BEIJING -- The cost of labor in China is on the rise. According to regional press reports, as well studies by International Monetary Fund and World Bank, labor costs could have a significant impact on manufacturing in China. This could spell bad news for the bulk-vending sector down the road. With a majority of capsule products imported from China, suppliers may need to raise prices to keep up with production costs.
For bulk vending, along with plush and amusement equipment importers, the news could not have emerged at a worse time. Still struggling to gain traction from a slow economic recovery and now skyrocketing fuel prices, product cost increases threaten to reduce profit margins that have already been cut razor thin.
Once thought to have a virtually unlimited labor pool of very low-cost workers, China is now facing a labor shortage, and companies in the world's No. 2 economy are being forced to compete with higher salaries. In Zhejiang province, a major manufacturing center recently raised its minimum wage to 1,310 yuan (about $200) a month from 1,100 yuan. Over the past year, a dozen provinces known for manufacturing in China's southern and eastern coasts increased minimum wages, most of them by more than 20%, to attract workers.
"Wages are in a rising trend, but that will not affect China's ability to compete if the average increase rate does not exceed 15%," Yin Xingmin, deputy director of the China Center for Economic Studies, Fudan University, told China Daily.
Hardest hit by wage increases have been small to midsize factories that struggle to compete with the salaries offered by larger and multinational firms. These are exactly the type of factories that produce the majority of capsule products, industry observers said. Bulk vending, unlike other consumer markets, cannot easily pass manufacturing and materials cost increases onto the consumers through small incremental prices increases.
"Suppliers in general have been informing operators of increasing prices for many years, since 2"capsules went from 25¢ to 50¢," said A&A Global Industries' Phil Brilliant. “And not to overstate the obvious, but bulk vending is a penny business and greatly impacted when any cost in the manufacturing, distribution or operation process increases. Vending is subject to the world economy and events."
As high-tech multinationals continue to raise salaries, the low-tech and smaller manufacturers find themselves in a bind. Turnover at some of these firms, according to the Institute of Contemporary Observation, a Chinese research group, is approaching 50%. Even larger firms that offer top salaries are seeing personnel turnovers of 20% as competitors lure workers away with job training that promises to upgrade skill sets and offer greater salary potential.
There are some bright spots. Economists point to three mitigating factors that may diminish or slow the impact of rising labor costs. First, labor still represents a small fraction of the cost of the finished product. According to some estimates, labor costs account for just 10% to 15% of the total cost of a product made in China and exported to the U.S. or Europe.
Second, Chinese factories continue to put new technologies and equipment online, which will likely improve productivity. This will allow manufacturers, according to some experts, to increase wages without passing those costs directly onto overseas customers. The Chinese government has also made massive investments in its infrastructure, modernizing ports and highways that have also helped control costs.
Third, some Chinese manufacturers in other industries have been shifting some of their production to lower-wage countries. Bangladesh, Vietnam and Indonesia are among those nations. While bulk vending suppliers are not yet a part of this nascent trend, the lower-wage economies are gaining their attention.