Dwindling labour forcing Chinese manufacturing to make major overhaul
As the workforce shrinks and costs rise, profits drop and capital flees to Vietnam and Indonesia. For experts, China must retool its low-end manufacturing industries in favour of high-end products in aerospace and telecommunications.
Beijing (AsiaNews/Agencies) – China’s dwindling pool of cheap labour and the rising cost of raw materials are hitting hard Chinese manufacturers, the backbone of the country’s export-driven economy. In order to continue growing, China must transform its industry, increase mechanisation and boost high tech sectors.

China’s fast shrinking workforce is the net result of the one-child policy introduced in the late 1970s, a policy that has been rigorously enforced, cutting into the country’s labour pool, especially the hundreds of millions of migrant workers who have been traditionally willing to work for low wages in sectors like the garment, toy and furniture industries.

The pool of 15 to 24-year-olds, a mainstay for factories, will fall by almost 62 million people to 164 million in the 15 years through 2025

A drop in the total number of workers has come a time when improving workers’ rights, such as the introduction of a minimum wage. Higher labour costs is already driving many foreign and Chinese companies to outsource production in countries like Vietnam where labour costs are lower and workers’ rights far fewer.

Products such as clothes, shoes and furniture accounted for about 68 per cent of China’s exports last year, or US$ 1.09 trillion, up from US$ 544 billion in 2005. At the same time, high tech exports are rising, recording a 31 per cent jump in 2010 to US$ 492 billion. That is more than double the US$ 218 billion in 2005 and almost a third of total shipments. Exports account for more than a fifth of China’s gross domestic product.

As a result of the dwindling labour pool and declining profits, small and medium-sized companies in Shanghai have experienced a slowdown in profit growth in the first half of this year, with some facing bankruptcy, a recent survey among 200 small and medium enterprises in Shanghai shows.

According to experts, for growth to continue, Beijing must focus on high tech industries like aerospace and aviation, medical instruments, software, computers and telecommunications.

Japan began the transition in 1969, South Korea in 1988, when manufacturers switched to high tech and valued added production, said Sun Mingchun, an analyst at Daiwa Capital Markets in Hong Kong.

The net result was that Japan’s growth slid to an average 5.2 per cent in 1970-79 from 10.4 per cent in the previous decade. South Korea’s expansion cooled to 6.3 per cent in 1989-98, from as much as 12.3 per cent during the previous decade.

For Mingghun, Chinese plants have five years to retool. If they do not, growth may decline in 2016-20 as low-cost producers fail and investment falls away.

Even so, experts agree that there is no guarantee that the switch will work. Only five economies (Japan, South Korea, Taiwan, Singapore and Hong Kong) went from low-wage to developed nation status, whilst maintaining a relatively high level of growth.

As China’s economic growth slowed to 9.2 per cent this quarter from 9.5 per cent in the previous three months, it must face an inflation rate of 6.2 per cent, twice that in food and other basic items. This is especially hard on low wage earners, pushing them to demand and obtain higher salaries.

Many business executives are nevertheless confident that they can meet the challenges, certain that China can do more than make toys, clothes and other low-end and low-quality products. In fact, many want to expand into high-end sectors.

In fact, most observers expect manufacturing to decline as investors move to low-wage areas in Vietnam, Bangladesh, Indonesia and even western China.

Meanwhile, the Commerce Ministry is offering tax and other incentives to companies in the highly industrialised region of Guangdong to upgrade their research and development capabilities over the next three years.