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Tuesday, April 20, 2010

Chinese Incentive?

In a wonky article from the Bicycle Retailer and Industry News, we can see a little forecast for prices of bicycles coming out of Asia. The article focuses on China's future conundrum between labor-rates and a growing middle class. The article points out that Chinese wages are increasing, which is great for Chinese workers, but reduces the incentive to locate factories in China.

Chinese workers are gaining increasing opportunities to earn a living closer to home and often fail to return to their distant manufacturing jobs where they are housed in dormitory compounds with other migrant workers. The high turn-over may also lead to production quality issues and more resources spent on training.

What I found to be very interesting about this article was the attitude of Taiwanese companies to abandon China and remain in Taiwan. I have heard this sentiment echoed from people in other industries as well as the bicycle industry. The expense of operating in China does not offset the estimated savings. With provincial and local governments free to arbitrarily manipulate the system, many Taiwanese companies find they serve more as occupational training centers for Chinese workers who leave or start domestically owned factories. This seems to be the opposite of what the Taiwanese government and the American Chamber of Commerce have been touting for the past couple of years. Both have been bullish on increased Taiwanese investment in China.

I have been told first hand of Taiwanese companies that saw their quality plummet upon moving to China while their operating expenses increased, leading them to return to Taiwan where the labor and infrastructure was more reliable. Others were crowded out by local bureaucracy.

Taiwan now has a reputation for high quality bicycle parts and equipment and that reputation translates into value as most cyclists want to buy quality goods.

Here's a blurb:
"But the Chinese government is also fostering labor-rate uncertainty, said Ying-Ming Yang, chairman of the Taiwan Bicycle Exporters Association and president of tire-maker Kenda.

Chinese authorities, who make decisions on minimum wage rates, benefits and pensions with little warning, often surprise factory management.

Business hates uncertainty, Yang said. “I worry that the situation could get worse,” he added. For example, one province announced that minimum wages would go up 28 percent effective April 1. It later made the date retroactive to March 1.

Still, OE pricing has remained relatively steady and consumers have yet to feel any upward price pressure from Chinese goods. The question, Yang said, is how long can manufacturers absorb cost increases?

Kenda has moved some production back to Taiwan from its Chinese operation as the pay gap tightens between Taiwan and Chinese workers, Yang said. At its Chinese operations Kenda has bumped up salaries and now pays for food at workers’ dormitories."


Sesquipedaustralian will be blogging on his trip around Taiwan :here