A comprehensive survey provides insight into the issues related to rapid increase of labour cost to the Chinese manufacturing industries.
Translation by Cathy Zhao and REN Zegang
Labour cost in China is rising fast but by how much? Are the labour cost and social security levy the heaviest burden on the businesses in China? What are their responses to the increase of labour cost? Institute of Quality Development Strategy in Wu Han University released a report “Chinese Enterprise Employee Survey” (Following as survey) on the 20th of June, and drew some conclusions on the questions mentioned above.
Being the biggest manufacturer in the world, China has now reached about 25% of the global manufacturing from a base of less than 2% 30 years ago. However, Cheng Hong, chief coordinator of the survey and dean of Institute of Quality Development Strategy in Wu Han University pointed out that the rise of labour cost that has accelerated since 2011 has brought China too many unexpected problems.
China’s labour cost used to be less than 3% of the American labour cost but now has climbed to 20%.
The survey found that many businesses in manufacturing industries ceased operation because of rise of labour cost. A large number of employees had been made redundant as a result. However there are still many businesses making effort to offset the rising cost through innovation.
Conducted in 2016 this survey covered 11366 employees in 1208 businesses in Guangdong and Hubei, the two major manufacturing provinces in south-eastern and central China. The selected companies were from the most industrialized regions in these two provinces that produced about 90% of the provincial manufacturing value and 86% of manufacturing employment in Guangdong and 86% of the provincial manufacturing value and 90% manufacturing employment in Hubei.
Manufacturing profit has reduced by 46.8% for the past five years.
It was found that the average profit ratio for the companies covered in this survey was 3.3% in 2015, down by 46.8% from a level of 6.2% in 2011.
However the actual profit ratio varied among companies. 25% of the businesses made nearly no profit and 19.8% were making a loss in 2015. There were 25% of companies whose profit ratio surpassed 7%. Half of the businesses in this survey had profit less than 2.5%.
Chen Hong believed that those businesses competing on low labour cost basis would continue to face difficulties. In the contrast, innovative companies would see profit increase. It is time for innovative companies to embrace opportunities in the time that cost is up rapidly.
As a reflection to China’s contraction in export in recent years, the profit margin for those export orientated processing businesses was the lowest alongside with non-export businesses and businesses doing general trade.
Also the survey found that the average profit ratio of private enterprises was 3.9%, higher than 2.2% for state owned enterprises (SOE) and 2.1% for foreign funded enterprises (FFE). The rate of making loss was 18% for private companies, 26% for SOEs, and 21% for FFEs.
The wage in China is far lower than that in America, but much higher than the ones in other emerging economies.
The survey found wage level increased significantly in Guangdong province in 2015. The entry level wage in manufacturing industries grew by14.5%. For the employees of two-year working experience their real wage increase was 8.3% in the period from 2014 to 2015, higher than the amount of 5.8% between 2013 and 2014. This survey found the wage level would continue to rise.
Nevertheless, labour cost in China is still far lower than that of in the US. The survey found that Chinese workers’ real salary per month including bonus was 4216 RMB in 2015, equivalent to US$ 635. The real wage of American workers monthly was about US$ 3099, which was 4.88 times of their Chinese counterparts.
However, the average wage for Chinese workers was higher than those workers in emerging economies including Brazil, Malaysia, Thailand, Mexico, Vietnam and India in 2015. The real wage for Vietnamese worker was US$ 206.
The share of social security levy and wage cost is moderate in total business cost
The survey found that in spite of rising continuously, the proportion of wage cost in total business cost of the companies surveyed had been kept below 18%. In his analysis Cheng Hong attributed this to the increase of investment in research and development, which proportionately reduced the share of labour cost in the business.
The social security levies such as pension contribution, social security contribution, unemployment benefit and etc combined only share 3% of the total business cost. The survey found that the actual social security payment by the companies was far less than the amount stipulated by the central government, which should be around 40% of the total wage cost.
The main contributing factors found to the low social security payment by businesses were local authorities in some cities set up a relatively low payment rate; lower threshold was deliberately used to calculate the level of payment; and evasion of social security payment by business in other formations. One of the common ways was to turn social security payment into wage which was welcomed by workers.
The survey found that 27% of the employees had not sign up any employment contract. Further 20% of the employment contracts belonged to short-term contract.
In total 76% of the employees singed up with labour contract. It was 98% for SOEs, 92% for FFEs and 69% for private companies. The coverage of social security schemes of workers was 80% in Guangdong province and was 72% in Hubei province.
However labour cost is still the mostly concerned issue to business management. The survey found that labour cost weighted 60% among all the obstacles to business development. Market demand came second with 56% and then followed with labour skills, technical talents, innovative capability, management talents, taxation system, interest cost and financing channels. The least was the consistency of government policy which took up 23%.
Ren Duyang, one of the initiators of this survey and director of Labour and Human Resource Division in the Population and Labour Economic Research Institute of Chinese Academy of Social Science, told Thepaper (www.thepaper.cn) that despite the relatively low percentage of labour cost in the total business cost, entrepreneurs would continue to complain about it because many Chinese businesses that have developed from labour-intensive industries are very sensitive to the rise of labour cost.
However the Chinese manufacture industries need this cost challenge as it will lead to elimination of those uncompetitive and inefficient companies and flourish of those innovative and efficient companies. In deed this survey found that those innovative enterprises had performed much better than average.
Rise of labour cost and redundancy
Cheng Hong pointed out that one direct consequence of continuous rise of wage is the high level of redundancy which reached 26% in manufacturing businesses in 2015. Most of the employees resigned voluntarily. Reduction of workers happened to 52% of the businesses participated in this survey in Guangdong and 45% of the businesses in Hubei. The average reduction of employees was 6.3% for the participated companies in Guangdong and 3.3% for the companies in Hubei.
The survey found that redundancy was mainly happened to non-skilled labours. Creation of jobs was predominantly in the sectors related to technology and designing. This verifies the trend that businesses are increasingly putting their resources into innovation.
Companies are offsetting rise of labour cost through investment on technology and training, especially through automation. The survey found 8% of the companies surveyed had applied robots to their production; 40% of the business had utilised automated equipments. Automation and robots took up 17% of the total cost in the category of machinery and equipment. Robot application was 14% for SOEs and FFEs, much higher than the 6% for private companies. 15% export-orientated processing businesses used robots in comparison with non-export businesses of 5%. Machinery building, electronic device assembling and metal processing are the sectors with the highest rate of robot application while textile and leather manufactures had the lowest rate.