Labor shortages will push up manufacturing costs

Labor shortages are cropping up in the Yangtze River Delta and the Pearl River Delta, the two main regions for electronics manufacturing in China, according to a report released in September by China’s Ministry of Labor and Social Security. While overseas electronics manufacturers have not been greatly affected by this issue as yet, they do expect labor costs to rise in the coming years.

Labor shortages are prevalent in the two regions around Shanghai and Guangzhou, especially among makers of low-end electronic products, and other labor-intensive manufacturers. Six main reasons underlie the general labor shortage in China:

The escalating demand for labor generated by the increased number of factories is concentrated in these two regions. More overseas companies now are transferring some manufacturing facilities to China. Furthermore, many of the manufacturers that previously had established factories in China are expanding their manufacturing capacity.

Factors such as meager pay, poor working conditions and low socialwelfare benefits are among the key reasons why migrant workers are reluctant to labor in factories in those areas.

Because most employees in factories are migrant workers from agricultural households, they typically need to return home to complete farming tasks during the harvest seasons.

The Chinese government intends to improve the income of peasants. The agricultural tax is likely to be removed in phases over the coming five years. The improving earnings status of Chinese farmers will encourage migrant workers to return to farming in the future.

Continued inflation has resulted in a decline in the income of migrant workers.

China’s family-planning policy, adopted at the end of the 1970s, is partly to blame for the labor shortage.

For the big overseas electronics manufacturers operating in China, rising labor costs are unavoidable in the future because of the increasing pay levels for workers, but also because the employers need to provide more training to cultivate sufficiently skilled workers. Furthermore, farsighted companies are striving to reduce employee turnover by offering better welfare conditions, including improved dormitories and more highquality leisure facilities.

by Kevin Wang, iSuppli Corp.