Production Costs in China Rise as Wages Increase

China’s image as a low-cost place of production is likely to change due to the rapid increases in worker wages.  In fact, wages for the average manufacturer worker in China are expected to double by 2015.  As this has begun to unfold, many foreign manufacturers have begun looking for alternative low-cost production bases and have been largely unsuccessful in finding better options.  Foreign reliance on China for inexpensive production will likely be a thing of the past as these wages continue to climb.

The main reason for this substantial increase in wages is to meet the demands of Chinese workers for better and more equitable pay.  In the past, the Chinese government has broken up strikes and organized worker walkouts very quickly but lately has tolerated such actions.  This has led to a widespread increase in minimum wages. 

If this continues, exports to other nations and foreign goods produced in China will become more expensive to foreign nations and consumers.  This increase in wages has occurred in other low-wage Asian countries such as Vietnam and Indonesia, and this is the key reason why foreign manufacturers in China are not taking their businesses elsewhere.  These companies are now trying to think of strategies that will combat these ascending wages in hopes to remain competitive in their prices.  

Despite increasing production costs, many companies are choosing to stay in China because this is where their sales are growing rapidly.  China represents the world’s largest market for products such as cars and steel and therefore has created an incentive for businesses to remain there.  Producing and selling in China also allows foreign producers to deal with only one currency, the Renminbi (China’s currency).

As wages continue to rise in Asia, specifically in China, it will be interesting to see how foreign companies cope.  Will they move their businesses elsewhere, or will they make adjustments in production and sales to mitigate the financial blow of increasing wages in China?