In recent months, some manufacturers in the Pearl River delta area of southern Guangdong Province have been faced with a new dilemma. They have been receiving new work orders for the usual wages, but have been unable to find enough workers to fill the positions.

The labor shortage has resulted in a high turnover of workers which has triggered a demand for higher wages.

The era of ubiquitous, cheap labor in China seems to have come to an end. Manufacturers have been running on thin profit margins. Offering higher wages equates to loss of profits.

Confronted with the dual pressure of a diminishing market externally and higher costs internally, manufacturers in Guangdong are incurring less and less profit, making it difficult for them to survive.

Relocation Phenomenon of Factories and Labor

The labor shortage is primarily a consequence of the low wages paid by the manufacturers. Most service and manufacturing industry employees make less than 1,500 yuan (US$219) a month. Some maintain that the labor shortage indicates that the low-wage workers have moved on in search of higher salaries and better benefits.

However, this does not explain the true labor situation of China’s coastal region. The reality is that migrant workers have chosen to move to provinces with a lower cost of living.

In southern Guangdong Province, they could barely support themselves on their 1,000 or so yuan (US$146) salary. In the interior provinces, on the same salary, they could afford a better lifestyle even with some money left over.

Simply put, southern Guangdong Province is faced with competition from the interior provinces. Since 2007, investors have begun moving to southeast Asia or interior Chinese provinces due to high land costs, the rising prices of raw materials, and high taxation in southern Guangdong Province.

From that point on, the main reason for lower production costs in the interior provinces was not low wages (since wages could not go any lower) but more favorable tax benefits and a cheaper cost of living.

Will the Labor Shortage Force Manufacturers to Upgrade to High-tech?

In Dongguan, Guangdong Province, manufacturers that are hiring the most people are in the shoe, purse, furniture, clothing, publication, and electronics businesses. These are traditionally labor-intensive industries. Some industry watchers have referred to southern Guangdong's labor shortage as “a collective moan of low-tech (or outdated) industries on the eve of their departure from Guangdong.”

They have theorized that when labor-intensive manufacturers can no longer survive based purely on low-cost labor, Guangdong can use this factor as an opportunity to replace such industries with high-tech or high-end service industries, attracting and recruiting college graduates to join the work force. This could prove to be one-sided wishful thinking.

Since the late 1980s, Shenzhen, a manufacturing hot spot in Guangdong Province, has been planning such a transformation and upgrade of its industrial mix. Its implementation started in the mid-1990s with workers being charged a high premium for “temporary residential permits” in hopes that low-paying manufacturing businesses would subsequently move out.

What resulted instead was the development of labor-intensive manufacturing businesses in the nearby cities of Dongguan and Panyu. In Shenzhen itself, the high-tech sector never really took off.

China needs to rethink how to position “Made in China” in the global value chain through the development of an international division of labor.

China Needs New Angles to Attract Foreign Investment

When China decided to engage in economic reform 30 years ago, the orientation of its international division of production was mainly inter-industry (division among industries) and intra-industry based (division within the industry). Learning from the experiences of the four small dragons—Asia, Hong Kong, Taiwan, Singapore, and Korea—China was able to attract industries from Hong Kong and Taiwan, due to its low labor and land costs.

However, in the last 15 years, with the expanding of its global production network, the new international division of labor is taking a dominant role. For one product, the value chain now spans several countries.

The biggest difference between the new and old international division of labor is the shift from industry division of labor to intra-product division of labor, i.e., different countries cooperate and divide the labor to manufacture a product based on their position in the product value chain.

Global companies now incorporate manufacturers in different countries into the global economic infrastructure. Through their participation in the international division of labor, more and more enterprises have been incorporated into the global product value chain, and the chain continues to grow.

One feature of this new arrangement is that developed countries control the technology and hold the highest value in the product value chain.

By contrast, developing countries only work in low-tech manufacturing and are at the low-end of the value ranking. Because China doesn't have cutting-edge technology, it can only participate in the value chain through using its assets of low-cost labor and land. It has become a factory of the world, but not in the same way that Great Britain was during the Industrial Revolution.

Now, as the expense of running factories in coastal provinces has gone up, manufacturing companies have moved to lower cost-of-living areas such as central or western China. The coastal provinces need to attract new foreign high-tech industries, yet these industries are often weary of protectionism and the lack of intellectual property-rights protection.

An article in Time Magazine (Feb. 1) addressed the topic. In “The China Fix,” James McGregor wrote: “In my more than two decades in China, I have seldom seen the foreign business community more angry and disillusioned than it is today … Visiting CEOs' banquet-table chatter is now dominated by swapping tales of arrogant and insolent Chinese bureaucrats and business partners.

“The litany includes purposefully inconsistent and nontransparent enforcement of regulations, rampant intellectual-property theft, state penetration of multinationals through union and Communist Party organizations, blatant market impediments through rigged product standards and testing, politicized courts and agencies that almost always favor local companies, creative and selective enforcement of WTO requirements … The list goes on.”

In light of all this, even though the “labor shortage” in China’s coastal areas really drives low value-added manufacturers to other places, it does not mean that high value-added manufacturers will come in.

Read the original Chinese article.