China's advantage in low labor cost will remain in coming decade, report

Along with rising labor cost will China lose its cost advantage in global competition? Some analysts expressed the worry.

While a latest report by the Boston Consulting Group (BCG) made it clear that the cost advantage in some low-cost countries including China will remain or even expand. Their advantage will not disappear despite raised labor costs due to needs in these countries and their modernization process.

Low wage, a huge attraction
Transnationals purchasing in low-cost countries could save their cost by 20 to 40 percent, BCG latest research showed. The cost advantages come from several elements: lower worker cost, lower investment cost, lower local purchasing cost, larger economic scale and government incentive. As expected, the main advantage comes from the gap in worker cost.

The per-hour cost for a worker in an American or European plant is between 15 and 30 dollars, or more, and this is mainly decided by whether there is a worker's union in the plant, the plant's location and the degree of welfare it provides, according to Jim Hemerling, global vice-president of BCG and person in charge of its China division. On the contrary, the per-hour cost for a worker in a Chinese plant is below 1 dollar--dozens of times lower. The wage level in Mexico and East Europe is about 2 to 8 times that of China, but still much lower than in America and West Europe. Actual wage level fluctuates around the average level, but a 20:1 gap between the West and China cannot be neglected.

China's cost advantage will be more noticeable
Despite China's remarkable cost advantage, many observers predict that the cost advantage in low-cost countries including China will disappear in near future (in 5 years, 10 years, or 20 years). They believe that although the factor cost of these countries are currently low, they will increase at a speed much faster than in developed countries so as to narrow the gap.

However, Jim Hemerling holds opposite views in this regard. He said clearly that BCG believes that in the next decade the cost gap between China and developed countries will not shrink, and instead will expand in many cases. The trend will be so even if large adjustments are made in exchange rates. BCG gave three reasons in its report.

First, leading companies operating in low-cost markets have in recent years continuously lowered their purchasing cost, and thus save much more than in western countries.

Second, wage increase in China and India are limited by the existence of a large number of unemployed people.

On the other hand, China is in urgent need of experienced managers, which leads to wage increase and fight for personnel--especially those who have worked as managers for over ten years.

Third, the gap of current wage level is so big that it can hardly disappear in near future, even if wage in low-cost countries increases at a two-digit speed.

On the contrary, worker cost in some small East Europe countries and Mexico may rise under pressure. These countries will still remain competitive over America and West Europe, but not much over China and India, for they have a higher starting point for cost and their annual growth rates are stable.

China's cost advantage will increase, that's why companies who adopted a "wait and see" attitude a few months ago are now shifting to low-cost countries including China, Jim Hemerling told reporter at last.

By People's Daily Online

People's Daily Online ---