Be Careful What You Wish For

Jul 01, 2010
Volume 22, Issue 7

Jim Miller
Recently, the business press has been full of articles about manufacturing workers in China demanding higher wages and better working conditions. The highest profile developments have been at the electronics contract manufacturer Hon Hai Precision Industry, which makes a broad range of products including Apple's iPhone and iPad. A spate of suicides in recent months highlighted the company's employment conditions and led it to promise a doubling of wages for many of its 800000 employees. Around the same time, Honda faced strikes at its Chinese plants and some of its suppliers' facilities, which forced it to grant a 24% wage and benefit increase.

Government policies are also driving up labour costs, according to press reports. Local governments have decreed increases of 5–25% in the minimum wage paid by companies operating in their jurisdictions, and are also becoming stricter in enforcing labour, worker safety and environmental laws. New government policies are also making it harder to fire or lay off workers.

The rapid rise in labour costs is a result of economic and demographic factors in China. The rapid growth of the Chinese economy, which grew almost 12% in the first quarter of 2010,1 has made it tougher for companies to attract new staff; according to the Wall Street Journal,1 job vacancy postings in China were up 35% in the first quarter of 2010 compared with the same period last year.

The pressures have been particularly extreme in Beijing and the coastal cities, where much of China's industrial base is located, and as such, the cost of living in coastal cities such as Shanghai and Shenzhen are growing rapidly. While companies and the government are looking to make more investments in inland cities, where wage rates are currently cheaper, it is expected that wage increases will even be felt there, thanks to fewer people entering the labour force because of the government's one-child policy.

The rising wages are likely to be accompanied by an appreciation of China's currency, the renminbi. The exchange rates between the renminbi and the US dollar and the Euro have been managed by the government to protect the export sector. However, China has been under growing international pressure to let the currency rise, and the need to control domestic inflation is another driving factor for revaluation.

Good news for bio/pharma

While causing short-term disruption, most observers believe that the improving wages and work conditions, and the appreciating renminbi will create a more sustainable Chinese economy that is driven more by domestic spending and less by volatile exports. This is good news for global bio/pharmaceutical companies because it confirms the assumptions and projections underlying a major strategy undertaken by many industry players: pursuing the growth opportunities in emerging markets. As they have faced declining opportunities in North America and Europe, the global bio/pharmaceutical companies have focused their strategic resources on emerging markets, especially the BRIC countries (Brazil, Russia, India and China), by investing heavily through acquisitions, establishment of R&D and sales organisations, and the in-licensing of products to build their local pipelines. The key underlying assumption for this strategy is that rising incomes and living standards in those countries will trigger greater spending on drugs. According to a projection from industry-watcher IMS Health, drug spending in China will grow 20% over the next 5 years.2

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