Do rapidly rising wages and incomes in China represent an opportunity or threat for western businesses wanting to succeed in china?
With a growth rate of 7.7% China is a rapidly growing country that has not only the second largest economy in the world, after the united states of America, but a vastly developing country that has a major influence on the rest of the world, especially more developed countries such as the US and the UK. It has a population of 1.4 billion people, soon to be 1 billion in urbanised areas that provide an abundance of consumers for new markets and therefore making it a major player in multinational cooperation’s targets for growth and profit. In the past Chinas geography and low cost factor have meant that many Western businesses have not only expanded into China and its markets but set up manufacturing bases in many of the coastal provinces and near big cities such as Shanghai. In 2009, 153 of the largest 200 exporters in China were firms with a foreign stake. The advantages of low cost manufacturing that is vital to many western businesses to succeed however may be coming to an end. Wage levels in China have increased continually over the last two decades as the economy developed and also from a variety of factors including to an aging population, social pressure and consequently the pressure on multinational corporations who operate within china. These wage increases and therefore rising incomes both offer the opportunity and threat for western businesses that want to succeed in China.
To an extent rapidly rising wages and incomes represent an opportunity for western businesses wanting to succeed in China. Rapidly rising wages will increase the income of millions of workers all over China, leading to greater growth of Chinas middle class. This mix of higher living standards and income will result in more consumers looking for international brands boosting demand. P & G, Procter and Gamble, have been in the Chinese market since 1985 and now has three of the top 5 brands favorited by Chinese consumers. When it first starting selling pampers in China, a range of disposable nappies, it was a complete failure. P & G wrongly assumed Chinese consumers would buy them if they were cheap enough, but didn’t take into account the idea that disposable nappies were a new idea to the Chinese culture and that they were a luxury that most people couldn’t afford. As rising wages increased and P & G invested in better manufacturing, distribution, quality and advertising more consumers were able to afford the little luxuries of the brand including pampers but also head and shoulders and toothpaste, raising revenue and therefore making P & G and very successful brand with in China. Consequently China is now there 2nd biggest market nationally with about 6% of the firm’s worldwide sales. So western businesses are more able to exploit their increased popularity and gain more revenue and profit, gaining success.
Similarly by increasing wages in the manufacturing factories it should help increase labour productivity and reduce labour turnover to maximise profit in the long term again helping to create success in within the Chinese market. One example of this is the company Foxconn, the Taiwanese founded electronics manufacturing giant that produces various high-tech devices including the iPhone, iPad and Kindle. In the first 5 months of 2010 the manufacturing company experienced an extortionate amount of 14 suicides among their workers in the Shenzhen factory, seeming to suggest that labour productivity was starting to slum and that the workforce was unhappy with the company. In response Foxconn raised wages for its assembly line workers in China by 16 to 25 percent, much above the industry average. This pay way will increase labour productivity and decrease labour productivity helping to utilize costs to make up for higher wages and keep Foxconn as the world’s largest electronic manufacturer and remain a successful company within China. Furthermore the wage increases may put pressure on western business to take more risks to increase the revenue to make up the loss by increasing on innovation and then realising new products.
To a greater extent however rapidly rising wages and incomes represent a threat for western businesses wanting to succeed in China. One reason as to why rising wages is threat is that demand for labour is starting to grow at a faster rate than supply of workers, meaning that wage increases will go up even more. The end result will meant that only the fittest companies who can survive the battle to attract the right workers will be able to advance their profit margins and succeed within china. Nike had previously manufactured its products in China because of its cheap labour, entrance to the Chinese market and therefore easier distribution links. However the wage increases have really squeezed on the company’s profit margins, something that can determine who’s on top in a very competitive market. Nike has historically dominated the Chinese sportswear market, holding 12.1%, according to the research firm Euromonitor International but Adidas now has 11.2% of that market and appears to be catching up. This suggests that rising wages and incomes are in fact making it harder for Nike to succeed within China, consequently it has been moving production to less developed countries such as Vietnam and Cambodia.
Similarly as wages increase further it means that it is a strain on western company’s profit margins, creating a harder job of succeeding in china. One example of this is the New Jersey based company Grumman Hill Group LLC, who owns the Aerosoles shoe chain. They are looking who is looking for a partner or buyer to buy the business to help navigate manufacturing environment to reduce its wage costs after being very effected by the squeeze in profits.
Furthermore although rising wages mean a rising income, the money that is gained isn’t necessarily going to be spent. The Chinese are known for saving their money until a much later date and similarly might not be spent on multinational brands but rather on necessities like houses that have rapidly rising costs or sending home to their families in very poor regions of china where multinational brands have yet to penetrate those markets and have their own brand ideals. This would make profit margins tighter as no extra revenue is coming in to counteract the rising wages and therefore make it harder for a business to succeed in china. Tesco for example is one western business that found it hard to become successful among the Chinese market. It’s 121 stores in China only gained 2% of the market share, failing to capture Chinese interests but rather being beaten by large domestic chains like Lianhua that are opening small, neighbourhood stores that sell key products consumers demand. This failure to utilise the rising incomes of Chinese workers meant that Tesco recently announced that it was pulling of the Chinese supermarket market and instead exploring the idea of a joint venture with China Resources Enterprise.
In conclusion I feel that rapidly rising wages and incomes in china represent more of a threat than opportunity for western businesses wanting to succeed in china because of the rising wages levels further squeezing cost of the rapidly developing economy and china itself. The rising incomes don’t necessarily mean that demand for companies products will increase meaning that the profit margins for companies will be tighter and in rapidly emerging, competitive Chinese markets that could be the difference between success and failure. Furthermore the aging population, increasing education levels among the young, increasing shortage of labour, increasing living costs and government policies further concentrating on worker’s rights are going to gradually bring the wage levels up even more, thus making it even harder to gain success in China. There are however ways into reducing the threat itself. Some manufactures such as General Motors, Motorola and Intel have moved their manufacturing facilities inland to source new talent in workers and solve the problem of the higher wages of the coastal provinces and big cities. Similarly by focusing on operational excellence, in the long term cost of higher wages could be paid back eventually. You could also invest in more machinery that in the short term would be higher than wage increases but long term would provide a saving of costs that could help the business’s gain success.