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Rising Chinese wages a headache for US firms
 
WASHINGTON, March 24 (BSS/AFP) - After decades of US caterwauling about the crippling impact of China's low labor costs on domestic manufacturing, firms state-side now fret about the impact of rising Chinese wages.

First came anger, then depression and then acceptance.

In the three decades since Deng Xiaoping began opening China's economy, US manufacturers have gone through something resembling Elisabeth Kuebler-Ross's five stages of grief.

Industry cried foul, then groped around for solutions, before accepting the rules of the game had changed -- deciding to make a buck by offshoring some of their own production to China.

To be sure, there are still frequent spasms of anger over China's ability to produce goods at "unfair" prices, notably in election years.

But the bitter pain of jobs lost and factories closed has
been sweetened just slightly over the years.

Using cheap Chinese laborers has resulted in $499 iPads,
bumper corporate profits and -- in turn -- fatter pensions for
those who have stock-based plans.

But there are already signs that this low-cost, high-reward
Chinese paradigm is coming to an end.

Late Thursday, US footwear giant Nike reported it had made
even more profit than it did the quarter before, yet its stock
sank.

Investors hacked about $1 billion off the company's value on
Friday because of a reference to "declining gross margin" stashed
in the bowels of the firm's quarterly report.

The details are complicated, but Nike's jargon in part
referred to rising wages in places like China taking a chunk out
of profits.

Indeed, the details show rising wages -- along with some
other factors like higher material costs -- caused Nike's margins
to fall two percent in just one year.

That spells extra costs worth tens -- if not hundreds -- of
millions of dollars.

But it is far from enough to make Nike's business unviable,
so why the worry?

According to Sara Hasan, an analyst who follows Nike for
investment firm McAdams Wright Ragen, the concern is that wages
in China are only going to increase from here on in.

"It's a very big deal, and it's a longer-term issue
definitely," she said.

In the last year, wages in China's southern industrial belt
have risen 10 percent, according to a report by Standard
Chartered. They rose 11 percent the year before that.

The Shanghai authorities recently announced the minimum wage
will rise 13 percent, doubtless prompted by labor shortages and
worker unrest.

"As (China's) economy grows and as the middle class grows, I
think the pressure is going to continue," said Hasan.

Nike itself admits the costs are unlikely to fall any time
soon: "While some raw material costs are starting to ease, we
have not seen them retreat to their previous levels; for other
input costs such as labor, upward pressure continues," CEO Parker
told investors.

That leaves US manufacturers with only a handful of options:
accept lower profits, pass the cost on to consumers or lower
labor costs some other way.

Part of the answer for Lacrosse, a small Wisconsin-based
footwear firm, was to shift some production from China to
Vietnam, where wages are still relatively low.

"As costs in China have grown... we make a growing amount of
our product in Vietnam," said Michael Newman, who deals with
investor relations for the company.

Western China, Thailand, Malaysia and Indonesia are also
cited as possible alternate production locations.

That has the added benefit of diversifying the supply base,
but moves production away from China's lucrative domestic market.

For bigger firms, the answer may be to trim supply chains or
tap consumers.

According to Hasan, Nike is in a good position to leverage
its brand strength and pass prices on to US and other consumers.

In the longer term, Nike also hopes to cut production costs
the old-fashioned way, through increased automation.

The company has invested its hopes in FlyKnit technology,
which knits a shoe upper in one go, reducing the need for workers
to assemble dozens of pieces.

Consulting firm Accenture believes that through a mix of
these responses, manufacturers with a large footprint in China
can handle wage increases of as much as 30 percent without too
much trouble.

"However," its report published earlier this year noted,
"China's low-labor cost advantage will not last forever."

That will undoubtedly change the rules of the game for US
manufacturers once again.
 
 
 
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