Asia Weekly

Postcard from China’s Yangtze Delta Region

Week Ended: July 30, 2010

Visitors to China are often astonished by the level of sophistication and development in Beijing and Shanghai, which both showcase modern architectural marvels and are capable of hosting world class events such as the Olympics. But drive 100 miles inland and the neon of these glamorous cities fades into the buzz of smaller cities. On my recent trip, I visited Nanjing, Hangzhou and Ningbo, second-tier cities in the Yangtze Delta region to visit factories that make such items as auto parts, optical components, processed foods and apparel. The companies, which collectively employ about 280,000 workers, are bellweathers of China’s labor-intensive manufacturing sector.

The factory workers I met on this trip are among China’s more than 130 million migrant laborers and minimum wage earners. The province that Hangzhou and Ningbo are located in is China’s fourth largest provincial economy and accounted for 6.8% of China’s GDP in 2009. The local government there has raised its minimum wage from US$110 per month in 2007 to US$160 this year, with increases of 12% to 15% each year. Companies expect that this rate of increase will continue and labor costs will climb.

However, higher wages alone cannot solve all labor relations issues. While some factories offer workers pleasant working conditions, many laborers operate in poor environments with noise pollution, toxic fumes and extreme room temperatures. The exhaustion they wear on their faces is evidence of daily 10-hour shifts in such conditions. Lack of proper housing is another problem facing the workers. Companies usually provide dormitories for employees but accommodations for couples and families are lacking. As a result, married women either have to separate from their families or leave their jobs after getting married. Finally, workers must also tolerate rigid management styles in some factories; one factory I visited codified “factory status” via different uniform colors. Managers, line supervisors and even workers from different production lines wear different colored uniforms. For young workers born under the country’s one-child policy, the harsh life of factory work is especially challenging as they are typically accustomed to the attention and support of their small families. Highly publicized incidents at one manufacturing plant have recently heightened concerns for the treatment of workers.

China has built extensive networks of roads, bridges, shipping fleets and railroads that allow companies to move to lower wage areas without sacrificing much in turnaround time. Managers at companies I met with said they have started to find ways to improve their working conditions and move production centers from coastal cities to inland areas, enabled by improved logistics. Furthermore, they are finding that domestic demand is strong enough to offset slower export orders and diminish any incentives to move operations overseas.

To seize upon the domestic opportunity, some companies have moved up the value chain, going from contract manufacturers to producers of their own brands that target domestic markets. No longer is China just a production base for the world, it also becoming its own immense market. Chinese companies are now inclined to move closer to their market, not further away. On future trips, I certainly hope to see happier faces and better work/life balance for workers as their evolving employers move inland and workers continue to stand up for their rights.

Elizabeth Dong, CFA
Research Analyst
Matthews International Capital Management, LLC

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The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information.