China's evolving labor marketChina's evolving labor market

Long before foreign investors began to salivate over the prospect of an increasingly affluent consumer market of 1.3 billion, foreign manufacturers looking for low-cost labor were enchanted by China''s promise of a seemingly inexhaustible pool of cheap and pliable labor.

However, as one dream begins to materialize, the former shows signs of erosion. While China still attracts manufacturers looking to cash in on low-cost workers, the promise is beginning to lose some of its former luster.

Several interrelated factors have triggered this change: the success of China''s economic development, including the volume of foreign investment it has attracted, rising economic aspirations among China''s population, increased government investment in rural living standards, slowing population growth, and the government''s ever loosening grip on the general populace.

Success can be said to breed many different things, but in the case of China it has unquestionably inspired a greater sense of economic entitlement, a sentiment especially felt in China''s industrial heartland along the Southern coast. This new awakening has led many to demand higher wages and improved working conditions.

American footwear and apparel manufacturers can testify to this trend. Nate Herman, Director of International Trade at the American Apparel and Footwear Assn., has commented on the migration of several factories northward in response to what others have estimated is a 20% to 30% jump in labor costs this year alone.

For example, on Jan. 1, local authorities in the Southern region of Guangzhou raised the minimum wage by 34%. Add to these costs tighter Chinese environmental regulations, and markets like Vietnam begin to look more and more attractive to producers.

Of course, wage hikes are not a product of government intervention alone. As the Chinese market continues to attract a growing number of manufacturing jobs, the labor market tightens and the balance of power begins to tilt in favor of the workers.

This advantageous position is bolstered further by a successful government program to curb population growth and improve the living standards of rural Chinese. Deregulation of food prices, lower agricultural taxes, and growing governmental investments in rural infrastructure and public health, have all helped to boost incomes among China''s rural majority and ease urban migration.

Aside from growing wages, there remains another labor cost to consider. Despite improved economic conditions and a tightening urban labor market, China ironically still struggles with high unemployment, estimated at around 10% in urban areas and 20% nationwide. This has helped to ferment growing social unrest, which is becoming a source of great worry for the central government and foreign investors.

Often, social aggravation takes the form of virulent nationalism, as was seen recently when Japanese-owned businesses were attacked following a political row with Tokyo. At other times, riots have broken out over working conditions, power shortages, and wages. These demonstrations have targeted specific companies, resulting in considerable property damage as well as lost production time.

The bottom line

What this means for processors largely depends on their relationship with China. For processors who have, or are considering establishing, manufacturing facilities in China, increased labor costs and social tensions could drive up production costs and potentially threaten production and delivery schedules. For processors competing with Chinese-made goods, these factors might offer some hope for price relief.

However, processors in this latter category should also note several countervailing factors. As labor costs rise, many Chinese firms are adapting by adding new automation or relocating production to the north, where the labor pool is less competitive. To assist in this production dispersal, the Chinese government has invested heavily in developing the necessary rural infrastructure to support manufacturing.

On the flipside, those companies that are exploring production facilities outside of the south should note that despite cheap labor costs, the farther one ventures north (or inward), the more one has to deal with less reliable infrastructure and technology. It also becomes more complicated dealing with local governmental regulations and customs, which can add to costs.

A look at the markets

Philippines Calls by the Philippine Plastics Industry Assn. (PPIA) and its supporters continue to put pressure on the government to honor its December commitment to reduce tariffs on petrochemical products, including resins. Under the terms of the ASEAN Free Trade Agreement, the Philippine government was to lower tariffs to between 0% and 5% by 2003. Protest from domestic petrochemical producers led to a compromise, Executive Order 161. The order, which is set to expire in July, granted domestic petrochemical manufacturers a temporary reprieve from the full impact of the treaty by only reducing resins duties to 10%, while simultaneously offering downstream producers some satisfaction by raising duties on finished plastic products to 10%.

Japan The Japanese government is considering levying taxes on plastic bags. The Environment Ministry announced in May its decision to forbid retailers from handing out free bags. Data from a 2003 survey, conducted by the Kyoto municipal government, concluded that plastic bags account for 15% of residential plastic garbage. The ministry hopes to submit the amendment to Diet next year, although some legal experts have already questioned whether a ban on plastic bags would infringe on the freedom of sales under Japan''s constitution.

Malaysia The Malaysian Plastics Manufacturers Assn. (MPMA) expects the plastics industry to grow 8% to 10% annually over the next three years. This heavy growth follows a solid 2004, which witnessed an 8% growth rate. Around 50% of last year''s production went to satisfy growing export demand among Asia''s developing economies. Malaysia''s current per capita plastics consumption was estimated at 56 kg, but is expected to rise to 60 kg by 2007.

Western Europe A recent report by Research and Markets, entitled Handbook of Polymers in Construction, calculates that the Western European building and construction markets, which consumed roughly 4.89 million tons of plastics in 1995, will rise to almost 8 million tons by 2010. Construction is already the second-largest plastics market in Europe after packaging.

England On May 27, the London Metal Exchange (LME) officially started offering futures plastics contracts for polypropylene and linear density polyethylene. Dow Chemical Co., Innovene Europe Ltd., Chemopetro A/S, Thai Polypropylene Co. Ltd., and Reliance Industries Ltd., will all offer contracts. Warehousing will be established in Singapore, Rotterdam, and eventually Houston, although delivery is only expected to result from about 1% of total transactions.

The hope of many processors is that this futures market will help stabilize prices for long-term resin contracts and limit some of the risk to processors. Chinese manufacturers are said to have expressed particular interest in the LME program, and while Chinese law prohibits participation of smaller firms, larger State Owned Enterprises will have the opportunity to invest. Additionally, LME Chief Executive Simon Heale has indicated that during ongoing talks with the Chinese government, authorities have expressed a willingness to consider granting greater freedom to domestic business that wish to invest in the new market.

The United States The U.S. International Trade Commission (ITC) decided in April to drop interim antidumping duties, which reached as much as 20%, after determining that U.S. processors were "not materially threatened with material injury by imports of PET resin from India, Indonesia, and Thailand." According to ITC data, of the roughly 5.21 billion lb of PET consumed in the U.S. during 2004, only around 17% was imported. However, the interim duties were credited for a 45% drop in overall Asian PET imports in 2004, and their elimination could open the door for cheaper resins for many U.S. processors.

High resin prices in the U.S. are one of the reasons that manufacturers of non-plastic rigid packaging appear to be growing at a much faster pace than their flexible packaging counterparts. Comparisons given in a May 23 Wall Street Journal article examined share prices of some of the top producers in both categories and found dramatic disparities. Rigid firms like Crown Holdings Inc. (up 71% over last year), Ball Corp. (up 14%), and Owens-Illinois Inc. (up 73%) dwarfed returns posted by flexible producers like Bemis Co. and Sealed Air Corp., which saw rises of 4.7% and 8.5% respectively. Greater industry consolidation among rigid producers was another key reason for their superior performances.

In May, the National Assn. of Manufacturers (NAM) announced its forecasts for the remaining half of 2005, predicting growth of around 4%, up from 2.5% during the first half of the year. Fueling this projection are expectations of increased business investment, easing energy prices, and a weakened dollar, which should help U.S. goods to better compete overseas.

Similarly, the Society of Plastics Industry (SPI) also released figures in May, forecasting continued growth and material investment within the U.S. plastics industry through the end of the year. This projected growth continues an upward trend in the plastics and rubber manufacturing industry where Federal Reserve Board figures have shown production capacity utilization approaching the critical 85% benchmark, the level at which producers generally begin investing in new machinery to increase output.

Egypt Cairo hosted the PLASTEX 2005 exhibition for plastics and rubber industries in late May. The exhibit, the largest of its kind in the region with 320 exhibitors from 31 countries, drew special attention from European producers anxious to cash in on this growing resin and consumer market. Egypt itself is a major regional market for plastic exports, consuming plastic materials and resins worth $1.65 billion in 2003, a figure that is expected to grow by 10% annually over the coming three years.

Brazil The Brazilian emphasis on exports is helping to develop its domestic downstream plastics products market, which has made it possible to increase value by as much as 400% over second-generation plastic goods, according to data published in a May 16 report from Noticias Financieras/Groupo de Diarios America. A detailed look at the Brazilian government''s plastics export program and domestic plastics market can be found in the May issue of MPW.

Venezuela According to a recent report by Chemical News & Intelligence, the president of the Venezuelan Assn. of the Plastics Industry predicts solid growth in 2005 following government initiatives to boost production by eliminating the country''s 15% duty on imported petrochemical equipment. These moves are credited with spurring the $85 million invested in equipment during 2004, a development that lifted the industry''s resin consumption by 25% to 450,000 tons in 2004. The association predicts that these levels will rise to 495,000 tons by the end of 2005.

Agostino von Hassell [email protected], and Mark Bella [email protected], of the Repton Group LLC (New York).