Wednesday, July 07, 2010

China's minimum wage increase and corporate responsibility

Minimum wage in 18 provinces of China has gone up with effect from the 1st July. The wage hike amounts to an average of 20%. Several other provinces and municipalities are expected to follow suit in the coming months.

Minimum wage increase should at least partially address the problem rising discontent among low wage workers who have resorted to industrial action demanding higher wages.

What should companies do? An emerging trend indicates that companies are tempted to move their manufacturing further deep in the mainland where wages are still low and local governments are eager to roll out a red carpet to attract investment. Some are even planing to move out of the country.

But moving inland also means all the hard work done by multinational companies to improve working conditions in their supplier factories will be undone. They will have to start all over again at the new location. Interior mainland locations are also less accessible and away from the media and NGO glare.

Local governments will be willing to turn a blind eye in order to get investors come and set up operations and add to local economy. This is what happened 20 years ago when the coastal provinces competed with each other to win favours with foreign investors.

Responsible companies therefore need to prepare a blue print clearly identifying the new social and environmental risks that the migration of factories will create.

Migration, by the way, is not a bad thing. Provinces which have not benefited from China's boom can now look forward to new factories which will generate employment and improve the local economy. This is also necessary to reduce the widening income gap in China. But a more responsible handling of such migration by companies will be required to avoid a repeat of exploitation.

The best practice for companies however would be to focus on improving productivity rather than switching to a low wage town. This is an opportunity for companies to invest in human resources to upgrade their skills. Higher productivity will make it possible to pay higher wages.

Companies should also note that China is no more about cheap labour alone. China is now also about a huge market and a well developed supply chain infrastructure which no other city on earth can offer. Not at this time.

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