Quality Products International

Factory and Company Audits should be a regular event.

by on Aug.14, 2010, under Asia Business, China QC Inspection Blog, General News

A recent article from China started me thinking on how the Chinese economy will evolve in the coming years.  The article deals with the wages growth in the Chinese economy.

An income survey report, based on 5,866 enterprises in Beijing, Shanghai and Guangzhou,
released by
Zhaopin.com in July, shows that the average wage rise was 10.1 percent so
far this year, 1.9 percentage points higher than 2009.

The statistics from Zhaopin.com show that from 2006 to 2008 wages steadily increased, with
the rate peaking at 13.8 percent in 2008. However, because of the financial crisis in 2009 the
rate dropped 8.2 percent, its lowest rate during the last five years.

“Although they are up again in 2010, and higher than 2007, the rate still hasn’t reached the peak
of 2008,” said Zhao Lipeng, senior payment consultant with Zhaopin.com. “However, in Beijing
the speed of the rises slowed, but wages still increased in 2009,” he added.

Zhao thinks that the 2008 peak is likely to be reached again sometime next year, which means
that many employees will remain disappointed this year.

“Last year, many employees didn’t get a pay rise because of the financial crisis and their
expectation this year is as high as 21.8 percent,” Zhao told METRO.

“I am still waiting for a rise this year and I hope it will be more than 30 percent,” said Eric Hu,
a 25-year-old, who works for a consulting company in Beijing.

The report shows that the top three industries for wage rises in Beijing are finance, IT and
advertising. Labor-intensive industries, such as manufacturing and the service industry, have
the lowest rises.

By Wang Chen: Wages Rise but don’t meet expectations, China.org,
http://www.china.org.cn/business/2010-07/28/content_20588480.htm

So what does this have to do with your manufacturing in China?  Well you can see that costs are going up. Labour is probably the biggest cost savings in moving manufacturing to China in the first place. Now you are seeing an average increase of just under 10% in the cost base.  Admittedly this is substantially less in the manufacturing industry but the cost is still increasing.  What does bear watching is that the export industry is not growing at the same rate.  The economies of the United States and Europe do not show the growth necessary to fuel this increase from China.

What can fuel income growth? Two main  thrusts, growth in markets increasing scarcity and thus profit, or increasing productivity which reduces costs and increases profits.  Considering the technology already available for manufacturing in Asia the idea of increased productivity being able to absorb this cost increase by itself is not sustainable in my opinion.  At some point Chinese manufacturers will have to look at other markets/products  or fail.  Either that or suddenly costs to manufacture in China will start to increase to keep pace with increased labour costs.  It happened in Japan and Taiwan and it will happen here.

Some manufacturers will stoop to cutting corners, not just on materials but also in labour areas.  This is an area that is rarely checked once the initial audit or survey is performed.  This lack has caused problems in the past.  A large sportswear manufacturer in the U.S. attracted much bad publicity due to the conditions in the factories where the products were produced.  Initial investigations by the company found things above board but, as cost pressures increased, unsavory practices crept in until someone found out. This cost the company a great deal of lost goodwill and money in cleaning up the problem.

Since labour is such a large component of costs of production in most cases it is seen as an area where there is scope for savings.  A more modern example is the issues currently facing Foxconn in China.  It is not enough to pay your workers well but to also treat them well.  Treating your labour force as just parts in a machine will eventually cause them to crack.  In earlier times this may have been the cost of doing business not only in China but in the West as well.  Just think back to the early days of the industrial revolution and the factories using women and young children.  However in the modern age these practices even if practiced elsewhere on the planet will reflect badly and publicly on the companies involved.

A yearly audit or survey should be part of a company’s standard operating procedure to combat such cost cutting and also to keep abreast of changes.  QPI Ltd. Offers a number of cost effective Audit services to keep your company informed of your partners in Asia both at the factory floor and their current solvency.

Author:   M. Charlin


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