January 24, 2022

As China’s Workers Get a Raise, Companies Fret

Bruce Rockowitz, the chief executive of Li Fung, the largest trading company supplying Chinese consumer goods to American retail chains, said in a speech here on Tuesday that the company’s average costs for goods rose 15 percent in the first five months of this year compared with the same period last year. Executives at other consumer goods companies have encountered similar or larger increases.

Airline flights to Vietnam, Bangladesh, Indonesia and other low-wage Asian countries are packed these days with executives looking for alternatives to double-digit wage increases in China. But wages are rising as fast or faster in many of these countries, following China’s example, while commodity prices have surged around the world, leaving buyers with few places to turn.

Bangladesh raised its minimum wage by 87 percent late last year, yet apparel factories there are still struggling to find enough workers to complete ever-rising orders. “Everywhere you see signs saying ‘people wanted,’ “ said Annisul Huq, the chairman of Mohammadi Group, a large Bangladesh garment manufacturer.

The Gap surprised financial markets on May 19 by announcing that a 20 percent jump in costs from suppliers by the second half of this year would depress its profits, prompting a 17.5 percent plunge of its shares the next day. Coach, the luxury handbag company, announced in January that it would try to reduce its reliance on China to less than half of its products within four years, from 80 percent now, by moving production to Vietnam and India.

Yet wages in Vietnam have been rising as fast as Chinese wages, or faster, while India has posed many problems for large-scale manufacturers. Mr. Rockowitz said that India’s infrastructure — roads and ports — was “really poor,” while labor issues, including government regulations, make it hard to build Chinese-style factories for tens of thousands of workers.

With costs rising in China and few alternatives elsewhere, “you have the perfect storm for raising prices,” said Bennett Model, the chief executive of Cassin, a Manhattan-based line of designer clothing. The company’s costs have risen 25 to 35 percent in the last year for cotton and fur garments alike.

Cassin has begun experimenting with garment production in Guatemala with some success, Mr. Model said, adding that many garment companies were still leery of buying from anywhere except China. “Everybody’s scared of the quality — you spend so many years training a factory” to meet detailed specifications, he said.

Yet with 14 million people, Guatemala has the population only of a single large Chinese metropolitan area like Shenzhen or Guangzhou.

Workers in developing countries all over the world are becoming more aware of pay elsewhere through the Internet and the use of social media like Facebook, increasing the pressure for higher wages, Mr. Rockowitz said.

Li Fung handles about 4 percent of American retailers’ imports from China of virtually all kinds of consumer goods, according to investment analysts. The exception is electronics, which tend to be imported directly to the United States by other companies like Apple.

Mr. Rockowitz and other executives predict that the extremely high concentration of factories in southeastern China near Hong Kong will give way to a dispersal across the country in the next five years. Workers are becoming much more reluctant to spend up to three days on buses and trains from the interior to reach coastal factories, particularly when the growth of domestic spending in China is creating more jobs in the interior.

Even the recent opening of high-speed rail routes that cut travel times by up to 80 percent has not been enough to revive the flow of migrants. “They don’t have to take a 1,000-mile trip to the coast — there’s a shortage of people, unbelievable,” said Douglas Hsu, the chairman and chief executive of the Far Eastern Group, a big Taiwanese multinational with extensive investments in mainland China.

And wages in China’s interior have been rising even faster in percentage terms than in coastal provinces, steadily narrowing what was once a pattern of much higher wages in coastal export zones.

Many companies have another reason for staying in China these days: that is where their sales are growing fastest. “If the market is in China, which in many cases it now is, there’s much less incentive to move,” said Charles Oliver, the senior partner of GCiS China, a market research company in Shanghai.

China has become the world’s largest market for a long list of products, from cars to steel. Producing and selling in China protects companies from later facing “Buy Chinese” policies, antidumping cases or other Chinese import restrictions.

Manufacturing in China allows companies to incur costs in renminbi, the same currency as a growing part of their sales. That insulates them from one kind of currency volatility even as the renminbi fluctuates more against the dollar and euro.

Rising wages and strengthening currencies in Asia are making it less attractive to move higher-value industries like auto manufacturing out of the West. But little mentioned by almost anyone making or trading consumer goods in Asia these days is the possibility of moving these relatively labor-intensive manufacturing industries back to the United States or Europe.

Mr. Rockowitz was dismissive of the idea in his remarks on Tuesday at the Foreign Correspondents’ Club.

“The Western world does not have the work force to do this kind of business,” he said. “For ‘made in Italy,’ the workers are old now and there are no new workers coming in.”

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Disney Plans Lavish Park in Shanghai

Disney hopes the Shanghai Disney Resort will be as transformative for the company as the establishment of Walt Disney World in Orlando, Fla., was in the 1970s. It wants to create an engine that will drive demand among China’s 1.3 billion residents for other products, like Pixar films and princess dolls.

Like many global companies, Disney is putting its faith in the rise of the Chinese consumer, and at the same time it is counting on Shanghai’s specific ambitions to become a world-class city.

There will be obstacles. Disney’s first foray into China — its theme park in Hong Kong — got off to a slow start after opening in 2005. It may be a small world, but cultural miscues, including a failure to understand how guests would use the park on holidays like Chinese New Year, resulted in angry customers and damaging media coverage.

The Disney brand is also not as deeply ingrained in China as in other parts of the world. China is the only major country that does not have a Disney Channel, the company’s typical way of building its brand and stoking demand for its experiences and products. Even the concept of brand is a tough sell in China, where cheap knockoffs proliferate overnight.

The Shanghai resort’s first phase — one of the largest foreign investments in China ever — will include a 225-acre Magic Kingdom-style park with a castle surrounded by themed areas. The park component alone will cost $3.7 billion. There will also be two hotels, a lake and a shopping district, bringing the total size of the first phase to about 963 acres. Disney hopes to have the complex open by the end of 2015, an ambitious time line.

This resort has long been expected, but until now plans have been largely secret. They call for its eventually stretching across 1,730 acres in the Pudong district southeast of downtown. The Chinese media have estimated that the full resort, including upgrades to transportation infrastructure in the area, could cost about $15 billion.

A resort of this scale would have a capacity like that of Disney World, which attracts about 45 million visitors a year. In acres, the Chinese resort will be vastly larger than Hong Kong Disneyland.

Notably, Disney did not identify which of its classic rides — Space Mountain, It’s a Small World, Pirates of the Caribbean — it will bring to the Chinese mainland. One reason may be those knockoffs: When Disney unveiled detailed plans for Hong Kong Disneyland, rival parks in Asia quickly installed cheaper rides with striking similarities.

Disney is also walking a careful line with the Chinese government, which approved the park, after two decades of off-again, on-again talks, on the condition that it would be sharply different from the original Disneyland, which has become a symbol of American culture. Disney agreed to heavily incorporate Chinese culture; dressing Mickey Mouse in a kung fu robe would not do.

“Authentically Disney but distinctly Chinese” is how Robert A. Iger, Disney’s chief executive, described the resort in an interview. “There will certainly be familiar Disney elements, but it will also be quite different from the moment that you walk through the gates,” he said.

Shanghai’s Disneyland, for instance, will not feature a Main Street-theme entrance, a staple of every other Disney resort. (The Main Street areas are designed to reflect Walt Disney’s idyllic childhood in a Missouri town at the turn of the 20th century.) Instead, guests will enter through a lush 11-acre area featuring water and trees, where they will be greeted by costumed characters, Mr. Iger said. The castle will be Disney’s biggest.

Disney will shoulder about 43 percent of the initial cost, and its partner, Shanghai Shendi Group, a consortium of state-owned companies, will cover the balance. That split mirrors the resort’s ownership structure.

But Disney will have operational control, holding a 70 percent stake in a management company created with Shendi to run the resort.

David Barboza reported from Shanghai and Brooks Barnes from Los Angeles.

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