Jun 3, 2010

Pay rises boost domestic buying, help rectify global trade imbalances

BEIJING: A burst of labour unrest in China has been resolved with hefty pay increases, illustrating how the balance of power in the country's vast factories is slowly tilting towards workers.

Rising wages in the workshop of the world might seem to pose unsettling implications for the global economy in the form of thinning profits for companies and cost inflation for consumers.

But such suggestions disregard more important, positive developments.

By spreading the fruits of China's stunning growth more evenly, higher incomes will help to boost domestic consumption and rectify imbalances that have dogged the global economy.

'If China wants to build up a new growth model driven by consumption, you have to find a channel to redistribute GDP more to labour, especially to the low-income class,' said Mr Ting Lu, an economist with Bank of America-Merrill Lynch.

'Now this is being driven not just by politics, but also by a natural changing balance in the demand and supply of labour.'

Honda Motor this week gave a 24 per cent pay raise to striking workers at a key car parts factory in Foshan city, in southern China's Guangdong province. The plant resumed full production yesterday, after workers ended more than two weeks of strike.

Foxconn yesterday said its workers in boomtown Shenzhen, also in Guangdong province, would get 30 per cent pay hikes after a spate of suicides raised concerns over conditions at its factory which churns out top-tier electronic products, including Apple's iPhone.

In his first public comments on the problem, Apple chief executive Steve Jobs said on Tuesday that the suicides are 'very troubling'. But 'Foxconn is not a sweatshop', he said at the prestigious All Things Digital conference in California.

Foxconn yesterday confirmed the death of another employee, but denied he died of exhaustion, following a spate of at least 13 suicides and suicide attempts in its Shenzhen plant so far this year. Mr Yan Li, 27, died last Friday after working the night shift for more than a month.

The owner of Foxconn, Taiwan contract electronics maker Hon Hai Precision Industry, said yesterday the wage increase reflected rising prices in China, and it hoped to earn workers' respect.

The Honda and Foxconn stories have been sensational in a country that stamps out strikes and suppresses unflattering news, but they are just a small part of a much broader wave of wage increases in the Chinese manufacturing sector.

Pay for China's 150 million or so migrant workers increased 19 per cent in 2008 and 16 per cent last year, even though exporters were hit hard by the global financial crisis, said Mr Cai Fang, head of the Institute of Population and Labour Economics with the Chinese Academy of Social Sciences.

'Overall Chinese income levels, especially for blue-collar workers, are expected to grow faster than before because fewer new workers will enter the labour force every year,' said Ms Maggie Li, an analyst at Mercer, a human resource consultancy.

This trend will accelerate from about 2012, she said.

In economic terms, China has arrived at its Lewis turning point, a period in development when the economy shifts from a labour surplus to a labour shortage and wages start to increase more rapidly, especially for the unskilled.

Chinese workers have made big strides in recent years in absolute terms as their wages rose about 8 per cent a year, but these increases have not kept up with the broader economy, which has boomed at a double-digit pace.

'China's wage level has stayed very low for a long time despite some increases in recent years and this has depressed domestic demand,' said Mr Yang Yiyong, a research director of a think-tank under the National Development and Reform Commission, China's powerful economic planning agency.

Beijing has declared the promotion of private consumption to be a priority as it seeks to re-orient the economy away from a model that has relied too heavily on investment and exports.

'A 100 per cent increase in wages of lower-income earners will generate about a 70 per cent to 90 per cent increase in consumption,' said Mr Wang Han, an economist with research firm CEBM.

However, economist Huang Yiping at Beijing University cautioned that the government cannot sit back and wait for higher incomes alone to boost consumption. It will have to craft policies that promote the service and skilled-labour sectors to ensure the continued creation of jobs as wages increase.

In the world economy, rising Chinese wages point to an inexorable, if gradual, reduction of China's large trade surplus. Prices of manufactured goods may increase a touch globally, but other countries will step into the breach.

'Low-income countries should be able to grow more rapidly in labour-intensive industries. Almost all other countries should experience improvement in their current accounts,' Dr Huang wrote in a recent research paper.

As the cost of labour increases, China's potential growth rate will slow to about 9 per cent a year from 11 per cent, said Bank of America-Merrill Lynch's Mr Lu. But that is still fast and nothing to fear, he added.

REUTERS, AGENCE FRANCE-PRESSE

Source - The Straits Times http://www.straitstimes.com/Asia/China/Story/STIStory_534636.html 

Jun 1, 2010

ECONOMIC WATCH

By Stephan G�rner & Kaushik Das, For The Straits Times

INCREASING productivity - creating more with less - is the only sure-fire way for businesses to gain a competitive edge. The same is true of countries, and Singapore's Budget 2010 and the recommendations of the Economic Strategies Committee have turned the spotlight back on the question of the country's national productivity. Rather than feeding the economy with more inputs of labour or capital, the Government is now seeking to renew the focus on productivity, and increase the quality and efficiency of Singapore's economic growth engine.

With global competition driving productivity increases for individual businesses, the productivity of labour inputs has increased some 250 per cent since the 1960s. New technology gets most of the credit, linked with better management and disciplines like lean manufacturing, which focus on improving processes and cutting waste. The productivity of material inputs has also doubled in the same period.

But new technology and better management have not helped improve the productivity of another essential economic input - energy. Energy productivity has improved by less than 50 per cent since the 1960s. From today's perspective, as we contemplate a future of higher energy prices and tighter resource constraints, this lack of focus on improving the productivity of our energy use seems short- sighted.

Now is the time to ensure that energy consumption forms part of our broader productivity agenda. Like labour or capital productivity, energy productivity measures the output and quality of goods and services generated with a given set of inputs. As demand for energy increases (as well as its price), companies that tackle this will have a bottom-line advantage. The size of the advantage will depend on overall reduction potential and the energy intensity of the business.

This is not to say gaining energy efficiency will be easy if we just put our minds to it. If it was easy, it would have been done already.

Companies, governments and consumer groups have sought for years to power more economic activity and residential consumption with less energy. There are innumerable barriers to these efforts, including relatively long periods required to earn back some energy efficiency investments. But there also have been some clear successes, such as the growing adoption of energy-saving appliances in many markets.

And as energy costs have risen, the return on efforts to optimise energy usage is now three times greater than in the 1990s, when oil traded for an average US$25 per barrel.

Companies with high energy productivity achieve gains by building on existing efficiency or waste reduction approaches. But we find that traditional lean programmes enable companies to realise only about one-sixth of their potential energy savings. To be successful, companies need an energy-first view of their processes. Then they can systematically identify energy waste and leakage, as they would in any other lean programme. Teams find that considerable energy savings can be achieved by simply changing the order of manufacturing steps, as you tap excess heat generated in one area to reheat elements at another point, or simply move the cooling processes away from the heat-generating ones.

We have found that most companies can reduce the overall energy efficiency of their operations by 10 per cent or more with relatively small investments and by up to 35 per cent when making substantially larger ones.

Savings vary by sector, of course. For example, integrated steel players in Europe or the United States can achieve 10 per cent to 15 per cent savings or more, and chemical companies 10 per cent to 20 per cent. What's more, all these savings can be achieved with limited investment and short payback periods of less than two years.

One European company, for example, estimates it can shave 6 per cent off its energy costs without any capital expenditure investments and an additional 5 per cent with capital expenditure expenses of less than US$20 million (S$28 million).

Few companies are making systematic efforts to holistically map out energy consumption at each step of their operating processes or to identify specific energy waste in their production systems and then to focus on opportunities to reduce it. They have not been setting concrete goals for improvement - the way they have in other areas where they have applied lean tools and thinking. As a result, few are realising anything near their energy-savings potential.

To some degree, you could argue that energy efficiency has been caught up in the wrong debate. It is often seen simply in the context of climate change, while it ought to be regarded as an essential part of broader productivity objectives. In many cases, it is an extremely attractive upfront investment that pays for itself over time, while providing the added benefits of reducing the cost of energy and increasing the productivity of the economy. Cutting carbon emissions is the added bonus.

The writers are partners with McKinsey & Company. Stephan G�rner is based in Sydney and Kaushik Das in Singapore.

Source - The Straits Times http://www.straitstimes.com/Review/Others/STIStory_533717.html?sunwMethod=GET

Some nations see double-digit jumps in shipments