Has China’s Role as the ‘World’s Factory’ Coming to an End?

Has Europe taken over China’s role as the “new sweat shop”?

Writes Spiegel Online, (bold original)

It used to be that European carmakers opened plants to assemble their cars in China. Now the Chinese have turned the tables with the opening of their first factory in Bulgaria, an EU country with low labor costs and taxes. Increasingly, Chinese carmakers are setting their sights on the European and American automobile markets.

Great Wall this week became the first Chinese automobile manufacturer to open an automobile assembly plant inside the European Union in the latest move suggesting the country's carmakers are seeking to establish a beachhead into the European market.

Bulgarian Prime Minister Boyko Borisov on Tuesday attended the opening of Great Wall's new factory in the northern Bulgarian village of Bahovitsa. The plant is to be operated jointly by Great Wall and the Bulgarian firm Litex Motors.

For years, European carmakers like Volkswagen have established large joint ventures in order to gain footholds in the Chinese market, but now the tables appear to be turning.

"Stepping on the European market is our strategy," Great Wall CEO Wang Fengying said at the opening festivities.

Within three to five years, the company plans to produce an entire line of models in Bahovitsa to be sold in Europe, she said. Test assembly of the Voleex C10 and the Steed 5 pick-up truck, which sell for 16,000 to 25,000 leva (€8,200 to €12,800), began already in November.

In the midterm, Great Wall plans to assemble around 50,000 automobiles per year at the 500,000 square meter plant. The number of workers is expected to grow from the current total of 120 to 2,000. Initially, the company plans to sell its vehicles primarily in Bulgaria and neighboring Eastern European countries like Serbia and Macedonia, but it later plans to expand into other EU countries.

Attractive Labor Market

Bulgaria, the EU's poorest country, is attractive as a labor market because it is an oasis of cheap wages and low taxes. Workers are considered well educated and the country is ideal as the site for a company like Great Wall to launch. Given that wages for factory workers have risen considerably in China in recent years, assembly sites abroad have become increasingly attractive for some manufacturers.

While it may be true that China’s wages have risen over the past years, it is important to put into perspective that there has been an enormous chasm between European wages (yes despite Bulgaria's position as having one of the lowest wage in Europe) and China’s wages.

From Urbanomics

Europe hourly compensation in manufacturing is more than 30 times China!

From Ebandit

Chinese workers would take more than 8 years and 10 months to catch up with the annual European minimum wage earnings.

Even if the wage convergence trend does deepen overtime, where China’s wages continues to increase as Europe’s wages decline, it would take substantial changes, and possibly many many many years, if not decades, for this wage based differential to close.

And while the mainstream loves to tunnel on “wages” or “compensation” as the key reason for any shifts in investments [mainly to justify government’s actions for currency interventions or the imposition of mercantilist-protectionist policies], the reality is that wages are just part of the many factors driving the entrepreneur’s economic and financial calculations or business decision processes, such as access to markets, finance, infrastructure et al…, regulatory costs, tax regime, legal environment, political institutions and etc…

Perhaps too, some Chinese investors may just be courageous and far-sighted enough to use the recent crisis as an opportunity to position or that the same investors appreciates Europe's competitive and comparative advantages and acted to capitalize on these

Besides, one investment shift does not a trend make.

The last point is that this serves an example of how conditions are not fixed (past performance does not guarantee future outcomes) and that the world is highly complex.

Wage Convergence: Myths And Facts

Dr. John Hussman, in this excellent weekly article, dispels the myth of cheap labor to argue for convergence of wages between the US and developing nations.

Dr. Hussman writes,

(bold emphasis mine)

“Why do workers in developing nations earn a fraction of the wages American workers earn?

``While protective and regulatory factors such as trade barriers, unionization, and differences in labor laws have some effect, the main reason is fairly simple. U.S. workers are, on average, more productive than their counterparts in developing countries. While the gap between U.S. and foreign wages can make open trade seem very risky, it is simply not true that opening trade with developing nations must result in a convergence of wages. The large difference in relative wages is in fact a competitive outcome when there are large differences in worker productivity across countries.

From Korean Times

``The main source of this difference in productivity is that U.S. workers have a substantially larger stock of productive capital per worker, as well as generally higher levels of educational attainment, which is a form of human capital. This relative abundance of physical and educational capital has been a driver of U.S. prosperity for generations. Neither advantage in capital, however, is intrinsic to American workers, and it will be impossible to prevent a long-term convergence of U.S. wages toward those of developing countries unless the U.S. efficiently allocates its resources to productive investment and educational quality. This is where our policy makers are failing us.”

The Top Ten Most Competitive Countries According to the World Economic Forum

So how then will the prospects of wage convergence occur?

By massive interventionism and inflationism.

Again Dr. Hussman

``If we as a nation fail to allow market discipline, to create incentives for research and development, to discourage speculative bubbles, to accumulate productive capital, and to maintain adequate educational achievement and human capital, the real wages of U.S. workers will slide toward those of developing economies. The real income of a nation is identical its real output - one cannot grow independent of the other.”

Dr. Hussman’s observation has important parallels to the prescient work of Dr. Ludwig von Mises who once wrote,

``What elevates the wage rates paid to the American workers above the rates paid in foreign countries is the fact that the investment of capital per worker is higher in this country than abroad. Saving, the accumulation of capital, has created and preserved up to now the high standard of living of the average American employee.

``All the methods by which the federal government and the governments of the states, the political parties, and the unions are trying to improve the conditions of people anxious to earn wages and salaries are not only vain but directly pernicious. There is only one kind of policy that can effectively benefit the employees, namely, a policy that refrains from putting any obstacles in the way of further saving and accumulation of capital.”

Hence, we learn of three indispensable variables as key to higher real wages: savings, capital invested per worker and productivity. Interventionism only achieves the opposite. Everything else is footnote.