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Electronics Production | September 09, 2008

Is China's cheap labor supply really drying up?

A lot has been written recently about the dwindling availability of cheap labor in China, including a recent article in The Economist magazine, says Charlie Barnhart of market researcher Charlie Barnhart & Associates.
Some propose that the good times (for Western electronics OEMs) will soon be drawing to a close – some claim there is plenty of runway remaining for at least the next decade. In our opinion what all these reports are missing is that the operant term in the preceding sentence is ‘cheap’, which from a business perspective is measured by an OEM’s Total Cost of Ownership – not just what they pay for labor.

Here are the facts as the market researcher measured them from actual electronics industry data:
- The cost of labor in China has increased faster than the currency adjusted local inflationary index for at least the past 6 quarters (the raising cost of labor is not news at this point, it is history).
- China as a low cost labor source has now been eclipsed by both India and Vietnam whose labor costs are lower on a fully burdened basis for both PCBA and Product build.
- The concentration of manufacturing in China’s River Deltas has reached the point of functional saturation, as determined by the industry versus the speculation of academics and journalists.
- On a Total Cost of Ownership basis (for most Western OEMs) Mexico & Eastern Europe are now at parity with China for all but the smallest, lightest and high volume consumer product solutions.
- Given the increasing cost of oil over time (and the global green movement) it is inevitable that cross-hemispheric solutions will ultimately lose ground to within-region (called ‘near-shoring’) solutions.

None of which means that the billions and billions of USD$ spent every year on electronics manufacturing services in China will suddenly evaporate in a puff of smoke. But times are changing… which may be the ultimate ‘So what?’ When has this industry (or much of anything else) ever operated in a quiescent state? Someone once said ‘change is inevitable’… so check your historic basis at the door and go do your homework, as I also remember someone else saying ‘Outsourcing is not a one-size-fits-all activity and never will be’, says Mr Barnhart.
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