other regional locations. Relocation strategies also come into play, and one way to absorb the cost, phase out expenses and phase in production and worker knowledge is to establish operations elsewhere and gradually shift production from one to the other. Whichever country the global manufacturer chooses, one thing is now very apparent – the high costs associated with China labor termination can in fact easily be absorbed by the cost savings achieved elsewhere.
Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates, establishing the firm’s China practice in 1992. The firm now has 10 offices in China. For advice over China strategy, trade, investment, legal and tax matters please contact the firm at firstname.lastname@example.org. The firm’s brochure may be downloaded here. Chris also contributes to India Briefing , Vietnam Briefing , Asia Briefing and 2point6billion
Richard Hoffmann of Dezan Shira & Associates China, Hoang Thu Huyen of Dezan Shira & Associates Vietnam, and Aneet Virk of Dezan Shira & Associates India also contributed to this article.
The Communist China Price
The Asia Comparator
(Staff, office, factory and operational costs in 14 Asian cities)
China-India Investment, Trade and Tax Comparison
Employment Overheads in China’s Social Security System
Setting Up Liaison Offices, Branch Offices and Private Limited Companies in India
Establishing Representative Offices in Vietnam