Manufacturing

China's Manufacturers Seek Ways to Cut Costs


A worker on a communications equipment assembly line in Shenzhen, China

Photograph by Qilai Shen/Bloomberg

A worker on a communications equipment assembly line in Shenzhen, China

In the southern Chinese city of Zhuhai, two hours by ferry and car from Hong Kong, there’s something new on the rooftop of the large factory complex owned by outsourcing specialist Flextronics International (FLEX): solar panels.

Flextronics first opened shop in Zhuhai in 1999, when the area was a backwater compared with Shenzhen and other industrial hot spots closer to Hong Kong. Today the company’s 50,000 Zhuhai workers produce Microsoft (MSFT) Xbox game consoles, Hewlett-Packard (HPQ) printers, Nike+ (NKE) FuelBands and other electronics. With wages rising quickly throughout Guangdong province along the coast, Flextronics managers must save money wherever they can. “Instead of paying the electric company, I’m able to generate my own electricity,” says Melinda Chong, general manager in charge of infrastructure operations.

A little savings here, a little there—that’s the new focus for multinationals that manufacture in the Pearl River Delta and other coastal export hubs. The country’s one-child policy is taking its toll. The number of working-age Chinese in 2012 fell by 3.45 million, to 937.27 million, according to the National Bureau of Statistics. While that’s just a small drop, it’s the first decline since record-keeping began and marks “the start of a trend expected to accelerate in the next two decades,” the Hong Kong-based China Labour Bulletin wrote in a June 11 report. “China no longer has an inexhaustible supply of young workers.”

China’s government is also mandating big raises: In 2012, 25 provinces increased the minimum wage by an average of 20.2 percent. The current five-year plan ending in 2015 calls for base wages to increase by an average 13 percent a year, part of a policy to address growing income inequality. Coping with mandated wage increases is “very tough,” says Carmen Lau, Asia vice president of human resources for Flextronics. Even when companies offer higher wages, they still find it difficult to hire workers since fewer young people are interested in toiling on factory floors. “We have a smaller and smaller pool” of potential recruits, Lau says.

Some of the biggest electronics manufacturers have relocated to other parts of China where workers are more plentiful and there’s space to grow. “They can’t get land in the Shenzhen area, so they have to be somewhere else,” says Cynthia Meng, an analyst in Hong Kong with Jefferies (JEF). Foxconn Technology (2354:TT), the Taiwan-based maker of iPads and iPhones for Apple (AAPL), has expanded away from the coastal regions. There are 250,000 to 300,000 workers at a Foxconn plant in Zhengzhou in the central province of Henan, according to the company and Bloomberg Industries. Hiring in the interior has helped the manufacturer boost its workforce in China by 50 percent in two years, to 1.2 million.

Wages are going up in the interior, too. “The cost differential is merging very, very fast,” says Jitendra Waral, a Bloomberg Industries analyst in Hong Kong. “If you move inland, it’s not really saving you costs any which way.”

For a manufacturer like Flextronics, moving inland or to Vietnam isn’t an attractive option because it would upend relationships with components suppliers. Flextronics has opened a small plant in Chengdu, capital of the western province of Sichuan, to make injection molds for smartphones, tablets, and game consoles. But its Zhuhai complex gets 41 percent of its materials from suppliers in the Pearl River Delta. “You might be able to find lower labor costs, but you need to take into consideration the whole system you are in,” says Francois Barbier, president of global operations for Flextronics. China, he says, will maintain its competitive edge over other manufacturing centers for “the next 10 years.”

Still, base pay for an entry-level factory job at Flextronics in Zhuhai is about 71 percent higher than five years ago. That leaves Flextronics managers looking for new ways to save money. Tony Wu runs the company’s plant in Suzhou, near Shanghai, that assembles CT machines and other medical equipment for General Electric (GE), Philips (PHG), and others. By China standards, the plant is small—5,700 workers—but it generated $1.3 billion in revenue for Flextronics last year. Wages at the Suzhou plant jumped 18 percent in 2012, and since Wu doesn’t see an end soon to those increases, he’s reducing the number of suppliers. The Suzhou facility has more than 120 suppliers just for packaging materials, and he’s trying to cut down to just a few. “Why do we have so many?” he asks. “It doesn’t make a whole lot of sense.” By consolidating his suppliers, Wu says he can offer them bigger volumes—and in return get bids as much as 17 percent cheaper. “That,” he says, “drives the costs down immediately.”

The bottom line: Minimum wages in 25 Chinese provinces jumped 20 percent in 2012, lessening the advantages of moving inland.

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Einhorn is Asia regional editor in Bloomberg Businessweek’s Hong Kong bureau. Follow him on Twitter @BruceEinhorn.

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Companies Mentioned

  • FLEX
    (Flextronics International Ltd)
    • $10.39 USD
    • -0.16
    • -1.54%
  • MSFT
    (Microsoft Corp)
    • $43.16 USD
    • -0.42
    • -0.97%
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