Signalfire

01 Sep 2010

Anxieties over the rising cost of food are bothering consumers in rich and poor countries alike, and stoking fears of social unrest in impoverished, unstable parts of the world once again.

On Wednesday, at least six people – including two children – were killed during violent demonstrations over soaring prices for basic necessities, including bread and fuel, in and around the capital of Mozambique, one of Africa’s poorest countries, sources told Reuters. The government has just increased bread prices by 30 percent.

“I can hardly feed myself. I will join the protest because I’m outraged by this high cost of living,” said Nelfa Temoteo, who lives in Maputo’s crowded Malhazine suburb.

The violence echoes the food price crisis of 2007-2008, which helped push the number of hungry people in the world above a billion, and sparked protests and riots in nearly 40 countries, including Mozambique, Egypt, Haiti and Lebanon.

In Britain too, shoppers will have noticed their supermarket bills going up again. The overall price of food and non-alcoholic drinks rose by 1 percent from June to July, the biggest single monthly rise ever recorded in government figures, the Daily Telegraph newspaper reported. And in Pakistan, where the worst floods in decades have damaged 3.6 million hectares of maize, rice, cotton and sugar cane, the U.N. Food and Agriculture Organisation (FAO) is warning the next wheat harvest is at risk as the disaster has destroyed more than 0.5 million tonnes of seed stocks ahead of the planting season, which starts this month.

“Food aid alone will not be enough. If the next wheat crop is not salvaged, the food security of millions will be at risk,” said Daniele Donati, FAO’s regional emergency operations chief.

In late August, Pakistan’s Dawn newspaper criticised the government-subsidised Utility Stores Corporation for hiking the price of certain foodstuffs like oil, ghee, pulses and gram flour by more than 20 percent, wiping out discounts it had earlier announced for the holy, fasting month of Ramadan.

The paper said the price of wheat flour is also creeping up in Asia’s third-largest wheat producer, and the higher cost of food is likely to hit the poorest hard.

“We must ask if this is just the beginning of a series of nasty shocks for the low-income consumer. Though far from perfect, the utility stores are a lifeline for those with limited means,” Dawn said in an editorial, urging the government to keep essential items at affordable levels in the shop chain, which is meant to sell staples at below-market prices.

People in crisis are also suffering in the Somali capital of Mogadishu, where food prices have reportedly shot up since Ramadan began, as Islamist rebels renewed their military campaign against the fragile government. One butcher told Associated Press he’s selling a kilo of meat for $3, up from $2 before Ramadan, and a sugar importer said supplies are dwindling in markets because traders have left or stopped importing food because of the fighting.

WHEAT THE MAIN CULPRIT

Ramadan may be a contributing factor in Muslim countries, as people stock up for holidays and special occasions. But across the world, food prices jumped sharply last month, which is likely to exacerbate local causes like floods, conflict and religious customs.

Surging wheat prices – mainly due to Russian restrictions on sales following a major drought there – drove international food prices up five percent in August, the biggest month-on-month increase since November 2009, the FAO said on Wednesday. The FAO’s Food Price Index – a basket of meat, dairy, cereals, oils, fats and sugar – has reached its highest level since September 2008, but is still 38 percent below its peak in June 2008.

The U.N. food body says the forecast for world cereal production this year has been lowered by 41 million tonnes to 2,238 million tonnes since June, but that would still be the third highest annual amount on record and above the five-year average.

Expected global rice production for 2010 has also been revised downward – mainly due to Pakistan’s floods – and now stands at 467 million tonnes, 5 million tonnes lower than June’s forecast but still 3 percent more than in 2009 and a historical record.

The FAO says the disturbances in cereal and rice markets will be tackled at a special inter-governmental group gathering it’s holding on Sept. 24.

No doubt both international and national policy makers will be keen to avoid a repeat of the crisis two years ago, and work done by researchers who analysed their responses back then should help prevent the same mistakes being made again.

Julia Compton of the Overseas Development Institute described in a blog earlier this year how bad government action can make the situation worse, citing the example of one Asian country that stoked fears of a national rice shortage, sending better-off consumers scurrying out to the shops to buy as much as they could, leaving the shelves empty.

And even though cash payments were recommended by international agencies as one of the best ways to help poor people afford expensive food, many countries found they couldn’t set up national welfare systems just like that, she wrote.

WHEN TO ACT?

Prices may not yet be spiralling as severely as in 2008, but how bad should things get before those in power start taking action?

In Pakistan, politicians know they can’t afford to upset a population mired in crisis any further, with an official indicating to Reuters last week the government would likely scrap plans to export 2 million tonnes of wheat.

Given it’s a staple food, any shortages or steep price hikes would further inflame public anger towards the government, which has faced mounting criticism over its handling of the catastrophe.

Pakistan banned wheat exports in 2007 because of shortages and high domestic prices – but some experts say such restrictions are a short-sighted response because they tighten supplies on world markets, pushing international prices even higher.

Wheat futures – financial contracts for supplies to be delivered at a later date – hit two-year highs earlier in August after Russia slapped on an export ban.

It’s too early to tell exactly what trouble today’s international price developments spell for the world’s poorest a little further down the line, but the alarm bells have started ringing.

The Financial Times reported on Monday that Egypt has seen small, localised public protests against high food price inflation.

Ministers have reassured voters there won’t be a rise in the price of the country’s subsidised loaves – sold for less than 1 US cent each – fearing social upheaval. So rather than hitting poor people’s pockets for now, the budget deficit is set to swell as the government absorbs the growing cost of wheat imports for its citizens’ daily bread.

While countries will respond differently, depending on their existing food policies and poverty levels, no one can say they haven’t been warned this time.

29 Aug

ZHENGZHOU: In a vast muddy cornfield scarred with the tracks of heavy vehicles, two young engineers pore over a construction blueprint showing a grid of 100 rectangular factory blocks.

Here on the outskirts of Zhengzhou, the provincial capital of Henan in China’s interior, Foxconn, the largest company and exporter in “the workshop of the world” has staked its future on a mammoth new industrial complex.

New powerlines are being erected and roads built to the site under the watchful eye of local farmers who daydream about the entrepreneurial opportunities that up to 200,000 new workers in the area might present.

Taiwan-based Foxconn Technology Group, which includes its flagship Hon Hai Precision Industry, makes gadgets for a constellation of global brands including Apple, Dell, Nokia and Hewlett Packard.

Most of that production comes from its plants in Shenzhen, in the Pearl River Delta area, one of the three major Chinese coastal manufacturing hubs, along with the Yangtze River area around Shanghai and Bohai Bay north of Beijing.

With this leap into Henan province, 1,600 km (1,000 miles) from Shenzhen, Foxconn is expanding aggressively inland, where wages are lower and workers more plentiful, keeping mostly higher-value, engineering, and R&D work in China’s coastal areas. It will have as many as 1.3 million workers in China by the end of 2011, up from 920,000 now, company officials say.

Foxconn is by no means alone. Intel, the world’s biggest chip maker, opened a $600 million plant this year in Chengdu and Hewlett-Packard built a laptop factory in Chongqing, both cities in the western province of Sichuan.

Cheaper labour is not the only attraction. The worker has become the consumer in China, with the government determined to raise household incomes and reduce wealth disparities. Locating factories nearer to markets makes dollars and sense.

“Most of the villagers here think it’s a good thing,” said Meng, Xiangting, 46, a farmer prying stones from a wall with a crowbar for use on his own crumbling home. “They’ve guaranteed jobs for anyone in the area between 18 to 50 years of age. I’m not interested. I’d like to open a small shop for the workers instead.”

With factories closer to home, children of farmers like Meng won’t have to make the annual trek to distant coastal regions and live desultory lives as migrant workers in factory towns.

A rash of suicides at Foxconn’s Shenzhen plant which the company said weren’t work-related but which victims’ families blamed on tough conditions, helped fuel a wave of labour unrest — and has become yet another motivation to move operations into the less volatile interior.

Foxconn’s move will touch off a mini-boom in an ancient Chinese capital perhaps best known for the 5th-century Shaolin temple that is home to its famous brand of Kung Fu.

Foxconn’s suppliers will have to relocate as well. The workers will need housing and places to shop. Some may even be able to afford cars to commute to work on the new highways being built to Foxconn’s mega-factory and its satellites.

TOKYO — The rapid rise of labour costs in China is “inevitable” and Japanese auto giant Toyota Motor has no immediate plan to review its supply chain in the country, its vice president said Tuesday.

Foreign-run factories in China have been targeted in recent labour unrest as workers gamble on overseas companies responding to their demands and government officials supporting their actions.

Production at Toyota’s assembly plant in southern China had to be suspended last month after a strike at an affiliated auto parts supplier in the country.

The unrest has sparked fears that the days of cheap Chinese labour could soon be over for foreign investors forced to offer pay rises to placate workers — and for consumers accustomed to inexpensive goods.

However, Toyota vice president Atsushi Niimi told journalists in Tokyo that he saw current events as a natural stage in China’s economic evolution.

“Japan had a period when (the government) sought to double incomes in the 1960s. At that time, strikes occurred frequently in Japan,” he said.

“It’s better for us to seek solutions by dialogue with employees, but before we are able to do this strikes occur. In a sense, it’s inevitable.

“If we change our suppliers, it would not provide a fundamental solution. What’s important is how well we communicate with employees.”

On the prospect of Toyota’s growth this financial year onward, Niimi said building more production capacity in emerging markets was key.

Despite the yen’s current strength, the company said it was not considering importing vehicles to Japan from its lower-cost plants overseas but would instead focus on making domestic plants more cost-effective.

“I believe there are still many things we can do to innovate ways of manufacturing in Japan,” he said.

“As Toyota is based in Japan,… we think it’s important to keep our competitiveness in manufacturing in Japan,” he said.

TOKYO (Reuters) — Confronted with rising wages and a shortage of labor, a supplier of car body frames to Honda Motor Co. last month earmarked the equivalent of a half year’s profit to triple the number of robots at its three Chinese plants.

The $22 million investment by Japan-based H-One is part of a push to automate factories across China that is expected to gather pace in the wake of the recent burst of strikes and expected appreciation of the yuan.

“The automation equipment industry is growing very, very fast. Sensors, frequency converters, conveyor belts, pneumatic systems, power tools — you name it,” said Raymond Tsang, head of consultancy Bain & Co.’s Greater China industrial practice.

“We’re seeing anywhere between 20 to 30 percent growth in those sectors year over year.”

The series of high-profile strikes in recent months has affected mostly Japanese-owned auto and parts factories including Honda and Toyota Motor Co. in southern China. It has put a spotlight on growing unrest among China’s massive migrant worker population wanting a greater share of the country’s growing wealth.

Although labor remains a small portion of overall Chinese manufacturing costs, some see the worker unrest as further spurring a move to mechanization.

With China now accounting for 15.6 percent of the world’s manufactured goods — having last year surpassed Japan to become the second largest after the United States — the automation trend holds the promise of big profits for equipment suppliers such as Japan’s Fanuc Ltd., Germany’s Siemens AG, and U.S.-based Rockwell Automation.

Investors have taken notice. Shares of Fanuc, the world’s top maker of equipment that numerically controls machine tools, have jumped 16 percent over the past month as the strikes began getting wide media coverage. Sensor maker Omron Corp. has shot up 13 percent.

But analysts argue the growth potential of this trend is far from factored into share prices. The prospect for rapid automation is likely as wages rise and manufacturers look to move up the value chain and produce higher quality goods.

According to Nomura Securities, the ratio of machine tools in China that use numerical controls, a good measure of the level of automation, climbed to 27 percent in the quarter to May, up from 22 percent in 2009 and 19 percent in 2008.

This brings China to the level of Japan in the 1980s when it was in still in a phase of strong economic growth. Japan’s numerical control ratio has since risen to a world-leading 82 percent, offering a glimpse of where China may be headed as its economy develops.

Yaskawa Electric says China demand helped it log record orders overseas for its industrial robots in May, and it reckons the prospect for further growth is strong with the ratio of China plants using robots at just one-fourth the level of Japan.

“The pace of automation in Chinese factories is faster than Japan in the 1980s,” said Wenjie Ge, an analyst at Nomura Securities, which forecasts wages to double in China in five years.

“Rising labor costs would not only lead to an automation of Chinese factories but also increase personal incomes, which is spurring the spread of cars and electronics, and this is again favourable for machinery demand.”

Huge wave

The surge in wages and impending revaluation of the yuan will undoubtedly prompt some companies to move factories to countries with lower labor costs such as Vietnam.

One example is the retail industry. Nitori, which owns a chain of interior goods stores in Japan and imports about 60 percent of its products from Chinese factories, said last week it would consider shifting some production outside China.

Bain’s Tsang says not all production will go the way of automation given that wages, while rising, are still in most cases a fraction of what they are in the West. It also makes little sense to automate when a manufacturer’s business model is based on being flexible to deliver volumes based on demand.

“Further automating their factories is something that most of them are thinking about doing. But they may not do it in same way as we see in Germany or in the U.S. where production lines are 100 percent automated with robotics,” Tsang said.

But the overall momentum behind automation is strong and there is little chance that manufacturures will ditch China as a production base. Among other things, producing in China keeps a maker close to the massive and fast-growing market there.

Shin-Etsu Chemical, which had been reluctant to place a factory in China due to the difficulty of procuring a stable supply of raw materials, said today it would build a silicon plant in Jiangsu Province in response to rising demand.

The Japanese chemical firm plans to invest about $95 million, its first major investment in China, to boost its annual silicon output by about 30 percent.

Electronics parts maker TDK Corp. is also planning to add new machinery at its Chinese factories.

THK Co., which makes linear motion guides for machine tools, received orders of 274 million yuan ($40.35 million) in the quarter to March in China, a record high for a second straight quarter.

Records for robots

Fanuc, which is also a top maker of industrial robots, plans to lift its monthly output of robots to a record high by this fall to meet surging demand in China and India.

“Japanese automation-related makers such as Fanuc have been in a better position than European rivals to benefit from the trend as their products are generally cheaper,” said Mitsushige Akino of Ichiyoshi Investment Management.

“But the recent weak euro is supporting European makers such as Siemens to gain momentum. Japanese and European makers are even in their product quality, and thus the real game is going to start now.”

SHENZHEN(CHINA): Last month, while enthusiastic consumers were playing with their new Apple iPhone 4, researchers in Silicon Valley were engaged in something more serious.

They cracked open the phone’s black plastic shell and started analyzing the new model’s components, trying to unmask the identity of Apple’s main suppliers. These “teardown reports” provide a glimpse into a company’s manufacturing.

What the latest analysis shows is that the smallest part of Apple’s costs are here in Shenzhen, where assembly-line workers snap together things like microchips from Germany and Korea, American-made chips that pull in Wi-Fi or cell phone signals, a touch-screen module from Taiwan and more than 100 other components.

But what it does not reveal is that manufacturing in China is about to get far more expensive. Soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and inflation and rising housing costs are all threatening to sharply increase the cost of making devices like notebook computers, digital cameras and smart phones.

Desperate factory owners are already shifting production away from this country’s dominant electronics manufacturing center in Shenzhen toward lower-cost regions far west of here, even deep in China’s mountainous interior.

At the end of June, a manager at Foxconn Technology – one of Apple’s major contract manufacturers – said the company planned to reduce costs by moving hundreds of thousands of workers to other parts of China, including the impoverished Henan province.

While the labor involved in the final assembly of an iPhone accounts for a small part of the overall cost – about 7 percent by some estimates – analysts say most companies in Apple’s supply chain – the chip makers and battery suppliers and those making plastic moldings and printed circuit boards – depend on Chinese factories to hold down prices. And those factories now seem likely to pass along their cost increases.

“Electronics companies are trying to figure out how to deal with the higher costs,” says Jenny Lai, a technology analyst at CLSA, an investment bank based in Hong Kong. “They’re already squeezed, so squeezing more costs out of the system won’t be easy.”

Apple can cope better than most companies because it has fat profit margins of as much as 60 percent and pricing power to absorb some of those costs. But makers of personal computers, cell phones and other electronics – including Dell, Hewlett-Packard and LG – deal with much slimmer profit margins, according to several analysts. “The challenges are going to be much bigger for them,” Lai said. Most other industries, from textiles and toys to furniture, are under considerably more pressure.

One way to understand the changes taking shape in southern China is to follow the supply chain of the iPhone 4, which was designed by Apple engineers in the United States, sourced with high-tech components from around the world and assembled in China. Shipped back to the United States, the iPhone is priced at $600, though the cost to consumers is less, subsidized by AT&T in exchange for service contracts. “China makes very little money on these things,” said Jason Dedrick, a professor at Syracuse University and co-author of several studies of Apple’s supply chain. Much of the value in high-end products is captured at the beginning and end of the process, by the brand and the distributors and retailers.
According to the latest teardown report compiled by iSuppli, a market research firm in El Segundo, California, the bulk of what Apple pays for the iPhone 4’s parts goes to its chip suppliers, like Samsung, Toshiba and Broadcom, which supply crucial components, like processors and the device’s flash-memory chip.

In the iPhone 4, more than a dozen integrated circuit chips account for about two-thirds of the cost of producing a single device, according to iSuppli.

Apple, for instance, pays Samsung about $27 for flash memory and $10.75 to make its (Apple-designed) applications processor; and a German chip maker called Infineon gets $11.72 a phone for chips that send and receive phone calls and data. Most of the electronics cost much less. The gyroscope, new to the iPhone 4, was made by STMicroelectronics, based in Geneva, and added $2.60 to the cost.

The total bill of materials on a $600 iPhone – the supplies that go into final assembly – is $187.51, according to iSuppli.

The least expensive part of the process is manufacturing and assembly. And that often takes place here in southern China, where workers are paid less than a dollar an hour to solder, assemble and package products for the world’s best-known brands.

No company does more of it than Foxconn, a division of the Hon Hai Group of Taiwan, the world’s largest contract electronics manufacturer.

With 800,000 workers in China alone and contracts to supply Apple, Dell and HP, Foxconn is an electronics goliath that also sources supplies, designs parts and uses its enormous size and military-style efficiency to assemble and speed a wide range of products to market.

“They’re like Walmart stores,” Dedrick said. “They’re low-margin, high-volume. They survive by being efficient.”

The world of contract manufacturers is invisible to consumers. But it’s a $250 billion industry, with just a handful of companies like Foxconn, Flextronics and Jabil Circuit manufacturing and assembling for all the global electronics brands.

They compete fiercely on price to earn small profit margins, analysts say. And they seek to benefit from tiny operational changes.

When a company is operating on the slimmest of profit margins as contract manufacturers are, soaring labor costs pose a serious problem. Wages in China have risen by more than 50 percent since 2005, analysts say, and this year many factories, under pressure from local governments and workers who feel they have been underpaid for too long, have raised wages by an extra 20 to 30 percent.

China’s currency has also appreciated sharply against the U.S. dollar since 2005, and after a two-year pause by Beijing, economists expect the renminbi to rise about 3 to 5 percent a year for the next several years.

“It takes 3,000 procedures to assemble an HP computer,” says Isaac Wang, an iSuppli analyst based in China. “If a contract manufacturer can find a way to save 10 percent of the procedures, then it gets a real good deal.”

Contract manufacturers like Foxconn are now searching for ways to reduce costs. Foxconn is considering moving inland, where wages are 20 to 30 percent lower. The company is also spending heavily on manufacturing many of the parts, molds and metals that are used in computers and handsets, even trying to find larger and cheaper sources of raw material.

“We either outsource the components manufacturing to other suppliers, or we can research and manufacture our own components,” says Arthur Huang, a Foxconn spokesman. “We even have contracts with mines which are located near our factories.”

Many analysts are optimistic the big brands will find new innovations to improve profitability. But within the crowd, there is growing skepticism about China’s manufacturing model after years of pressing workers to toil six or seven days a week, 10 to 12 hours a day.

“We’ve concluded Hon Hai’s labor-intensive model is not sustainable,” says Wang at iSuppli Research. “Though it can keep hiring 800,000 to 1 million workers, the problem is these workers can’t keep working like screws in an inhuman system.”

This type of low-end assembly work is also no longer favored in China, analysts say, because it does not produce big returns for the companies or the country. “China doesn’t want to be the workshop of the world anymore,” says Pietra Rivoli, a professor of international business at Georgetown University and author of “The Travels of a T-Shirt in the Global Economy.”

“The value goes to where the knowledge is.”

SEOUL, July 7 (Yonhap) — The average wage level of Chinese workers is expected to more than double in five years due to labor shortage, which could put pressure on global inflation, a report said Wednesday.

“The shortage of labor force in China is continuing and the number of economically active workers has declined,” said the report by the POSRI, a research institute of steel giant POSCO. “The average wage of Chinese workers will increase by more than double within five years.”

Many economists assess that the Chinese economy has drained its once vast reserves of unemployed workers in rural areas and is facing a shortage of fresh laborers, according to the report.

The POSRI said the global economy is not likely to enjoy “low inflation and high growth” again, which implies that the expected wage hikes in China may stoke global inflation.

Recently, domestic and foreign companies in China have decided to raise salaries for employees at their factories as workers went on strikes demanding higher wages.

The spiral labor unrest is prodding companies in China to shift their production to India, Indonesia and other Southeast Asian nations, the POSRI said. For the past years, many foreign companies have rushed into China in the hopes of taking advantage of low labor costs.

“Wage hikes may accelerate moves for industrial restructuring,” it said.

June 18, 2010

TAIPEI, Taiwan (AP) — Compal Electronics Inc., the world’s largest contract laptop maker, said Friday that China’s labor shortage and rising wages will pose a big challenge to it amid the recovery in the computer market.

But instead of moving to lower-wage countries, Compal will increase the wages of its Chinese workers and try to improve their working environment, said company chairman Hsu Sheng-hsiung.

He said the wages will increase by a “small amount” but refused to elaborate.

Compal churned out 38 million laptops last year — 23 percent of the world total — mostly from its production base in the Chinese city of Kunshan, near Shanghai.

With computer sales expected to increase 20 percent this year, Hsu said Compal will set up several facilities in China’s interior to meet demand.

“By 2030, 80 percent of China will be urbanized,” he told a shareholders meeting. “Wages are still low in the west, but will catch up rapidly. Corporations must not relocate for the sake of wage concerns like nomads chasing new grasslands.”

With an economic recovery in full swing in China, workers have begun demanding significant wage increases and showed far less tolerance for harsh work conditions than their predecessors did only five years ago.

The problem of poor worker morale in China came into stark relief earlier this month amid a spate of suicides at the giant electronics facility of Taiwan’s Foxconn Technology Group in southern China. Stung by the suicides, the company promised to raise basic wages at the facility from 900 yuan ($130) to 2,000 yuan, beginning in October.

The Chinese Communist party called on employers to raise salaries and improve training for workers today, as Toyota became the latest foreign firm to be hit by a wave of high-profile strikes.

The People’s Daily, the mouthpiece of the ruling party, warned that the country’s manufacturing model faced a turning point as demographic and social changes slowed the influx of low-cost labour from the countryside.

Coming a day after the premier, Wen Jiabao, made similar comments, the editorial suggests the authorities may be encouraging businesses to restructure the economy by putting less emphasis on cheap exports and more on higher-value goods and domestic consumption.

For most of the past 30 years, China’s economic growth has been fuelled by low-cost migrant labour. This has helped raise national competitiveness, attract foreign investors and keep consumer prices lower across the world. But members of a new generation of migrants are less willing to endure hardship and many have successfully gone on strike to demand better conditions.

Without mentioning strikes, the People’s Daily said China should adjust to a tighter labour market by improving skills, creating more service-sector jobs and giving workers more cash to spend. This echoed a speech a day earlier by Wen, who said a new generation of migrant workers should be given improved conditions .

“Your work is glorious and should be respected by society at large. Migrant workers should be cared for, protected and respected,” he told workers at the construction site for the No 6 subway in the capital. “The government and the public should be treating young migrant workers like their own children.”

According to labour activists, there have been numerous strikes in recent years, though few get reported in the media. Chang Kai, professor of labour relations and law at Renmin University, said the number had increased by 30% per year.

Their impact has grown as the “one-child” family planning policy starts to thin the bulge in the working-age population. This demographic change in the balance of labour supply and demand has added to improved worker organisation and greater activism at high-profile foreign firms.

Japanese firms have disproportionately been the focus of the reported strikes. The Toyoda Gosei car parts plant, in Tianjin, was shut down by a strike this week until the management promised to negotiate higher wages.

Three Honda plants in Guangdong have been affected, along with a Hyundai factory in Beijing and a Taiwanese rubber products manufacturer in Shanghai. According to Xinhua news agency, the fast food franchise KFC has conceded to a union demand for minimum monthly pay of 900 yuan (£90), up by 200 yuan.

In most cases, however, workers have organised outside the unions, which are seen as close to management and the party. This has sparked commentaries in local media urging unions to mediate more effectively between workers and employers.

Having seen how the Solidarity movement in Poland helped to overthrow a communist government that stopped representing its interests, China’s leaders do not want to alienate the labour force. So far, there is no sign of any mass, nationwide protests. This week’s statements of support for workers’ rights suggest the politburo wants to keep on the right side of the activists.

7 June

Though Europe’s social model proved “resilient” against the economic crisis, it must be “corrected” to prevent increasing social unrest, EU Employment and Social Affairs Commissioner László Andor told EurActiv at the fringes of a meeting with EU trade unions and employers.

EU finance ministers agreed on 9 May to establish a rescue mechanism worth around €750 billion to protect the euro from collapsing under the weight of debt accumulated in countries such as Greece, Spain or Portugal (EurActiv 10/05/10).

Crisis-hit EU countries have adopted highly unpopular austerity measures, which in the case of Greece sparked violent street protests (EurActiv 05/05/10).

The European Commission has developed a blueprint for growth, the ‘Europe 2020′ strategy, which it believes will set Europe on the path to economic recovery. As reported by EurActiv, a number of stakeholders have argued that the Europe 2020 strategy does not have a sufficiently strong social dimension in its current guise (EurActiv 10/03/10).

The term ‘European social partners’ refers to those organisations at EU level which are engaged in the European social dialogue, as provided for under Articles 154 and 155 of the EU Treaties.

Andor confirmed that the European Commission has a “real concern” about social unrest in certain countries where the “financial panic has been out of control”.

He described the need for tough austerity measures in hard-hit countries such as Greece as “inevitable”, adding, however, that EU financial support should help to prevent any severe escalation.

Andor said that these risks should not affect other countries “where this panic doesn’t apply and social unrest can be constrained”.

Specifically, it is essential to maintain a strong social dialogue and fully involve social partners in the development of future plans, he said.

Likewise, he said it was vital to bring forward a convincing strategy for growth and jobs, which is why he believes it is “crucial” that EU leaders give political approval to the Commission’s Europe 2020 strategy at a 17 June summit in Brussels.

In response to the escalating risk of social unrest, he said the EU must continue to reform and “correct” the European social model, as this is the only way to “preserve peace” in the long run.

Sense of urgency ‘missing’, say social partners

Andor was speaking to EurActiv on the sidelines of a 4 June meeting with EU ‘social partners’, who were presenting the final input of workers’ unions and employer organisations to the ‘Europe 2020′ strategy for growth and jobs.

Workers and employers joined forces in agreeing that an ambitious growth strategy is the only way to ensure economic recovery.

However, Philippe De Buck, director-general of BusinessEurope, said European employers feel a sense of urgency was missing from the strategy.

Changes difficult to swallow

Andor argued that while some changes might be difficult to swallow for European citizens, the European way of life in its current form would have to change, for example through people working later in life.

“We have to appreciate that Europeans are living longer, and of course social security systems have to be adjusted to this demographic fact,” he said, though he added that “working longer doesn’t necessarily undermine quality of life”.

While some structural changes are inevitable, Andor argued that the European social model has proven “quite strong and resilient and has helped people in the face of this crisis”. The automatic stabilisers and social security mechanisms are “very much appreciated” by EU citizens, he claimed, praising the EU’s anti-crisis efforts.

Discussions on these changes are around the corner, he told EurActiv, starting with the launch of a dialogue on social security.

On 23 June, together with Commissioners Michel Barnier and Olli Rehn, Andor will launch a Green Paper on Pensions, though he cautioned that the latter “is going to be a longer-term discussion, because we don’t like to make improvised decisions on issues that will affect the structure of society”.
Positions

Philippe De Buck, director-general of BusinessEurope, said that while “we are with the trade unions when it comes to supporting a growth strategy,” the employers federation believes it would be a mistake to make companies the “victim of stoppages and social unrest at this point when we need economic recovery so badly”.

Meanwhile, trade unions expressed “despair” at the economic policies being pursued in Europe at the present time.

John Monks, European Trade Union Confederation (ETUC) general-secretary, argued that the massive cuts in public expenditure “all happening at the same time” across Europe would destroy any prospects for growth. Too many simultaneous austerity measures will simply not work, he claimed. “Slashing spending while still suffering from low growth and high unemployment is crazy,” he stressed. He added that ETUC’s main point is “to warn of social unrest if the agenda is cuts, cuts, cuts and 2020 is just words, words, words”.

European Commission President José Manuel Barroso responded by underlining the necessity of these measures in the current climate, saying that confidence was required for growth to take place, and confidence would not return “until we get our house in order”. He said the EU’s social model had proven its merits. “We managed through social dialogue to preserve many jobs, proportionately much better than the USA, for example,” the commissioner said.

Barroso said he was “extremely worried” by the social situation in Europe. In his meeting with the social partners, he reminded them of the need for fiscal consolidation and structural reforms, noting for example that he was in favour of a financial transactions tax.

Wed June 2

BEIJING (Reuters) – A rare burst of labor unrest in China has been resolved with hefty pay increases, illustrating how the balance of power in the country’s vast factories is slowly but surely tilting toward workers.

China

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 this disregards more important, positive developments. By spreading the fruits of the 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 labor, especially to the low-income class,” Ting Lu, an economist with Bank of America-Merrill Lynch, said.

“Now this is being not just driven by politics, but by a natural changing balance in the demand and supply of labor.”

Honda Motor Co this week gave a 24 percent pay raise to striking workers at a car parts factory in southern China. The plant resumed full production on Wednesday.

Foxconn on Wednesday said its workers in a different part of southern China would get 30 percent raises after a spate of suicides cast a troubling light on conditions at its factory which churns out top-tier electronic products, including Apple’s iPhone.

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 percent in 2008 and 16 percent in 2009, even though exporters were hit hard by the global financial crisis, according to Cai Fang, head of the Institute of Population and Labor Economics with the Chinese Academy of Social Sciences.

TURNING POINT

“Overall Chinese income levels, especially for blue-collar workers, are expected to grow faster than before because fewer new workers will enter the labor force every year,” said 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 labor surplus to a labor 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 percent a year. The problem is that these increases have not kept up with the broader economy, which has boomed at a double-digit pace.

Labor’s share of national income declined to 39.7 percent in 2007 from 53.4 percent in 1996. During that same time, the corporate share rose to 31.3 percent from 21.2 percent, official statistics show.

“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 Yang Yiyong, a research director of a think-tank under the National Development and Reform Commission, a 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.

CONSUMPTION GROWTH

The central government has launched a flurry of incentive programs to encourage people to buy home appliances in the countryside and cars in cities. It is also building up the social safety net to stimulate more discretionary spending. And some cities have even started offering shopping vouchers.

But nothing will be as powerful as income growth.

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

Huang Yiping, an economist at Peking 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-labor sectors to ensure the continued creation of jobs as wages increase.

For the world economy, the conclusion is more unambiguously positive.

Rising Chinese wages point to an inexorable, if gradual, reduction of its whopping 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 labor-intensive industries. Almost all other countries should experience improvement in their current accounts,” Huang wrote in a recent research paper.

As the cost of labor increases, China’s potential growth rate will inevitably slow to about 9 percent a year from 11 percent, said Lu of Merrill Lynch. But that is still very fast and nothing to fear, he added.

“If we want to seek sustainable growth and if we want to seek happiness, maybe in the next stage we will focus more on redistribution than growth,” Lu said.

(AFP)

BRUSSELS — European austerity measures to tackle the soaring debt crisis have sparked “despair” and will cut too deep, a senior trade union official warned Friday, as he announced a protest action day.

John Monks, head of the European Trade Union Confederation, who met EU and employers’ officials in Brussels, said there was “despair and alarm at the prospects of growth in Europe as all countries, not just those in distress, move to cut their budgets, cut public expenditure.”

“We don’t want a bleak mid-winter for the unemployed,” he added, pointing out that already there was “quite a bit of social unrest in some countries” over the kind of deep cuts in public spending, including salaries, pensions and benefits.

Rioting has been particularly fierce in Greece where the government is making deep cuts after being afforded a multi-billion euro bailout by the EU.

Monks said plans were underway for a European “day of action” on September 29, with the focal point a protest at a meeting of EU finance ministers scheduled the same day in Brussels.

Work stoppages were a possibility on that day “to keep pressure on the growth agenda,” he stressed.

EU Commission chief Jose Manuel Barroso said the talks had been tough and “very open” but insisted on the need for the austerity measures as Europe emerges from the worst recession since World War II.

“I underlined the need for fiscal consolidation and structural reforms,” he told a joint news conference with Monks.

“Only if we are serious about getting our house in order, and only if we really do our best to work for a sustainable future, will we be able to re-establish confidence in our economy and growth,” he added.

“Without determination to act now, we put our European model of society at risk,” he told reporters.

Philippe de Buck, director general of the Business Europe employers’ group, called for restraint and social dialogue.

“The last thing we need is continued social unrest This is a way to undermine confidence,” he warned.

Bernard Thibault, head of France’s main union federation the CGT, said workers were “the main victims of a crisis which they were not responsible for,” something which he said justified their protest action.

He said dialogue with Barroso was not fruitful as the EU leader justified the austerity plans due to national debts.

June 1

TOKYO — The strike that has crippled production at Honda Motor’s factories in China has come as a wake-up call to Japan’s flagship exporters as they seek to remain competitive and push into China’s burgeoning market with the help of low-wage workers.

The strike by Chinese workers to protest pay and working conditions has cost Honda, Japan’s second-largest carmaker after Toyota, thousands of units in lost production in the world’s biggest auto market. The walkout began on May 17 at a Honda transmission factory in Foshan, in the southeast, and has shut down all four of Honda’s factories on the mainland.

“Honda takes the situation very seriously,” said Yasuko Matsuura, a spokeswoman for Honda in Tokyo. The company “is working toward reaching a resolution as soon as possible.” On Tuesday, there were conflicting accounts by the company and Chinese employees about how soon workers might return to their jobs.

In Tokyo, the strike has driven home a salient point: as Chinese incomes and expectations rise in line with the country’s rapid growth, while Japan’s own economy falters, the two countries face a realignment that could permanently alter the way their economies interact.

To complicate the picture, Japanese companies see the Chinese as crucial consumers of their goods to make up for a shrinking and aging market at home. Some of the most profitable Japanese companies, like Fast Retailing, which runs the budget clothing line Uniqlo, have relied on production in China since the 1990s to keep prices low.

“Japan is starting to realize that the age of cheap wages in China is coming to an end, and companies that looked to China only for lower costs need to change course,” said Tomoo Marukawa, a specialist on the Chinese economy at Tokyo University.

Despite the consequences for production costs, a rise in wages and standards of living in China would be welcomed by many Japanese exporters. The same companies that produce in China have also moved to sell their wares there, moving factories to the mainland to reduce costs further and meet the needs of local customers.

In Uniqlo’s case, as incomes in China rose, it followed up with local stores in 2002; the company has opened 64 outlets in China and aims to open 1,000 stores there in the next decade.

And yet, for Honda, prices of its cars in China may have to drop considerably before the company can truly tap into the market.

The strike by 1,900 workers at Honda’s Foshan factory came as a particularly big shock to Honda, which had announced just days before that it would increase production in China to meet demand.

Honda’s chief executive, Takanobu Ito, had said the automaker would begin major expansions at two joint ventures in China, Guangqi Honda and Dongfeng Honda, increasing capacity by 30 percent to 830,000 cars and minivans by 2012.

In April alone, Honda made 58,814 cars in China, a 28.7 percent increase from the same month the previous year and a monthly record.

Five of six Japanese car manufacturers with factories in China broke production records in April.

“The wave of motorization in China will not abate for the foreseeable future,” Mr. Ito said last week. He said that Guangqi Honda would introduce a compact car intended especially for the Chinese market that would be produced there in 2011.

The rise in output in China has been driven by a strong economic recovery in that country, which is buoying auto sales more than in any other major market. The rebound has been good news for Japanese automakers, hard-pressed to cut costs as they seek to return to profit after a collapse in car sales because of the global economic crisis.

Auto sales in Japan have remained sluggish, and sales in the United States and Europe have not rebounded to precrisis levels.

In China, Japanese carmakers are also racing to catch up with rivals after arriving relatively late in the market. The first Honda rolled out of a plant in Guangzhou in 1999, while Toyota did not produce in China until 2002.

Though sales have grown rapidly since then, Japanese carmakers are still struggling against local rivals because of a dearth of small, low-cost models, which are driving market growth in China.

Honda’s least expensive model sold in China, the Fit compact car with a 1.3-liter engine, is priced at about 83,000 renminbi, or about $12,500. A Chery QQ 1.3-liter minicar from the Chinese carmaker Chery Auto sells for about half the price of the Fit.

Given that the average monthly income in China s is 2,050 renminbi, about $300, the price of a Chery QQ is around 19 months’ salary, while the Honda Fit requires more than 40 months. The Honda Accord 2.4-liter sedan, meanwhile, sells in China for about $35,000, far beyond the reach of most workers.

For Honda, the promise of access to a huge, growing market in China was as much a factor as cheaper labor in luring it to open factories there. A 25 percent import tariff on foreign cars is also a major incentive for foreign automakers to produce in China.

More quickly than any other major Japanese automaker, Honda has started exporting cars made in China to third countries. A small plant in Guangdong makes its Jazz model for export.

Besides complaining about their pay, Honda’s striking workers complain about a wage gap: the company’s Japanese employees in China are paid about 50 times what local Chinese workers receive.

Experts say that at the factory level, Japanese companies will need to start changing the way they work with employees — giving them fair pay, benefits and a chance for promotion in line with those accorded to employees from headquarters in Japan.

“Japanese manufacturers need to raise morale by making sure that local staff can also climb within the company,” said Tatsuo Matsumoto, Asia researcher at the Japan Center for International Finance.

By MARCO SIBAJA (AP)

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