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Chinese Workers Get Perks

Labor shortage spurs firms to court factory employees

By Mei Fong

The following article appeared in The Asian Wall Street Journal issue of August 16, 2004.

The third of August was a red-letter day for workers at Guangdong Chigo Air Conditioning. Minutes after the close of the workday, dozens stood eagerly in line for a rare treat in this dusty industrial town: free run of the shady, company-owned orchard, filled with ripe pomegranates. "This is a very nice benefit," said one of the workers, 21-year-old Chen Ya-xi, who rushed in after flashing her company ID to guards at the gate.

Pomegranates aren't the only perk at Chigo. In the past five years, Chigo's millionaire owner, Li Xinghao, has built a swimming pool, new housing and a reading room for his workers. He has also sought to decrease high employee turnover rates by raising salaries and giving bonuses to workers who stay more than three years.

Mr Li isn't alone. After decades of abundant cheap labor willing to put up with long hours and Dickensian working conditions, the Pearl River Delta, China's manufacturing heartland, is facing labor shortages. As a result, more Chinese manufacturers are paying attention to something they rarely did before: keeping their low-wage workers happy.

The Pearl River Delta, which produces a giant share of the world's shoes, clothing and electronics, is short an estimated two million workers, according to China's state-run newspapers. Numbers in other provinces have also shrunk.

Here in southern China's manufacturing powerhouse, the shortage is partly due to the nation's increased prosperity, which is spawning rival manufacturing hubs in other regions of the country. The government's recent increase of agricultural subsidies, as well as increases in grain prices, also makes it more attractive for farm workers to stay on the land. As a result, rural income growth is rapidly outstripping urban income growth. In the first half of this year, rural incomes rose by 10.6 percent while the cost of living in cities rose by about 3.6 percent, lessening the gains farm workers make moving to China's urban centers.

Recently, cities in southern China have been ordered by provincial governments to shorten overtime and raise minimum-wage rates after years of fairly flat-line pay. In mid-August, the city of Guangzhou announced it would raise the minimum monthly wage by a third to the equivalent of $85, making laborers there among the highest-paid in China.

While a few large Western-owned factories have been offering some perks like better pay and English classes for years, Pearl River Delta's labor shortage is pushing more manufacturers to offer better working conditions in order to retain staff. Some factories are now building facilities with previously unheard-of luxuries like swimming pools, dormitories equipped with television sets as well as libraries, gymnasiums and even churches. Apache II Footwear Ltd., which makes sneakers for Adidas-Salomon AG, recently put two counselors on staff to act as sounding boards for workers, who are mostly teenage girls living far from their hometowns in China's hinterland. Esther Wang, one of the counselors, says her duties involve offering romantic advice and birth-control hints. "These girls have nothing to think about but love, love, love, because their jobs can be so boring," she says.

The labor shortage has global implications. As the low-price trendsetter for plenty of goods manufactured globally, China's rising labor costs, coupled with recent price increases in oil, electricity and commodities, could put upward pressure on China's export prices, say some economists. This could potentially raise prices of everything from consumer products to mortgages for consumers in Europe and the U.S., says Goldman Sachs chief China economist Hong Liang.

The labor shortage in coastal cities is unexpected, given China's 1.3 billion population, high unemployment rates and surplus rural labor that is officially estimated at 150 million. Economists are still divided on the reasons why coastal demand is outstripping supply. Some say this is a short-term problem that will be resolved once more migrant workers are informed about the rising demand. Others believe the problem is more deep-rooted, given rising educational standards and the slower labor-force growth resulting from China's strict population control policies.

According to official figures, annual population growth during the 1990s averaged 1.07 percent, down from 1.47 percent in the 1980s. Also, notes Goldman's Ms Hong, rapid urbaniztion has reduced the number of available rural laborers.

What this all adds up to, experts say, is that wages will have to rise. In a recent research note, Citigroup economist Huang Yiping estimated that payrolls could rise by 40 percent to 50 percent as companies increase employee social-welfare contributions in a bid to attract workers. And as costs go up for the Pearl River Delta's manufacturers, some will move into China's hinterlands to tap into cheaper local labor pools there, while others will leave the country altogether, or even go out of business.

Those likely to be the first casualties of rising labor costs are low-margin manufacturers making items like clothing and toys. Loh Sai Kit, director of Yiu Fai Toys Factory in the Dongguan manufacturing hub, says he has seen several toy manufacturers close down in the past six months. Some have moved to Vietnam, he says. "It just didn't make financial sense for them to go on and try to honor their agreements," says Mr Loh, since most prices were negotiated at the beginning of the year, before costs began to climb.

Mr Loh himself is in the process of renegotiating existing contracts, and will raise prices next year, he says. His factory, which had $15 million in profit last year manufacturing musical toys for clients like Wal-Mart Stores Inc., will likely register a loss this year, he said, its first in eight years.

Nonetheless, he is investing in a new $2 million factory with built-in air-conditioning, a big plus in attracting workers in southern China's hot and humid weather. Workers are willing to take slightly lower pay in places such as electronics factories, which are of necessity air-conditioned, he says. "Here, because we don't have air conditioning, we have to pay more," says Mr Loh, waving around his six-year-old factory, where workers in striped tunics and shower caps perspire in the muggy heat. Yiu Fai's workers are paid $85 a month, 55 percent above Dongguan's minimum wage.

Manufacturers that have started relocating inland, where pay scales are about 40 percent lower, face much higher start-up costs, particularly in building facilities to compensate workers for the loss of big-city attractions. Two years ago, Ngai Lik Holdings, which makes compact-disc players for Wal-Mart, opened a plant in Qingyuan, a town two hours from Guangzhou known for its scenic mountain views and tasty, free-range chicken. But Ngai Lik is facing problems recruiting labor, despite delights such as a pool table, a fully-equipped karaoke room and disco-dancing on weekends. "Nobody knows about this place yet," says manager Nelson Chiu. Outside the factory, a bright red banner reads: "JOB OPENINGS FOR GREAT NUMBER OF WOMEN WORKERS".

Apache Footwear, which has also relocated to Qingyuan, is partway through the process of completing a $25 million giant compound that, when finished, will include housing for married workers, a church, a school, a mall and a sports hall. Already, workers are using the brand-new clinic, a kindergarten and a supermarket stocked with instant noodles, mosquito repellent and condoms. The reading room, hung with avant-garde Wassily Kandinsky prints, has newspapers from the Sichuan and Hunan provinces, poorer regions that supply a lot of Apache's workers.

"It's not just about pay, it's about lifestyle," says Apache Chief Executive Steve Chen, "we've building a community so people will stay." He won't say if his heavy infrastructural investments will result in higher product costs.

These factories are ahead of the pack. While overall conditions in Pearl River Delta factories have improved in the past few years, labor unionists say there is still plenty of worker abuse. It is still common for pregnant workers to be dismissed, and pension and social-security schemes by and large still don't cover many migrant workers. Li Qiang, executive director of the New York-based China Labor Watch, says virtual incomes of most factory workers are dropping after taking inflation into account.

China's manufacturing wealth is based on the "enormous mental and physical sacrifice of young workers from rural areas," says China Labor Watch's Mr Li.

While labor conditions in general remain unenviable, optimists can point to the factories that are breaking the mold. In tiny Yanbu township, otherwise known as "bra town" for its many underwear manufacturers, Top Form Underwear Co.'s factory no longer supplies worker housing, opting to pay its workers more instead.

Such an arrangement is rare in factories, where employers supply -- and, by extension, control -- most aspects of their employees's working lives, from housing to recreation.

Top Form workers make on average $123 monthly, about 20 percent above market rates in the area. The factory, which manufactures for Playtex Products Inc. and Limited Brands Inc.'s Victoria's Secret and is part of Top Form International, started phasing out dormitories for its 1,000 workers about three years ago. Workers need to "have a life of their own," says Top Form manager Charles Lee. "They're not children."

Qiu Haixu contributed to this article. 

Reprinted by permission of THE ASIAN WALL STREET JOURNAL,
© 2004 Dow Jones & Company, Inc. all rights reserved worldwide.