Large Wave of Factory Bankrupt in China

When I open newspaper, especially on Weibo, bad news are coming one after another. There are a large wave of factory bankrupt and shutdown starting from this year. The wave spread out from Pearl Delta, to Yangtze Delta, and quickly spread out to the whole China.

Labor Cost as the Last Straw

Most of the news attributed the bankrupt to a lot of factors, including the decline of export orders, and increase of material cost. But seldom can they ignore the fact that the labor cost has increased like crazy.

A report mentioned a typical first line worker’s salary was about 1000 RMB/month in 2006, and that number has raised to 5000-8000. Other industry shows the same trends with 3x increase in the last three years. The percentage of labor cost increased from 10% to about 40% for many factories.

Worker Shortage

Along with the sharp increase of salary was the worker shortage. Many factories have orders, and machines, but not enough workers. The worker shortage started to be a hot topic. Meanwhile, it is harder for the workers to find a job. The problem? Pretty simple, the salary issue.

There is no such a thing called worker shortage. If the factory wants to increase the salary by 10x, many developers and office workers will join the factories, but the salary was constrained by the revenue. The actual problem is, the labor cost of yesterday does not attract workers of today, and the labor cost of today is not supported by the orders from overseas.

In this case, there seems only one way – lay off all the workers and shutdown the factories. Thus the problem of worker shortage becomes more troublesome when there is less demand.

Why when the demand goes down, the worker salary still stay up? Because the worker salary is not just determined by demand, there is a hard support – the living cost. With CPI increasing 10% every year, the workers can no longer justify leaving their own hometown (where they don’t need to pay housing, and little on food), and move to big cities, where factories are.

Automatic Assembly Line

I wrote an article about a factories in Zhejiang that was just shutdown. The writer said they had the opportunity to buy automatic assembly line to replace the manually work in 2006, but they missed the opportunity, because the labor cost is so low that to spend money on automatic assembly line does not make sense.

Then 2012 came. When they cannot afford to hire workers, they are also lack of money to buy the automatic assembly line. So they went out of business.

That is the point I am going to talk about in this article.

Massive Shutdown of Labor Intensive Factories May Not Be Completely Bad

Why? Think of the Zhejiang factory story I just mentioned. In a society automatic assembly is not justified because of cheap labor, why people worry about technical innovation? Why use machines to increase the efficiency? Why doing scientific research? Why….?

In the current world, with the biggest challenge to China raises the biggest hope: Technical Innovation!

When hiring people are no longer the by default choice, people have to spend time to automatic stuff and increase efficiency. Having millions of people working in shoe factories does not make sense in the global landscape. It does not justify itself in USA, and now does not justify itself in China.

I would envision a China with a lot of technical innovation. The cost of building machines, and automatic systems are not lowered, but the alternative is much more expensive, just like eco-energy is more useful when oil price keep going up. I would see innovative technical companies emerging in China. People complain about lack of innovation from China for years. Now, we have a much stronger driver and reason to do so, besides weak criticism on newspapers.

I do see the hope out of the disaster.


3 thoughts on “Large Wave of Factory Bankrupt in China

  1. Thank you for the post, I enjoy reading your blog. But what jobs will all those laid off factory workers do? Join Shanghai startups?

  2. They can either find another job, or go back home, and look for job in other places. It is likely that they can find another job, if their expectation is not that high, or some of them just choose to go back, where the cost of living is much lower.

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