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SOCIO-ECONOMIC DEVELOPMENT OF CHINA. AGENDA I.Introduction II.Facts III.Labor cost development I.Average income II.Main drivers IV.Examples I.Apparel.

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Presentation on theme: "SOCIO-ECONOMIC DEVELOPMENT OF CHINA. AGENDA I.Introduction II.Facts III.Labor cost development I.Average income II.Main drivers IV.Examples I.Apparel."— Presentation transcript:

1 SOCIO-ECONOMIC DEVELOPMENT OF CHINA

2 AGENDA I.Introduction II.Facts III.Labor cost development I.Average income II.Main drivers IV.Examples I.Apparel industry II.Automotive industry V.Reasons to produce/invest in China VI.Pros and Cons VII.Outlook

3 INTRODUCTION Does China lose his labour costs advantages? LOW LABOUR COST BIGGEST WORK FORCE IN THE WORLD HUGE DEVELOPMENT IN THE LAST DECADES INCREASE OF THE LABOUR COST IN THE LAST YEAR SOME INDUSTRIES HAVE LEFT CHINA

4 INTRODUCTION - Increase of the labor cost caused by political strategies Labor law (107 articles) Article 1: This Law is hereby formulated in accordance with the Constitution in order to protect the legitimate rights and interests of laborers, readjust labor relationship, establish and safeguard the labor system suiting the socialist market economy, and promote economic development and social progress. Article 3: Laborers have the right to be employed on an equal basis, choose occupations, obtain remunerations for labor, take rests, have holidays and leaves, receive labor safety and sanitation protection, get training in professional skills, enjoy social insurance and welfare treatment, and submit applications for settlement of labor disputes, and other labor rights stipulated by law. [...] Article 10: The State shall create employment conditions and expand employment opportunities through promotion of economic and social development.

5 INTRODUCTION Article 13: Women shall enjoy equal rights as men in employment. Sex shall 35 not be used as a pretext for excluding women from employment during recruitment of workers unless the types of work or posts for which workers are being recruited are not suitable for women according to State regulations. […] Article 19: Labor contracts shall be concluded in written form and contain the following clauses: (1) Time limit of the labor contract; (2) Content of work; (3) Labor protection and labor conditions; (4) Labor remunerations; (5) Labor disciplines; (6) Conditions for the termination of the labor contract; (7) Liabilities for violations of the labor contract.

6 INTRODUCTION Labor contract law – 2007 (98 articles) Article 4: Employers shall establish and perfect labor bylaws so as to ensure that workers can enjoy labor rights and perform labor obligations. […] determine such bylaws or significant matters in direct relation to the real benefits of workers as the remune- ration, working time, rest and vacation, work safety and health care, social insurance and welfare, job training, job discipline or quota management, the draft thereof shall be discussed at workers congress or by workers, which shall bring forward schemes and opinions. […] equal consultation by employers and labor union or representatives of workers. […] - Growing leading role of Vietnam (lower labor costs) in different sectors (electronics, toys, automotive, clothes and accessories). - China is still competitive in the market (increase of the labor productivity more money, better work) and its economy become stronger even if the increase of labor cost.

7 INTRODUCTION - Change from a foreign demand to a domestic demand - American and European companies leave China - No sufficient technical knowledge (improvements step by step). - In a foreign enterprise in Beijing or in Shanghai: Medium level manager $ (+extra) in a year Senior manager $ in a year High level manager $ in a year -More services offered by the enterprises to the workers --> higher expenditures

8 FACTS Does China lose his labor costs advantages? -since 2000 the labor costs have risen by 10 % each year - total work force of 784 Mio.* -thereof with an university degree 8,9 %* - unemployment rate of 4.1 %* - average income in China RMB in 2010** * Statistical Yearbook of China 2011 ** National Bureau of Statistics, urban workers

9 LABOUR COSTS DEVELOPMENT US-Dollar Average monthly income (2010) * 362 $ *Urban employees, Source: Germany Trade and Invest

10 LABOUR COST DEVELOPMENT US-Dollar + 103% China Vietnam + 55% 110 $ 276 $ Average monthly income ( ) * *Urban employees, Source: Germany Trade and Invest

11 LABOR COSTS DEVELOPMENT What are the main drivers? high annual growth * GDP + 9% Exports +20% retail +17% changes within the society (strikes, new generations...) introduction of the one-child policy during the 80´s increased minimum wages increasing living expenditures (especially coastal area) -> Inflation Figures from 2011, Source: Germany Trade & Invest

12 EXAMPLES Apparel industry the leading apparel player form Europe and US want to shift a large share of their sourcing value away form China. (over the next 5 years) Reasons labor shortages -> workers move to more attractiv industries increasing labor costs Capacity for Western buyers is reaching its limits Conclusion It´s getting more and more unattractive for foreign companies to invest into China´s apparel indusry. -> labor force and labor costs are very important Source: Mc Kinsey CPO Survey, Sept.- Nov. 2011

13 EXAMPLES Automotive industry every big car maker plans to invest in China and to extend their capacites Reasons the biggest car market worldwide registered cars by 2009 : 62 Million -> 2020: 200 Million* high import duties on cars –> Joint ventures with Chinese companies Conclusion Automotive companies have to invest into China to increase their profits and to enhance their global market shares. -> labor costs are not the main drivers *estimated by Mc Kinsey

14 REASONS TO PRODUCE AND INVEST IN CHINA - The labour cost increase but the quality is better day by day. - Increasing productivity (people know well the work that they have to do) - From "made in China" to "created in China". -Morality theme: well being of the people (yesterday exploitation, today work). - The Chinese currency (Renmimbi - RMB – or Yuan - CNY become more international day by day. China wants it as the international currency, replacing the Dollar. (Current exchange rate: 1 US$ :6,25 RMB; 1 € : 8,00 RMB

15 REASONS TO PRODUCE AND INVEST IN CHINA In 2009 the PBoC, the Popular Bank of China, announced the “Administrative Rules on Pilot Program of Renminbi Settlement of Cross-border Trade Transactions”: more easy commerce. Today an foreign company can export the goods and it can provide services in RMB if the counter-party is located in one of the 20 provinces and cities chosen, that are in the most influent region of the Chinese territory. Advantages for the importer:  decrease of the supply chain cost  more transparency in the cost  better relationship with the provider  increase of the number of the providers

16 REASONS TO PRODUCT AND INVEST IN CHINA Advantages for the export agent:  more simple currency change  increase of the number of customers  direct use of the RMB Advantages for the Chinese enterprises  more transparency in the prices and more simple system  decrease of the risks and costs connected with the change  more efficiency  Social stability entail no strong change in the regulations  Development of infrastructure - new spaces for industry in the countryside Negative Aspects: -the Chinese policy favours the Chinese enterprises.

17 PROS Endless supply of low labor cost Annual wage of 52,607$ in US in 2011 was > eight times higher that of china. Even compared with BRICS,china‘s wages is low. Boston Consulting Group, forecasts manufaturing wages in china rising only 4.41$per hour in 2015,compared with 26.6$ in US. Low pension, 250 million migrant pension neglected. Basic healthcare provision is low. Legal protection of worker‘s rights is insufficient.

18 PROS According to UN, china ‘s labor supply is to peak at China’s family planning policy to be revised after 30 years, possible changes could lead to new cycle of labor. Employees,sometimes dismissed without notice or clear reason, receive poor compensation. China’s labor is tilting towards more skilled workers. According to Ministry of Education-2011.Total of 7.99 million universities grads, post grads joined the labor force. Labor bonus also means a massive domestic consumer’s market.

19 CONS Average wage quadrupling (annual 20,856 yuan in ,799 yuan in 2011) Population aging ((1982)Population aged up to 14 fell from 33. 6% to 16.45% and aged over 65 rose from 4.9%to 9.1%(2011). China approaching Lewis turning point:Means where surplus low-cost labor depleted,and wages and benefits increase. Losing labor advantage to vietnam and indonesia in low-cost manufacturing. Inflation soaring up.

20 OUTLOOK After summarizing the statistics and points,demographic trends are evolving to sustain china’s advantage. Even though wages have risen rapidly in the past five years.its labor cost still remain very low relative to global level, Supply of low-cost is far from being depleted. Built up a large pool of skilled labor to move up the value chain. Shifting to consumption driven economy. All these factors combine in line with China’s broader economic strategy, It’s labor bonus will evolve.


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