Southeast Asia: "Low salary advantage" bearing geometry?

Recently, news of textile export growth in Southeast Asian countries has been frequently reported in many media outlets. The analysis of the causes of the growth has more or less been attributed to the shift in orders brought about by rising labor costs in China. Is the low salary advantage equivalent to a manufacturing advantage? What kind of new problems face the textile industry in Southeast Asian countries?

Loss of orders is not "negligence"

India’s “Business Standards” stated that while China is facing problems of inflation and rising manufacturing costs, India hopes to gain some of the international market share of clothing and textiles that originally belonged to China. According to reports, in the Indian textile and apparel manufacturing industry, orders from the United States and Europe have increased by about 10% to 15%. According to the person in charge of the Indian Textile Industry Association, “Although India’s exports currently account for only 4% of the global apparel export market, due to rising labor costs in China, some orders originally planned for Chinese companies have now shifted to India.”

Since last year, affected by the increase in labor costs in China, labor-intensive companies in many developed countries have begun to accelerate the transfer to Cambodia, Vietnam, and Other Southeast Asian countries. Some experts pointed out that this is the inevitable result of the transformation of China's textile industry. It shows the end of the era of demographic dividend and the era of cheap labor. The fact that the industry's development is too dependent on low-paying advantages should also be changed, and the phenomenon of some large-volume, low-value-added orders shifting is also certain.

According to the survey report from British recruiting organization Hays, China’s labor force’s salary increase has made it more attractive to countries such as Bangladesh, Vietnam, Sri Lanka and India, which are in the context of rising raw material prices.

It is understood that the German Textile Machinery Association (VDMA) has started planning to hold professional exhibitions and industry forums for textile machinery in Vietnam in order to seize the opportunity for Vietnam textile exports to rise. Statistics show that from January to November 2010, Germany’s total textile machinery exported to Vietnam reached 27 million euros, an increase of 84% compared with the same period in 2009. The relevant spokesperson stated that the demand for German textile machinery products by the Vietnamese textile manufacturers is increasingly strong.

The advantage of manufacturing cannot rely on the labor cost advantage of low-paid Southeast Asian countries to see the clues from the following set of data. The salary level of a medium-sized textile export enterprise in China is about 100 yuan/hour, and skilled workers can reach 150 yuan/hour. According to the latest data released by the “Economist” in the UK, the Singaporean with the highest hourly pay for manufacturing labor in the ASEAN countries was 62.4 yuan/hour in 2010, followed by Malaysia at 31.8 yuan/hour, Thailand 11.7 yuan/hour, and Indonesian manufacturing. The hourly wage of the labor force is at least 4.5 yuan/hour.

In comparison, India and other countries have a particularly low salary advantage. However, the current level of labor force in these countries, especially the level of mastery of skilled technology, is still unable to compete with the Chinese labor force, so the phenomenon of labor shortage is also reflected.

In Myanmar, skilled workers are still scarce despite the fact that various manufacturers are raising minimum wages. Experts from countries such as Indonesia and the Philippines are calling for the government to increase investment in labor training to deal with the growing shortage of skilled workers.

At this stage, the Indian government began to gradually improve the treatment system for workers in order to fully consolidate the existing labor resources and strengthen the advantages of low-cost manufacturing power. In the power loom industry, the government had earlier issued a related insurance plan to ensure the rights of the workers of the power loom industry. In this policy, the insurance coverage for accidental injury insurance is 150,000 rupees (1 Indian rupee or 0.14 *** yuan). At the end of last year, this plan was further improved. In these insured groups, each textile worker will receive 600 rupees for children’s education every six months. The funding period is 4 years. At present, more than 800,000 textile workers have been listed as beneficiaries of this policy.

The National Board of Directors of India’s Jute also proposed a welfare plan to safeguard the interests of workers in the jute industry. Under this plan, seven factories will fund 14 blocks of Rs. 14,314,000, and each block can accommodate 1,500 workers and their family members. The board of directors will provide a subsidy of at least 2 million rupees for each factory participating in the program.

The enterprises in Southeast Asia also encountered cost problems. Under the background of global shortage of raw materials, some countries in Southeast Asia did not face the problem of “labor shortage”, but their manufacturers also had to face two options, either reducing scale, saving production costs, or increasing Product prices remain profitable.

Benefited from the sharp depreciation of the Vietnamese dong against the US dollar, Vietnam’s textile exports exceeded 2 billion U.S. dollars in the first two months of this year, an increase of 54% year-on-year. At present, the United States, the European Union, Japan and other markets have a strong demand for textiles from Vietnam, and the textile industry in Vietnam has therefore set a grand goal of achieving an annual export of US$13 billion. However, the increase in wages, the increase in production costs, and the increase in the cost of imported raw materials such as cotton caused by the devaluation of the Vietnamese dong will still pose severe challenges to the textile industry in Vietnam. At the same time, the recent sharp increase in domestic electricity prices in Vietnam has forced some producers who are overwhelmed with electricity charges to re-arrange their production schedules to avoid the high electricity bills at peak hours.

The Halico plant in Bac Ninh province, Vietnam, changed its production time and helped the company save 20% of its electricity consumption through “night fighting”. Although the night production plan saves the company some expenses, for large enterprises, the long-term implementation of this method also needs to consider the negative impact on employees' emotions. Pham Phu Cuong, production manager of Nha Be Garment Company, said that the new production plan requires additional subsidies for employees, including night transportation subsidies, which is equivalent to indirectly increasing the company's production costs.

This kind of day-and-night reversed work model has boosted the value of the Vietnamese labor force, and whether it can fundamentally ease the cost pressures on companies is still unknown. The vice secretary-general of the Vietnam Textile and Apparel Association, Shao Shan, made it clear that in the next few years, factors such as cheap labor and other Vietnam's competitive advantages will gradually be lost. Therefore, the basic measure for maintaining export growth is to diversify the commodity structure, increase product added value, and continue to expand the market.