If your organization currently has sourcing of lower-cost finished goods or parts components residing in China, I highly recommend you read a recent Financial Times editorial commentary penned by David Pilling. This November 17 commentary which is titled, How Foxconn signaled a new China price, (free preview account or paid subscription may be required) makes a rather insightful argument that global supply chains may have crossed a rather new threshold: before and after Foxconn’s recent wage concessions. It notes that the foremost contract manufacturer in the world, which now employs 800,000 Chinese workers, and has granted a 30 percent wage increase to its workers, has managed to ease negative publicity on the likes of its high profile customers like Apple, Dell and HP. It also led to a wave of further wage increases among other industries.
Victor Fung, Chairman of Li & Fung, one of the world’s largest sourcing companies in clothing apparel is quoted as indicating that the controversy concerning Foxconn has become an epoch-making event. He is quoted: “One can talk about a world pre- and post- Foxconn. Foxconn is as important as that.”
Post Foxconn trends are noted as a greater tolerance by Chinese officials for labor unions, increased worker rights, and a potential period of more sustained wage inflation. Pilling argues that factories making more sophisticated electronics or automobile parts are likely to stay near Guangdong province, while production of lower-end goods will continue to move to more interior or other regions. Mr. Fung also is noted as observing that Chinese companies themselves are inquiring about sourcing garment or footwear production outside of China. Another secondary consequence is a spillover of higher wages into countries neighboring China, with signs that this is already underway in Bangladesh.
The most important post-Foxconn effect penned by Pilling is the most profound. If wages in China, and elsewhere in Asia continue to rise, so will the general prices of finished goods, and some traders are predicting that 10-20 percent cost increases in China could come as soon as next year, setting the stage for the re-balancing that all other global economies have been seeking, regardless of higher exchange rates.
It is a compelling editorial that readers should be read and placed in context. It is also another strong argument for having a flexible global outsourcing or in-sourcing strategy, especially if your firm has high direct labor cost dependencies.