Economies move from Agrarian to Industrial to Services. The wage and skill levels also increase while a country progresses in the A-I-S path. Countries enter the Industrial economy phase on the back of low wages and low skill sets, inherited from the Agrarian Economy. As skill sets improve, the demand for skilled labour increases leading to a demand-supply imbalance, which in turn leads to wage inflation. Add to this the changing focus of the young to pursue higher education than semi engineering education required for the manufacturing sector, and you see a further widening of the gap between demand and supply of the blue collared workers, the backbone of the sector. A country is able to maintain its manufacturing edge, only as long as it is able to keep the wages down, for wage is very critical input in manufacturing, despite mechanization. Once the Industrical economies mature, the wage level increases, pushing up the cost of production and thus the prices. The low cost advantage is lost. Most of these countries compromise on quality in the initial phases, for they enjoy the low cost advantage. They are unprepared for the phase when they lose their low cost advantage. We have witnessed this in the developed countries in 1970's, in Japan in 1980's and in Korea in 2000's. Closer to home, I have personally seen this in the textile city of Coimbatore and the hosiery town of Tiruppur.
Looks like China, who became a world power on the back of their low cost, low quality, low wages manufacturing sector, is seeing the beginning of the end of their boom period in manufacturing. We are seeing the first signs of labour unrest and wage hikes.
"Foxconn, which manufactures components for giants like Sony and Apple, has been forced to announce a 66% wage increases after a spate of 11 suicides by its workers and allegations that it was caused by workplace depression and low wages.The embattled Foxconn Technology Group has indicated it will move a part of its plants in southern China to one of the northern cities like Tianjin to overcome the problem of rising wage costs. Though Foxconn or other foreign companies might chose to relocate within China, they would not pull out of China altogether because it might cause market access problems in one of the world’s biggest markets, sources said. Many of the foreign companies either sold vast quantities of products in the local market or provided components to major sellers to China, analysts pointed out"
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"The biggest eye-opener for multinationals in China recently has been a nine-day-old strike at a sprawling Honda transmission factory here in Foshan, about 150 kilometres northwest of Hong Kong. The strike, which has forced Honda to suspend production at all four of its joint venture assembly plants in China, has shown that Chinese authorities are willing to tolerate work stoppages at least temporarily, even at high-tech operations on which many other factories depend. Even before the strike, manufacturers and buyers of low-cost products were already actively seeking alternatives to China, such as Vietnam and Cambodia, said Richard Vuylsteke, the president of the American Chamber of Commerce in Hong Kong. Honda has been making increasingly generous offers to settle the strike. The company has already offered increases in total compensation of close to 50 per cent, according to crumpled-up copies of the offer provided by striking workers. One surprise of the strike here is that it involves workers whose wages appear to have already roughly doubled in the past five years: blue-collar workers in export factories in the Pearl River delta region around Hong Kong. Partly because so many young Chinese now go to university, and partly because of a declining birth rate, the number of young Chinese available for factory work is falling far short of the demand from employers. That is producing higher wages for blue-collar workers and giving them leverage to demand more, as the Honda strike shows.
