China labor prices are rising - What it means for outsourcing

By Charlie Barnhart

May 21, 2007

China's labor costs for electronics manufacturing are rising even faster than I thought they would. In my work for the Outsourcing Navigator Series, I see dozens of quotations for manufacturing projects each month, and nearly every one includes a

China estimate.

Based on this information, I've concluded the following:

Before November 2006, China's labor costs were rising 3 to 5 percent per year. Then in November that gradual slope in the cost curve took off like a rocket. The result: For all 2006, costs rose nearly 16 percent with the vast majority of that increase occurring in November and December. In the first three months of 2007, the rate of increase has flattened a bit but has not reversed course. My estimate for 2007: A 10 to 13 percent increase.

At this rate, China's labor costs either have or soon will reach parity with Malaysia and Thailand, thus making Vietnam the lowest labor cost location in Asia.

What does all this mean for your sourcing decisions?

More than ever, OEMs need to refrain from making decisions based on fanciful whim about where they think costs are lowest and start getting the facts - and the facts need to be accurate. Plus, they need to start doing their homework on Total Cost of Ownership (TCO) whenever thinking about China, Malaysia, Thailand, Vietnam or even Singapore because all of these geographies are becoming progressively intertwined from a regional economic perspective.

Here's the bottom-line:

Rising labor costs in China will inevitably relieve the competitive pressures that have been holding down prices throughout the region so it is reasonable to say that prices throughout Southeast Asia are going to start going up. When and how much - who knows? The best course of action may be for North American OEMs to take at look at Mexico, and Western European OEMs to look toward Eastern Europe.

What impact do you think this will have on global manufacturing? Please post a comment on my weblog.

If you need help with TCO or want to know more about what's going on in Asia and the rest of the world, check out my upcoming Outsourcing Navigator workshop next month in Chicago.

Note from TFI: Quarterly Forum members, have you registered for the June event in Chicago? Planned reports include TFI's annual EMS-ODM industy financial performance analysis, a new study on logistics, and a panel on environmental compliance