Strikes and walk-outs by workers demanding better pay may be a bellweather for the future, but it is not denting the major suppliers’ commitment to investing in China
There have been strikes and standoffs at plants across China, marking the end of an era. Chinese workers are now beginning to demand higher wages and better conditions. China is no longer going to be the cheapest place in the world to make things. But China is still going to be the world’s biggest market for automobiles. As the country’s workers demand more, and as their incomes rise, they will begin to demand vehicles for personal use.
So will the end of cheap labour affect China’s automotive supply chain? What implications are there for the automotive logistics sector in China? Will this spate of wage demands rise across the nation and across all sectors?
The recent wage disputes began after workers began committing suicide at a subsidiary of Hon Hai Precision Industry, a Taiwanese electronics maker. Hon Hai and its subsidiary, Foxconn International Holdings, decided to increase wages for entry-level staff at their plant in China. The new wages are now double the previous amount.
This has prompted a wave of demands for better wages in other industries. A couple of supplier companies for Toyota and Honda began to face problems with staff in the second quarter of this year. For example, staff at Atsumitec and Omron, suppliers to Honda in China, went on strike to demand wages to be raised. And then there was the saga at the Denso Guangzhou Nansha plant, where workers also demanded salary increases. After four-and-a-half days of strikes in June, workers and management came to an agreement and production re-started. Meanwhile OEM plants such as those for Honda and Toyota were sitting idle until the wage disputes were dealt with at their supplier plants.
But demand is still high for vehicles in China, so far from deterring suppliers, they continue to expand along with OEMs. Denso, for example, has announced it will increase capacity this year, as Toyota will also further expand in China. Neither company has given exact expansion figures yet, but they have said that wage disputes will not deter them from growing in China.
“We are considering expanding our production capacity for car air-conditioning related components in China,” says Denso spokesperson Goro Kanemasu. “China is one of the key regions that we are focusing on.” For Denso, the largest global automotive supplier with annual sales of $32 billion in the last financial year, Asia accounts for 71% of Denso’s global sales, with China now accounting for 30% of Asian sales.
The examples at the automotive supplier plants are only the tip of the iceberg. Further up the chain, experienced engineers and staff are also constantly on the lookout for better wages.
“With the expansion of China’s auto industry, the shortage of engineers is critical,” says Bill Russo of Synergistics. “The minimum wage of an automotive design engineer is about RMB 5,000 per month ($740). Given the scarcity of talent, those with several years of experience can actually earn wages higher than the average of engineers in foreign companies.”
Russo goes on to say that China’s position as the low-cost “factory of the world” could be under threat as widespread calls to increase workers’ wages combined with rising inflationary pressures push companies to consider relocating work outside the country.
A few cities in China have already begun to raise minimum wages, with many more cities and provinces to follow suit amid concerns that factory owners in China were underpaying their workers, says Russo.
Essentially, the labour market in China is becoming more competitive. This is a natural stage in the development, which will raise China’s cost structure and place pressure on companies trying to grow profitably, he says.
But since every global supplier wants to supply an OEM in China, they have to keep their product prices competitive. Many will have to look to cut costs elsewhere in their supply chain, and this may well be in the logistics arena.
So are LSPs being pressed to cut costs as wages rise? Or will tier one suppliers consider cheaper suppliers or setting up production hubs in cheaper countries rather than China?
“We are monitoring the current situation in China, but the latest occurrences don’t have a significant effect on our sourcing plans,” says Michael Sommer from Continental Asia. “We are localising the whole value chain including R&D, sourcing and manufacturing in China,” says Sommer.
“We make a detailed selection according to evaluations of monetary factors, such as logistics, preferential tax policy, compensation, land price as well as non-monetary factors, such as attractiveness of the region, industrial community, labour market and authority support,” says Sommer, adding that this localising is where there is a big potential to save costs depending on the commodity.
“Continental also has plans to expand our operations into other Asean countries. We are investigating other markets outside [China]. Thailand, Indonesia and Malaysia are already well-established, large markets. We will also observe the markets in Vietnam and Cambodia, and if a reliable supplier portfolio should be established here, we could imagine sourcing the parts also from these countries in the future,” he says, adding: “But it is too early to tell.”
Arthur Zhou at Visteon China echoes the sentiment. “As a tier one supplier, we need to be close to our customers and will continue to do so. Our strategy is to remain engaged with our Chinese customers and we remain committed to the longterm development of the Chinese automotive industry. We have had operations in China since 1994 and plan to continue to grow our capability here.”
But, says Zhou, “We always look at opportunities to suit our customers’ needs and market situation. Visteon already has a very extended footprint in Asia Pacific. In Thailand specifically, we have been operating since 1996.”
Supplier ZF Friedrichshafen is strong in China. The company has 20 plants here, of which 10 are wholly-owned foreign enterprises. ZF China President Ye Guohong does not see wage disputes or price hikes deterring ZF from continuing to expand in China. “We do not see this as a big challenge for us as up to now we are an employer of choice and we have excellent labour relations,” he said, speaking at the opening of ZF’s new Asia headquarters and technical centre in June.
Choosing a local LSP still saves costs in China. However there is a trend developing as global LSPs take over smaller local service providers, thereby gaining access into the local logistics arena. They are still often referred to as local LSPs thanks to their in-depth local guangxi–networks and knowledge–of the vast interiors despite being part of a global service provider.
“Yes we do use local service providers–multiple ones actually,” says Carrie Zhang, senior logistics manager, Asia Pacific, Delphi Automotive Systems China. “When we say ‘local’ service provider in China it could be an international service provider that has acquired a local service provider.”
Swiss service provider Agility Global Integrated Logistics, for example, took over a local service provider, Baisui United Logistics Shanghai, in late 2008. Baisui United Logistics Shanghai has been operating since 1993 and has its own fleet of trucks, with 15 locations across China and logistics centres across the country. In June this year, Agility opened a new 66,000m2 logistics hub in Shanghai. Today Agility can offer local logistics services from Shanghai, Chongqing, Shenzhen, Guangzhou and Tianjin.
North American service provider Schnieder Logistics took over BaoYun Logistics in 2007. The combined offering includes transport, warehousing, cross-docking and thirdparty logistics. Prior to the acquisition, Schnieder only offered consulting services focused on the domestic Chinese market.
But despite these and other global service providers acquiring local LSPs, there is still no single service provider who can cover the length and breadth of China, so companies have to use multiple providers.
“Visteon works with several local logistics service providers to help in China, some of which are appointed by our customers,” says Arthur Zhou of Visteon. “By doing so both Visteon and our customers benefit from the logistics provider’s expertise in the local market, understanding of customer needs, and competitive environment.”
A major issue for tier one suppliers is making sure damages are at a minimum and, if goods have been damaged en route, that there is an organised method for receiving compensation.
Large global providers have lengthy procedures with lots of paperwork but they do ensure that damages are compensated. Local service providers in China often do not have a lengthy system to compensate tier one suppliers for goods damaged in transit. But these local LSPs are so eager and hungry for work that it is often easier to claim for damages.
“Damage is an issue,” says Carrie Zhang, but at Delphi a process called ‘problem reporting and resolution’ is used where if a damaged product is received at the warehouse, the proof-of-delivery document will state it is damaged. This document will then be used to make a claim. “We have a contract between us and our service provider with a clear liability clause,” she explains.
These clauses between tier ones and service providers stipulate industry-wide compensation rates for different modes of transport. Special Drawing Rights (SDRs) are international foreign exchange rates set by the International Monetary Fund. Because of exchange rates, the relative value of each currency varies continuously and thus the value of SDR fluctuates. The IMF fixes daily the value of one SDR in terms of US dollars based on the exchange rates of the constituent currencies.
But in China things are done differently. “More from goodwill than a commercial perspective,” Zhang explains.
For example, if one follows the international convention clauses it might be that the value of the goods damaged is actually around $1,000–but using a rate set at $17 per SDR, the tier one would only get around $60 from the service provider. But for the sake of ‘goodwill’, the service provider is usually willing to give more to maintain a working relationship.
“We negotiate a rate better for us,” says Zhang, adding that local service providers in China are very keen to gain business with the tier one suppliers.
“No one wants to see damaged goods, but it happens,” says Zhang, “We can claim almost 100% back, but with international shipments it’s a lot harder.”
The first thing that TRW Automotive’s Gary Dubberley did when he became operations manager for parts and service in Asia Pacific, was to put the existing HS codes into a little book. Using this as a base, changes can be easily seen. With more than 6,000 codes for automotive related parts, noticing and monitoring HS codes is crucial, as an increase in taxes or a reduction in tariff rates for a certain product means higher or lower costs for the company.
“You need to establish what your HS codes are to know upfront what duties and VAT you’re paying,” says Dubberley.
Similarly it is imperative to stay up to speed with changes in policies in the region, especially as wages in China are taking an upward swing. There are many different trade agreements between China and other countries, such as the Asean region.
“Another challenge we face is that there are periodically some regulation changes on tariffs for different parts. We have to keep updated on those changes,” says Visteon’s Arthur Zhou. “However, Visteon has been working very closely with Chinese customs to apply for pre-approval and reach agreements on the definition of codes before we do customs clearance.”
Moreover, Zhou says he has regular and close communication with customs as well as industry associations to make sure updates are timely with professional explanations on the regulations.
Earlier this year, the Chinese authorities announced that the Renminbi would be graudally de-pegged from the US dollar. For international tier ones this means that as the value of the Chinese currency rises against the dollar, China becomes more expensive and contracts previously made in RMB will now cost them more. But tier one suppliers and their service providers sign long-term contracts that usually cover a few years, meaning sudden changes in exchange rates cannot immediately mean cancellation of contracts.
“We have contracts with service providers for some years so we are not able to adjust anything,” says Delphi’s Carrie Zhang, “This FX situation has already been budgeted in when we made the contracts.” But she adds a hint of concern: “We don’t know how it will evolve.”
“Since most of Visteon’s plants in China support customers in China, the appreciation of RMB has not affected our business,” says Arthur Zhou of Visteon.
With the exchange rate having been de-pegged to the US dollar relatively recently, long-term dramatic shifts are yet to be seen. But even still, the Chinese government is not expected to allow the currency to appreciate as quickly as the market would probably dictate. While analysts say the RMB is as much as 40% undervalued, it is likely to appreciate only a few few percentage points this year, and controls are expected to remain for the foreseeable future, which means the prospect of tier suppliers and manufacturers seriously considering a flight from China appears to be a long way off.