Factory workers build on unrest

Strikes at Honda plants and a wave of suicides among workers who assemble iPhones highlight the ugly side of a remarkable growth story. Will the recent wage increases be enough to calm the sitution?

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Given that China's breathtaking economic growth has been based on its success in becoming the world's manufacturing centre, the sector's recent traumas have the potential to become even more serious.

Four Honda car plants in the southern city of Shenzhen were brought to a standstill late last month because staff at the company's gearbox plant went on strike for higher pay. Last week, after the Japanese car giant hoped the worst was over when it offered a wage increase of 24 per cent, problems erupted again and two car factories were shuttered a second time as a result of a pay dispute at another supplier.

Staff are now demanding the right to form their own unions instead of the state sanctioned ones, though a Honda spokesman said that workers at its Honda Lock parts-making plant had agreed to return to work yesterday. The problems at the electronics maker Foxconn were more serious: 10 apparent suicides by workers in the past five months and a drop of about 50 per cent this year in the company's share price.

The Taiwanese-owned firm announced pay for production line workers at its factories in Guangdong province, China's manufacturing centre, would increase 30 per cent immediately, then by a further two thirds in October. Prior to the increases, some staff were on basic wages of 900 yuan (Dh483) a month, and many worked 12-hour days to earn extra money. The household name companies whose products Foxconn makes, among them the computer giant Apple, have suffered as protesters waved placards showing apples dripping with blood. The companies are expected to see higher costs by Foxconn for their products.

In the wake of the pay rises at Honda and Foxconn, other manufacturers in China have also given hefty pay increases to production staff, who spend long hours doing what are often described as boring and repetitive jobs. It follows months of reports that factories were struggling to recruit workers. The unrest appears to have spread from the southern and coastal production hubs to plants in China's less-developed interior. Workers in cities such as Xian having downed tools in strikes over pay.

John Zeng, a senior market analyst at the Asian Automobile Forecast Service at IHS Global Insight in Shanghai, says the problems, especially those at Foxconn, indicated "a terrible situation". "It's basically long working hours, they're not paid enough and they're [working under] very, very big pressure," he says. "We're talking about the younger generation in the labour force. They have more awareness of their rights compared to their parents and they speak more loudly than before to protect their rights."

Wages had been static for too long, Mr Zeng says. But the figures show wages had been a shrinking part of the country's surging economy. They represented 39.7 per cent of China's GDP in 2007, compared with 51.4 per cent in 1995, according to a study by the Guangzhou Daily quoted by media. By comparison, in the UK last year, wages made up about 53 per cent of GDP, according to a report released by the country's Trades Union Congress.

Geoffrey Crothall, of the workers rights group China Labour Bulletin, which is based in Hong Kong, says what has taken place in the factories of late is by no means a revolution in Chinese labour relations. But it does represent the culmination of "an intense wave of labour activism" after an increase in the number of industrial disputes in the past decade. "There has been accumulated pressure built up for many, many years and now the workers who have been paid the minimum wage are beginning to say enough is enough," Mr Crothall says.

There are wider economic reasons why pay issues have come to a head now. The increases announced by Honda and Foxconn are part of a pattern seen since the labour market tightened at the end of last year, according to Ren Xianfang, an analyst at IHS Global Insight in Beijing. China's rapid recovery from the global economic crisis has helped increase demand for labour and this, coupled with many workers deciding to return to their inland home provinces where opportunities have improved, has forced employers in the southern and coastal hubs to offer better wages.

It raises the question of whether this could dull China's manufacturing edge, which is based on a vast supply of cheap labour. Some analysts forecast the wage increases offered by major employers such as Honda are unlikely to spread. Dr Bala Ramasamy, a professor of economics at the China Europe International Business School in Shanghai, says heavy media coverage of the latest events has forced multinationals to improve pay.

But the bargaining power of employees at smaller, Chinese companies may be weaker. "If multinationals pay below the market wage, it's considered exploitation; if it's done by the local companies, I don't know what you call it," he says. The importance to the final manufacturers of their local suppliers of goods and services, especially if they remain price competitive, could keep factories from moving overseas, at least in the short term, to cheaper countries such as Indonesia and Vietnam, says Dr Ramasamy. He does, however, believe that "ultimately that will happen" even though the improvements in productivity at Chinese factories in recent years may partly offset the higher wages.

Also, wages can constitute as little as 2 per cent of the cost of making certain goods, so even significant increases may not slash profitability. As well as considering moves overseas - Foxconn has indicated it may switch some of its Chinese production to Taiwan - manufacturers may be tempted to move inland, where the infrastructure is rapidly improving but salaries are still lower, Mr Zeng says. "There will be a trend to move the labour-intensive [industries] from the coastal to the inner [regions], rather than to other countries," he says.

Some companies are already looking to move to the interior, with Delta Electronics, one of the world's largest makers of power switches, is said to be keen to relocate a plant from Guangdong to Hunan province to the north. But the need to be close to reliable suppliers could mean the factories stay put, Ms Ren says. Central cities such as Chengdu, which have good infrastructure and suitable suppliers, could prove attractive, she adds.

"However, a large-scale relocation, I don't think that's possible in the short term." And some observers say the government is happy to see the workers earning more. China wants to transform its export-driven economy into one powered by domestic consumption, as in more developed nations. Higher wages for the poorest-paid workers advance that transition. They also accelerate the sector's climb up the value chain from the low-cost, high-volume model that has been so successful. Higher wages in the factories also reduce China's vast income disparities.

"The government is encouraging the wage increases by the [foreign-invested enterprises]," says Ms Ren. In the long term, the pressure for higher wage is likely to continue to increase as fewer workers are available, Ms Ren says. The labour force is now growing more slowly, partly as a result of China's one-child policy. And while the working-age population is still growing, it is set to peak in 2015.