Increase of wages and market performance in Chinese factories - Essay Example

Increase of wages and market performance in Chinese factories 1. Introduction The development of effective business practices is depended on various factors. Usually, the needs of businesses, both in the short and the long term are taken into consideration for designing the key business strategies. However, market conditions can often lead businesses to strategic choices that are considered as risky. Rising wages in a market that is based on the low-wages practice is such strategy. In China the increase of wages in certain industries has become obligatory under the pressures for protection of employee rights and securing equality and fairness in the workplace. The rising of wages in Chinese factories operating in the electronic goods industry and its implications on the western markets are explored in this paper. Emphasis is given on the Chinese firms producing iPads, a product quite popular in the western markets. It is revealed that the increase of wages in the particular industry of China can have a negative impact on the country’s attractiveness as a low-cost producer. Still, China can respond to the needs of western firms in terms of volume of production. Also, even after being increased, wages in China can be characterized as rather low, compared to the salary of workers in the same industry of the western countries. For these reasons, the increase of wages in the particular industry of China cannot particularly discourage western firms from buying iPads and other similar electronic goods from China. 2. Rising wages in Chinese factories – implications for the local and the international market 2.1 Increase of wages and market performance The level of wages is usually considered as a criterion for evaluating the potential of a market to face local and global pressures. Indeed, in economies where economic instability is continuous, the decrease of wages is often used for controlling inflation. It is derived that increased wages denote the strength of an economy and its future prospects. Lipsey and Chrystal (2007) note that the increase of wages is feasible only in markets that are characterized by long relationships, meaning those markets where employees tend ‘to work for the same firm for many years’ (Lipsey and Chrystal 2007, p.576). In other words, the increase of wages reveals the market stability as it is reflected in the establishment of long-term employment contracts. The increase of wages has been often criticized as negatively affecting the performance of firms or industries involved. However, in practice no such issue seems to exist. According to Trivedi (2002) the claim that the increase of wages can lead to a series of problems for industrial relations and industrial performance should be rejected (p.640). It is explained that it is not the increase of wages that results to such phenomena but the decrease in performance (Trivedi 2002, p.640). It is also noted that the increase of wages can boost organizational performance since it can lead to the increase of employee satisfaction, i.e. to the increase also of employee performance which has a critical impact on organizational performance (Trivedi 2002, p.640). According to Taylor and Weerapana (2011) the decisions of countries in regard to the prices of the products imported can highly affect the potentials of the firms operating in the industry involved to keep the prices of their products at standard levels (Taylor and Weerapana 2011, p.58). Reference is made to the case of USA that ‘decided in 2002 to introduce trade restrictions related to the steel’ (Taylor and Weerapana 2011, p.58). This decision led to the increase of the price of steel as a material used in production. As a result, manufacturing firms producing goods based on steel had to increase the prices of their products, not being able ‘to produce the same number of products at the same price’ (Taylor and Weerapana 2011, p.58). The prices of goods based on steel had to be increased since the cost of the key material used in the production process, i.e. the steel, was increased (Taylor and Weerapana 2011, p.58). It should be noted that the decision of a firm to increase wages can be based on various factors. Most commonly, such decision results from the need of a firm to align its practices with the legislative rules that regulate the specific issue (Taylor 2006). It is also possible for such a decision to be taken when severe conflicts are developed between an organization and the local unions (Taylor 2006). There is also the case that the rising in wages is feasible because of the significant increase in the orders received, i.e. because of the increased demand for a particular product (Taylor 2006). In the above case, the firm needs to assure that its employees will respond to the need for increase of production (Taylor 2006). Rising wages is considered as an important strategy for keeping employee motivation at high levels, a fact that will also enhance the employee performance (Taylor 2006). Strazzari and Trevallion (2004) refer to low wages as a practice used by firms operating in Southeast Asia so that they attract foreign investors (p.45). Reference is made, for example, to the manufacturing firms of Australia (Strazzari and Trevallion 2004, p.45). It is noted that these firms have transferred their production centers offshore, especially in Southeast Asia, where wages is kept at low levels (Strazzari and Trevallion 2004, p.45). In this way, the operational costs of these firms are effectively controlled (Strazzari and Trevallion 2004, p.45). Through the above view, keeping the wages at low levels is presented as a practice that can help businesses to keep their costs low; it can be doubted though if the above practice is the appropriate one for achieving this target since it can be related to certain implications. For example, producing in countries with low wages could lead to the decrease of quality of the products involved, an issue that should be taken into consideration when such strategies are initiated. On the other hand, transferring the production center offshore may be unavoidable for the businesses that cannot afford the cost of producing internally, i.e. in the place where the center of operations is established (Navaretti and Venables 2004, p.219). From this point of view, the increase of wages in a market where a different practice has been held can change the market’s dynamic and prospects. For example, countries of Southeast Asia have been traditionally preferred for the development of the production processes due to the low wages. In case of increase of wages, these areas would not be an attractive place for foreign investors (Navaretti and Venables 2004, p.219). In other words, raising the wages could often result to the development of turbulences not only in a particular industry but also in a whole market. It is derived that raising wages, as a business practice, should be avoided in countries that are strongly depended on foreign investment, such as the countries of Southeast Asia, including China. 2.2 Increase of wages in the Chinese market China is one of the most powerful economies worldwide. The rapid development of the country has highly based on its strategic choices in regard to industrial production (Yusuf and Nabeshima 2010). More specifically, from 2005 onwards China has become quite popular for its low wages as combined with an extremely high volume of production (Yusuf and Nabeshima 2010, p.89). In practice, the phrase ‘China price’ (Yusuf and Nabeshima 2010, p.89) has been used for reflecting the above two facts: low price and high production. The above characteristics of the Chinese market are considered as the country’s major advantage compared to its rivals in the global marketplace (Yusuf and Nabeshima 2010, p.89). From this point of view, rising wages in one or more Chinese industries could threaten the above advantage of China. The practice of China to keep wages at low levels is also highlighted in the study of Madura (2011). According to the above researcher, the monthly wages in China can be as low as $300 (Madura 2011, p.39). It is also noted that due to the specific practice, China holds an advantage compared to most other countries worldwide, especially the European and the North American countries, where wages can be significantly higher (Madura 2011, p.39). From this point of view, it is doubted whether China can change this practice since it is a key strategy for keeping national income at high levels and securing the position of China as a major economy worldwide (Madura 2011, p.39). The above two advantages of China, as a major producer in the global market, have been further promoted because of the extensive use of marketing (Guo and Guo 2010). Through appropriate marketing strategies the advantage of China in terms of price/ volume of production has been made known worldwide (Guo and Guo 2010, p.151). Marketing has been also used to inform investors worldwide that China has improved its performance in another aspect of the production process: quality (Guo and Guo 2010, p.151). Carbaugh (2010) highlights another important aspect of the practice of China to keep production costs low. Carbaugh (2010) notes that up today China has managed to secure its competitiveness in the global market by keeping wages and other production costs at significantly low level (Carbaugh 2010, p.264). This practice has been strongly criticized as of its effects on products’ safety and on labour law (Carbaugh 2010, p.264). Reference is made, for example, to the recall, for three times, by Mattel, of thousands of toys that were produced in China and were found to be unsafe for children (Carbaugh 2010, p.264). Disney also decided to recall thousand of toys that were produced in China as they did not meet the safety standards required (Carbaugh 2010, p.264). It is made clear that keeping wages low can have many implications for the Chinese economy. Moreover, under the pressures of the international law in regard to employees’ rights and in regard to the quality of products, China would need to review its strategic choices related to the production processes in all its industries (Phadtare 2011). In this way, two important targets would be achieved: the quality of products produced in all Chinese industries would be improved, under the terms that employees would be more motivated in completing their tasks (Phadtare 2011). Also, in this way, the real GDP of China would be increased (Phadtare 2011, p.282). The specific benefit would be resulted by the increase of wages (Phadtare 2011, p.282) and the introduction of similar practices to enforce industrial relations, such as the hiring of new employees and the provision of additional benefits to existing employees (Phadtare 2011, p.282). 3. How does the increased wages in Chinese factories producing electronic goods, such as iPads, affect the western markets? Electronic goods industry is highly developed in most Asian countries. The particular industry is considered as highly profitable; still, delays in the global market have negatively influenced the particular industry (Lim and Pang 1991). The support of the government is often necessary so that the industry’s problems are effectively faced (Lim and Pang 1991). Such problem appeared in Singapore. In the above state, the intervention of the government helped to wards ‘the increase of benefits from foreign investment’ (Lim and Pang 1991, p.134). The intervention of the government in Singapore’s electronic goods industry was financial having the form of funding, and non-financial, such as the creation of the science park through which electronic goods could be effectively promoted (Lim and Pang 1991, p.134). The above example shows that the level of wages in a particular industry can be depended on a variety of factor. In the case of Singapore, the support provided by the government resulted to the rapid development of the electronic goods industry, a fact that would also benefit wages across the industry (Lim and Pang 1991, p.134). However, in this way, the cost of production for firms operating in the electronic goods industry of Singapore would be increased, leading to the limitation of profits of the parent companies, usually based in Western countries (Lim and Pang 1991, p.134). Wei and Liu (2001) explain that the development of China as a major economy worldwide has not particularly help the performance of certain of the country’s industries. Reference is made, as an example, to the electronics industry. It is explained that, normally, the increase of FDI in China would lead to the improvement of the country’s performance in all industrial sectors, including the electronics industry (Wei and Liu 2001, p.110). In opposition, the increase of FDI in China did not help towards the development of the country’s electronics industry, mostly because of the following reasons: a) under the pressure of strong competition emphasis has been given on the continuous establishment of new businesses (Wei and Liu 2001). As a result, ‘large quantities of production capacities become idle’ (Wei and Liu 2001, p.110); b) the ‘market share of indigenous businesses has been significantly decreased ‘(Wei and Liu 2001, p.110), c) the improvement of technologies used in the production process has been delayed because of restrictions in regard to the foreign investments (Wei and Liu 2001, p.110). According to the World Bank (2007) iPads have highly contributed in the development of economies of countries in Southeast Asia. These countries are all benefited by the production of the particular product due to the following reason: each part of iPads, as also of iPods, is produced in a different region (World Bank 2007, p.118). When all parts are ready, they are fixed together for forming the final product (World Bank 2007, p.118). In the case of China, low wages has been an incentive for iPads and iPods’ designers (World Bank 2007, p.118). It is noted that in China the level of wages in regard to these products is higher, compared to other countries of the greater Southeast Asia, a fact that allows people in China to be benefited more, compared to other people, living in other countries, who also participate in the production of the specific type of products (World Bank 2007, p.118). It is assumed that an increase in the wages of Chinese workers in the electronic goods industry would result to the decrease of orders by western countries and the development of additional production units in other countries, with lower wages. In a recent article of Economist, the ‘boomerang effect’ is presented. Boomerang effect reflects the change in terms of production processes worldwide and the effects of this change on the allocation of resources for a high range of products. Referring to the iPad (see Figure 1 below), the following fact is made clear: the production process related to this product has been divided into various phases: each of the product’s parts is produced in different region, so that production costs are kept at lowest possible level. However, since production costs in China, and other countries that have been based on the practice of low-cost production, have been increased it is no more for the interest of multinationals to keep their cooperation with these countries (Economist 2012). Gradually, the centers of production have become to return to western countries, a phenomenon that it is described as the boomerang effect (Economist 2012). Figure 1 – iPod, costs/ profits/ subcontractors (Source: Economist 2012) Duhigg and Greenhouse (2012) refer to the radical increase of wages in Foxconn,’ the firm that makes electronic products for Apple and other firms’ (Duhigg and Greenhouse 2012). It is explained that this increase has been resulted after a series of complaints for the extensive violation of Chinese laws in regard to employees’ rights (Duhigg and Greenhouse 2012). The above trend is also described in a report published by CBS News (2012). In the particular report it is made clear that the increase of wages in China would result to ‘the elimination of profits of technology firms that use China for the production of one or more components of their products’ (CBS News 2012). 4. Conclusion The power of China as a major competitor in the electronic goods industry, as also in other industries, has been highly based on the following strategy: the low level of wages is combined with the potentials for high volume of production. However, the above advantage seems to be gradually extinguished. The demand for the increase of wages in all countries worldwide, including those countries that were used as centers of production, has lead to the alteration of global market’s priorities. Multinationals, based on Western countries, have achieved significant profits by transferring their centers of production to China and other countries that offered the advantage of low production costs. Since wages in China, and in other countries, need to be increased, this advantage does not any more exist (Economist 2012). This trend seems to be clearer in the electronic goods industry, where failures in the quality of products cannot be tolerated since they can cause non-reversible damage to a firm’s image in the market (Economist 2012). In this way, in the context of the boomerang effect, as described above, western markets will start to re-develop their production units, which were transferred to China and other countries offering the advantage of low-production costs. In the electronic goods industry, a similar practice will be followed, since most of the industry’s competitors will have, soon, no benefit from keeping their production units in China, since the production costs would be of equal level such as in Western countries. References Carbaugh, R. (2010). International Economics. Belmont: Cengage Learning. 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