Having established itself as a major force in the global economy, China is turning its attention to social reforms and has announced policies that will resonate throughout the electronics and other manufacturing industries. The changes that were reported after the government concluded its Third Plenary Session in November make it clear the era of China sacrificing its people, resources and environment to satisfy Western manufacturing demands is coming rapidly to an end.
Within years, manufacturers in the country will experience higher costs and lose privileges they’ve enjoyed for decades, many of which are related to economic and labor practices that have long been discarded in Western nations. Electronics manufacturers will no doubt feel the pinch as some of these policy changes begin to take effect with higher costs one of the more obvious impacts.
“The phrase used by the communiqué of the plenum in summarizing the objective of the meeting is 'comprehensive and profound reform,' ” said KPMG analysts Peter Fung and Peng Yali, in a report. “The current reform is not going to be piecemeal or partial. It will include economic, political, social, cultural, and ecological areas. It will be a comprehensive reform rather than focusing on only one or a few specific areas.”
China can afford now to conduct far-reaching social reforms, confident in the knowledge that its integration into the global economy is almost complete and is probably irreversible. It is fast-becoming the world’s most important economy having surpassed the United States in 2013 to become the No. 1 trading nation. The other No. 1 titles it previously secured include: biggest exporter; biggest PC and mobile phone market and; biggest automotive market. (See: China Eclipses U.S. as Biggest Trading Nation).
With all these titles in its pouch, China is turning its attention to social engineering. It no longer wants to be the world’s dumping ground for discarded electronics, its biggest polluter or the lowest labor-cost country. So, the country’s leadership has instituted policies that will change the manufacturing landscape and alter how local and foreign companies engage with its citizens. Wages, for example, are forecast to rise 10 percent or more and other measures being considered to improve workers’ lives will similarly impact manufacturers’ costs. (See: China wages seen jumping in 2014).
What has this got to do with the electronics world? As in the West, the next phase of development for countries as they gain economic power is social reformation. During this period, many unpleasant practices condoned by governments in a bid to be competitive against larger economies typically get swept away. China isn’t different. As the country has grown in economic power and influence it has also begun to examine ways to improve the social position of its citizens and accept values and practices that are considered normal in developed countries.
As a result, over the next five to 10 years, I expect significant changes to how workers are treated in China’s manufacturing plants: Wages are certain to go up; labor laws will be strengthened and harmonized with conditions and practices in Western nations; workers will demand and secure better, safer and more rewarding working conditions; the cost and penalties for environmental pollution will rise and; manufacturers’ total production costs will increase substantially from what they are today and five years ago.
Which industry segments will be impacted most? Contract manufacturers and electronic component manufacturers in labor-intensive segments will feel the heat first, initially. Eventually, all companies involved in the electronics design and supply chains will be impacted as suppliers succeed in passing on their higher costs to customers.
Perhaps the best example of a Chinese manufacturing icon that will soon come under pressure as China embraces more Western practices is the factory dormitory system favored by electronics manufacturing services (EMS) providers and best used by companies like Foxconn to secure production contracts from the likes of Apple Inc., (NASDAQ: AAPL), Hewlett-Packard (NYSE: HPQ) and Dell Inc. (NASDAQ: DELL).
The company-owned factory dormitory and many of the practices labor rights activists find abominable in Chinese manufacturing plants are not unique to China. Many of these, including child-labor, hazardous working conditions, environmental pollution and low wages, were once the norm in Western countries until being abolished over the last century. Reforms recently announced by China’s Communist Party are set to sweep away some of these and the development will have implications for electronic companies and other manufacturers that have made the country their key production center over the last two to three decades.
Just to clear things up, let me state that I don’t support child labor or unfair wage practices and I certainly don’t believe workers should be herded into dormitories like cattle. There are those who defend factory-owned dormitories on the basis that these workers are being given work opportunities they wouldn’t have in their home provinces and that China’s “hukou” (household registration) policy doesn’t allow them to rent or own property far away from their “registered” hometowns or villages.
Some of the reforms are far-reaching and their impact will be immediate. For example, the government is changing its one-child policy to allow some couples to have a second child. It has signaled the end of the hated “re-education” camps and has said it will reform the hukou practice to enable more rural dwellers move to and have residency rights in big cities. (See: China to accelerate “hukou” system reform: document, China's Plenum Outlines Ambitious Reforms to Its One-Child Policy ... and China’s labor camp system officially abolished).
These reforms will take time to unfold. What’s clear, though, is that whatever your company’s reasons for heading to China in the first place, you need to update the longer-term plans and justification for remaining there.
DISCLAIMER: Bolaji Ojo is editor-in-chief and publisher of Electronics Purchasing Strategies. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at email@example.com.