A low-cost paradise lost

Last week, Foxconn, the world’s largest electronics contractor, made an unusual announcement: it would stop making so-called “condolence payments” to families of Chinese workers who kill themselves. These payments could total what a worker would bring home in about 10 years of work, and may have contributed to a spate of suicides—11 so far this year—at its factories in China.

Foxconn, which is based in Taiwan, announced pay raises to boost workers’ morale. It wasn’t alone. After two Honda plants in China ground to a halt as employees demanded a better working environment, the automaker announced it would boost pay. The raises—70 per cent at Foxconn, and 24 per cent offered from Honda—were good news for workers, but some fretted it might be bad for business. Foxconn reported it would seek higher prices for its products, while reports of other Chinese labour protests spread (workers at a third Chinese Honda plant walked out on Friday). “Many Taiwanese investors and other foreign businesspeople now worry that the era when China was a low-cost paradise has come to an end,” said the Taipei Times.

According to the University of Toronto’s Xiaodong Zhu, an expert on China’s economy, wages have been rising for years. Because of the country’s one-child policy, fewer workers are available; some factories have even reported problems filling positions. Still, there are concerns a sudden surge in wages could overheat the economy, or spark inflation: some reports say that factory wages in China have jumped as much as 20 per cent this year.

Even so, Zhu notes there’s been more to the country’s success than low wages. Productivity has been increasing at nine or 10 per cent per year, he says—compared to about two per cent in the U.S. “As the economy grows and people become richer, the manufacturing [sector] shrinks,” switching to a service-based economy, he says.

Last week’s salary hikes can be seen as a broader pattern of change—one that will likely leave a better paid, better educated workforce in China, with more buying power. That should mean less dependence on exports as Chinese consumers flex their muscles.