Wages are surging this year in China and in its main low-wage Asian rivals, benefiting workers across the region. However, the increases confront trading companies and Western retailers with surging costs, and are making higher price tags likely for US and European consumers.
Bruce Rockowitz, the chief executive of Li & Fung, the largest trading company supplying Chinese consumer goods to US retail chains, said in a speech in Hong Kong on May 31 that the company’s average costs for goods surged 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.
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. However, 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 in its share price 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. Rockowitz said that India’s infrastructure — roads and ports — is “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 percent 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, 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 only the population of a single large Chinese metropolitan area such as 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, Rockowitz said.
Li & Fung handles about 4 percent of US 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 US by other companies such as Apple.