Paul French, China editor, argues that demographics and costs appear to be conspiring against China’s world-dominating manufacturing sector. But then again…

A very rare thing has happened – for once the Chinese government’s own statistics agree with everyone else’s.

This year, on average, minimum wages across all of China have risen by about 20% year-on-year. With food prices and general living costs continuing to soar, at least wage rises will help.

Demographics are a challenge for China. The population is getting older, and the available pool of young workers getting smaller. According to data just released from the 2010 nationwide census, China’s population under 16 now makes up just 16.6% of the total, down from 23% in 2000. The proportion of people aged over 60 has increased from 10.4% in 2000 to 13.3% in 2010.

So is this the end of China as the centre of low cost manufacturing? Certainly some looking at these numbers are quick to talk about south Asia, or other parts of the Asean (Association of Southeast Asian Nations) region with more youthful demographics, supplanting China. Certainly, India has lower wages and better demographics for a mass-based low-paid workforce.

But I think India will probably not take over from China in this regard.

Higher wages in place

Here’s why. Only 9.5% of China’s workforce actually receives the minimum salary these days. Most now get more and have done for some time. The average manufacturing salary is 2.6 times higher than the minimum wage. Consequently many employers have got used to paying higher wages and have largely already factored it in.

Foxconn, a company that has featured many times in this column, raised wages by up to 100% in 2010 after the bad publicity that followed a spate of worker suicides.

In the face of this publicity, a share price collapse of 20%, massive wage rises and increases in input and energy costs, where is Foxconn now, a year later? Actually, it’s not doing too badly.

In May this year, Foxconn’s shares jumped as much as 15% in one day, their biggest daily gain in more than a year. Why? Because of surging global demand for iPhones, iPads, iPods plus all the gadgets Foxconn’s other clients – including Sony, HP, Amazon, Nokia, Motorola, Nintendo, Microsoft, Dell and Cisco – are selling to you.

Rare materials  

And wages are the least of Chinese manufacturers’ worries. In the crucial technology sector, encompassing everything from iPads to car catalytic converters, wages represent just 5% of the total cost of goods sold, while raw materials account for more than 90% of costs.

This is why so far this year you’ll have read more articles on rare earth metals in China than real wages in China over your morning muesli. Demographics are a problem, but right now those rare earths remain rarer than warm bodies willing to clock in for the night shift.

The other side to all this is that Beijing appears happy enough to see wages rise – indeed Beijing has to sign off on all minimum wage rises. Rising pay, and a stronger Chinese currency generally, mean a strengthening domestic Chinese retail market for everything from pak choi to BMWs. More local sales reincentivise domestic manufacturers to keep their factories local and close to the best regional retail market.

India may have the demographic advantage in future and a population set to overtake China’s, but India’s total retail sales this year will be, optimistically, $396bn; China’s retail sales this April alone were, conservatively, $210bn. Nobody’s moving to India to get closer to the customer.

Staying put 

Chinese manufacturers may move inland to save money on land, rent and supply chain costs but they aren’t likely to flee to Bangladesh or Vietnam when their single largest concentration of growing sales is right at home in China. And there’s still massive potential locally – those tech manufacturers may be paying higher wages but they’re operating in a market that still only has 17% penetration for computers and 62% for mobile phones. Those higher paid workers are now a growing customer base for all those gadgets they’re churning out.

Admittedly China’s more raw hinterland cities, and relatively poor countryside, are not yet bouncing along to the beats from Apple iPods or keeping fit with Wii Virtua Tennis but they are starting to see laptops and other gadgets appear in large numbers … and that’s keeping them close to home.

Paul French has been based in China for more than 20 years, and is a partner in the research publisher Access Asia.