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Rising wages send companies in search of cheaper workers

TOKYO -- With a tradition dating back to the Edo period (1603-1868) and a history of making shirts for the Japanese Imperial Navy during the war, apparel maker Flex Japan knows a thing or two about cotton dress shirts. First of all, shirt-making is a labor-intensive industry requiring many workers to cut and sew. Second, it is preferable to have experienced workers doing the cutting and sewing to maintain quality. Craftsmanship doesn't happen overnight.

     Therefore, relocating a production site is no small decision. Yet, after 25 years of relying heavily on China for its production, the Nagano-based company is not hesitating in its drive into Myanmar and Bangladesh, two of the cheapest production destinations in Asia.

    Wages in China have doubled in the past five years, clearly outpacing the increase in productivity. This June, Flex will open its second factory in Myanmar, adding to the one it built  in 2006 during the period of military rule. The 12,000-sq.-meter factory will turn out 2.4 million dress shirts a year. In a partner factory in Bangladesh, the number of workers will increase from 250 to 500 within a year, enabling production of 1.2 million shirts. In total, production in the two countries will triple to 4.8 million shirts, accounting for roughly half of global production.

     One in every five shirts sold in Japan is made by Flex, and they carry all kinds of labels, from high-end Isetan department store to cheaper menswear retailers Aoki and Konaka. Market share is steady, but executives at Flex saw a risk to their profitability. After 20 years of deflation, prices of dress shirts in Japan were just not going up. To continue to win orders from Japan's largest retailers, the company had to act. Wages in Myanmar and Bangladesh are currently a third or a quarter the level in Fujian and Jiangsu provinces, the main production sites in China. Moving to the cheaper sites will provide immediate, if temporary, relief.

     "We liked the characteristics of the people of Myanmar," said Toshihide Sakai, director of planning at the company. "No riots, no strikes, no emotional outbursts. We also noticed that they tend to stick with the company."

     The company has flown 18 workers from Myanmar to train for three years at its headquarters in Chikuma, Nagano Prefecture, famous for its groves of apricot trees. The workers will learn the secrets of shirt-making and then return to Myanmar to be the pillars of the operation there.

     Along with the double-digit rise in wages, job-hopping was one of the biggest headaches for the company in China. Although Sakai acknowledges the skills and work ethic of Chinese workers, the ambitions of the young workers eager for a better life, and the ease with which they could quit and move to the factory next door for a slightly higher salary, were becoming a heavy burden for the company.

Chinese dreams

In 2012, then-Chinese President Hu Jintao pledged that the government would double the average household income in mainland China by 2020. One worker living this dream is 27-year-old office worker Zhang Yunfeng, who lives in the northeastern Chinese city of Dalian. He wholeheartedly believes that a future of steadily rising wages and quality of life awaits him. "I have no doubt that my salary will rise faster than the rate of inflation, making me more affluent by the year," he said. Since joining his company in 2013, he has bought a Skoda sedan, taken on a mortgage for a 90-sq.-meter apartment, and married his childhood sweetheart. Earlier this month, 500 friends attended his wedding party in his hometown, the mining city of Fushun.

     His monthly salary has increased by 10% in each of the two years he has worked at the company, and he expects it to continue at the same rate for the foreseeable future. "I have to pay for the interior decoration of my new house. Then we will have kids and the bills will continue to rise. Better diapers, better powdered milk, better medicine and better schools," he said. All his assumptions are based on expectations for double-digit rises in salary.

     This month, the urban minimum wage of Guangzhou, the southern Chinese city known as "the world's factory," was raised a whopping 22.3% year on year to 1,895 yuan ($305) a month. Workers in Shenzhen will take home the highest salaries on the mainland, at 2,030 yuan, following a 12.3% increase. Shanghainese workers will earn at least 2,020 yuan, up 11%. Minimum wages continue to climb, even as the economy weakens, amid a campaign by the ruling Communist Party to show migrant workers and other low-income earners that it is serious about addressing widening income inequality.

     Western multinationals have already noticed this trend, with Nike closing down its factory in Jiangsu Province in 2009 and Adidas shifting production from Jiangsu to Cambodia in 2012.

     The story of rising wages, however, extends to Southeast Asia. In Thailand, the Ministry of Labor has launched a feasibility study to consider five options for raising the minimum wage next year. The 300 baht ($8.95) daily minimum will be raised by legislative action, by organic growth via the private sector, or by a combination of both.

     "We cannot afford to worsen the living standards of our employees," said Yasuhiro Iida, president of Denso International Asia, as he began labor negotiations this spring. The automotive components supplier's regional headquarters for Asia and Oceania, based in Thailand, employs 5,500 people. "Addressing inflation at a minimum, we want to find a compromise where both management and the workforce can come together," Iida added.

     Last spring, the company raised wages by around 7%, much higher than the 2.2% inflation rate. In Thailand, where unemployment is less than 1%, retaining workers without significant and steady raises is getting tougher. On top of fattening paychecks, Denso has been upgrading its factory mess hall, adding pingpong tables, and providing faster Internet access to satisfy its workforce.

Big jumps

The Japan External Trade Organization (Jetro) estimates that Indonesia will have the highest average wage increase in Asia this year, at around 12.3%. The 30% rise in gasoline prices last November triggered a torrent of related increases. The minimum wage jumped 20% in some regions. Pushed by the momentum, Japanese companies such as Toyota Motor were forced to add 1-2% on top of the wages that had already been settled on for the year.

     In Vietnam, 2,500 workers at Hyundai Vinashin Shipyard went on strike for two days to oppose the 5% pay raise suggested by the South Korean management. The company ended up bumping up the offer to 12%.

     Some companies have changed their perspective and ceased to focus on wages alone. Masatoshi Matsuzaki, chairman of the board of Japanese copier maker Konica Minolta, stood on the banks of the Strait of Malacca in Malaysia last month, thinking about how his new factory, located close to one of the most important sea lanes in the world, could make use of the strategic location.

     For years, Konica Minolta concentrated production of multifunction peripheral printers in China. Now the copy-fax-printer-scanners will be produced in Malacca too, with a third of the workforce the company employed in China. "We will not pursue cheap labor. We will instead use information technology to accelerate automation and create a competitive plant," Matsuzaki said at the opening of the new factory.

     The city of Malacca has restaurants serving tandoori chicken, Hainanese chicken rice and European cuisine next to each other. One road is named after Chinese Malaysian businessman Tan Cheng Lock, but has a signpost with the road name in Arabic. The diversity stems from the intertwined history of the city, which in the past has been Malay, Portuguese, Dutch and British, attracting Chinese, Indian and Arab merchants.

     Wages in Malaysia are relatively high compared to other members of the Association of Southeast Asian Nations, but the abundance of ships that travel between Europe and Asia via the Strait of Malacca offers unrivaled convenience for manufacturers there.

     Ever since then-Chinese Leader Deng Xiaoping initiated his economic reforms in 1978, China has thrived as the world's manufacturing hub, powered by a seemingly endless supply of workers willing to work for low wages. Goods under the label of "made in China," went to all corners of the world. High growth in exports raised demand for even more labor, especially for low-skilled manufacturing workers.

     As farmers left their fields for higher-paying jobs in the cities, the urbanization rate of China, which was 19% in 1980, jumped to 26% in 1990 and 54% today. According to the National Bureau of Statistics, the number of people who left their hometowns to work in cities for more than six months reached 274 million last year.

     The Financial Times recently noted that the "migrant miracle" that powered China's industrial rise "is mostly exhausted" after years of migration, and rural labor is drying up.

     Professor Xin Meng at the Research School of Economics of Australian National University agrees that China is experiencing a significant shortage of urban unskilled labor, but said this is not the result of diminishing worker numbers. "Shortages of labor in Chinese cities are mainly a consequence of institutional restrictions on rural migration to urban areas under the hukou household registration system," she said, pointing to the discriminatory system that divides citizens into rural and urban residents, denying rural workers full access to welfare, education, health care and social services when they migrate to towns and cities.

     "China has 283 million workers still employed in the agricultural sector -- a large pool of potential urban workers," she said. But until hukou reform encourages these potential workers to leave their farms, the labor market in China will continue to be tight.

     Economies initially grow fast when foreign technology is introduced and cheap unskilled labor enables mass production. But when excess labor starts to run out, wages rise dramatically and eat into profitability. Like Hong Kong, Singapore, Taiwan and South Korea before it, China will at some point run out of cheap labor. While living standards will be higher than before, high growth will not return.

     This shift is known as the Lewis Turning Point, named after Nobel laureate Sir Arthur Lewis. Is China there yet? Most agree that it will be within the next 10 years.

Nikkei staff writers Junya Henmi in Nagano, Yukako Ono in Bangkok and Deputy Editor Toru Takahashi in Tokyo contributed to this article.

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