The recent episodes of wage inflation in China are very interesting in the perspective of the fact that China is today the factory of the world and the control of inflation in most parts of the Western world over the last decade or more has been fuelled by cheap outsourcing out of China and the shifting of manufacturing locations by a large number of multinational corporations out of their own countries into China. The benefits of the shift of manufacturing into China more than a decade back with no minimum wages, no social security, no working norms etc. etc. became a no brainer with the kind of facilities that China provided for brining in FDI into that country.
However as the per capita GDP in China has grown rapidly over the last few years with the growth being on an average 10-12% per year the times of low costs had to end one day. This combined with the one Child policy of China being followed for a large part of the last two decades had to ultimately reach a stage where the working population would either stop growing or growing very slowly relative to the past. This is another factor which will keep the wage pressure going for the next few years also.
The formerly vast pool of impoverished workers from the countryside has begun drying up, as increasing numbers consider it not worthwhile to migrate from their villages. Western multinationals have devised “corporate codes of conduct” setting a floor for labour standards and, under pressure from the international anti-sweatshop movement, are seeking to enforce the codes in the Chinese factories that produce goods bearing their brands. The Chinese Federation of Trade Unions has mounted new efforts to establish union branches in foreign-run enterprises, and has begun organizing enterprise-level trade-union elections in state-owned enterprises.
This is happening at a time in China where the exports are coming under pressure due to the slowdown of the global economy and are likely to remain under pressure going forward as its biggest trading partner, the Euro zone goes through a phase of adjustment and slower growth. By recent estimates the Chinese currency is also estimated to be undervalued by nearly 30%. At some stage in the future this adjustment in the value of the currency is also imminent and will put further pressure on manufacturers out of China.
Infact I was amazed to read that some of the largest contract manufacturers for prominent brands out of China have been paying around USD 125 per month to the labour. The average labour cost in India will be at par or higher than this level despite India having a per capita GDP which is just 25% that of China. Combined with this there is increasing pressure on Chinese companies today to provide social security cover to the employees. Wage increases for Chinese migrant labour has far lagged the increase in the cost of living. As such the disparity in the prosperity of the haves and have nots has been continually growing.
I believe that all these issues are today a golden opportunity for Indian manufacturers, especially in labour intensive industries to pick up their socks and start competing aggressively. Industries such as textiles, leather, labour intensive engineering products, handicrafts, toys and other labour intensive products today have a golden opportunity as such events will force outsourcers of products to look for alternative destinations to procure their products. India is today demographically the best poised to take advantage of the vacuum that will be created as Chinese manufacturers become less competitive. In India most businesses have prospered in spite of the government not because of it which is the total reverse of China where state support and subsidies have played a big part in the emergence of Chinese manufacturing.
This is not to say that things are absolutely clean in India and that child labour or sweat shops do not exist here. The fact of the matter is that even if they do they are in the small scale and unorganized sector not in the kind of large sized manufacturers of China.
With improving infrastructure, better availability of power over the next few years, strong domestic growth (which essentially provides a domestic base to grow) and good funding availability in the form of both equity and debt this is the time for the Indian manufacturing sector to take advantage of the changes that are occurring. Demographically India is the youngest large sized economy of the world and the number of people entering the work force over the next decade is likely to be so huge that overall wage inflation can remain subdued as long as there is a proper system of training and there is a focus on productivity improvement. Indian exports in most of such industries where India can emerge as an alternative are not even 5% of Chinese exports today, thus giving enough growth opportunities.
A number of such sectors which have been given a low discounting by the stock markets in the past due to the widespread belief that competing profitably with the Chinese might not be viable for these companies should now be good investment opportunities with a 3 to 5 year perspective. We could see lot of private equity money flow into such sectors as the recognition grows that there is a strong growth opportunity in such sectors now.
On the markets – The strength of crude oil prices despite negative news flow from Euro zone and mixed news flow from the US indicates to me that the market believe that the recovery process which is underway is sustainable. The US Dollar index seems to have made an intermediate top which should lead to money flow into risky assets. I believe that markets are in a phase of bottoming out which should be followed by at least a 10% rally.