Labour Costs- the be all, end all?
Never stopping at glass ceilings, China has been increasing the productive capacity of the economy by skyrocketing the volume of goods and services produced annually.
In pursuing their aim of a highly skilled labour force, they have increased their capacity for skills training and encouraging the use of robotics. However, this technological advance has come at the cost of the disempowerment of unskilled workers. As a result, China has come to learn that increasing its economic status has been everything but a smooth journey. The conquering of the Clarke-Fischer Model — which has allowed China to transition to a post-industrial phase of development, meaning that there is an increased emphasis on research and development and thus has driven up labour costs. This transition has caused supply chains to look to relocate their labour to cheaper locations. However, the process of relocation is not the blind and simple selection of a “third world country” to provide cheap labour but instead requires a certain level of infrastructure, including a ‘stable’ currency, as well as access to technology. Most importantly, there needs to be a “labour force that is capable of production demands.”, according to Elisabetta Gentile of the Asian Development Bank — meaning that it is essential for these conditions to be met for successful manufacturing and production. The relocation of supply chains will create 17 million jobs in 12 emerging market economies, according to projections made by The Banker, an international finance affairs publication. The benefits are clear and as a result many governments will start modernising programmes hoping to accommodate these Chinese supply chains. The movement of supply chains is not solely due to increasing labour costs; geopolitics has started to play an increasing role. The bubbling trade war between the USA and China and the potential tariffs slapped on Chinese produced goods have accelerated the movement of production to other countries in Asia. China had a rough summer with tariffs of a staggering 25% being placed on their goods, a further round is expected towards the end of 2018. Despite geopolitical issues being undermined by increasing labour costs, the trade war was the last straw concerning the relocations of supply chains — especially with $506 billion worth of goods being sold to the USA. Although the effects of this geopolitical tension will not explode overnight, it has caused manufacturing firms sleepless nights due to price increases and a volatile consumer market and thus a reduction in revenue and profit. Vietnam has benefitted from this relocation, especially because China has invested $3.5 Billion into the ‘Association of South-East Asian Nations region’, of which 40% was directed to Vietnam. The economy has started to flourish with Vietnamese Exports having increased by 21% in 2017 along with Foreign Direct Investment shooting up to 44%. The investments has improved infrastructure, which has in turn attracted increasing amounts of foreign investment creating a multiplier effect and played a significant role in reducing the poverty numbers. However, the gem of ‘low cost labour’ has started to lose its sparkle as a result of the rise of increasingly complex supply chains from multinational companies such as Apple and Samsung. Manufacturing high quality, high tech and sporting goods require complex skills and therefore incurs more expensive labour costs; it is only a matter of time before relocation pops into people’s minds. There are only so many “cheap countries” in Asia before time & proximity (from China especially) becomes an issue. Running away from labour costs is clearly not the solution. Perhaps companies and firms will have to incur long term costs by investing in technology and increasing their use of robotics. In the long run, this could substitute labour and reduce their costs of production and therefore increasing profit. The relocation of supply chains to provide cheap labour presents benefits for the host country, however, these benefits of improving unemployment and providing unskilled work is undermined by the increasing pace of automation in manufacturing.