Li & Fung bullish on the Delta despite pay rises

PUBLISHED : Wednesday, 01 June, 2011, 12:00am
UPDATED : Wednesday, 01 June, 2011, 12:00am

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Even as soaring wages send shock waves across the Pearl River Delta and force factories to move or upgrade, the president of global supplier and exporter Li & Fung sees no threat to China's status as the world's manufacturing powerhouse.

Bruce Rockowitz, who is also its chief executive, predicts manufacturing costs on the mainland will jump by about 5 per cent annually through to 2015. Higher wages get top priority in China's 12th five-year plan, with the aim of increasing spending power. That will increase imports, which will help improve its trade balance.

Li & Fung would be passing the higher costs on to retailers, said Rockowitz.

The wage increases, he said, would mark 'a huge reverse' from a long deflationary period and force producers of consumer goods like garments and shoes to migrate 'fairly rapidly' to western China or developing countries such as Vietnam, Bangladesh and Indonesia. However, the higher rates of pay would still pose no serious challenge to China's role as 'the factory of the world'.

'Some ask what's next? There is no real next. There is no viable alternative in the scale of China,' he said.

Rockowitz, who has spent almost 30 years with supply-chain services, said the efficiency and quality of South China's factories were unrivalled in the world. But he said that as factories in Guangdong moved up the value chain to making higher-end products such as vehicles, they would have to raise the levels of automation to survive.

While manufacturers had to be flexible in production, companies such as Li & Fung must mitigate risks by diversifying sourcing regions, according to Rockowitz. 'Prices are going up 15 per cent this year, but I don't think consumers are prepared to pay more in the United States and Europe,' he said.

On March 1, Guangdong raised the minimum salary by an average of 18.6 per cent, the second increase in 10 months. Dongguan raised monthly salaries even more, by 19.6 per cent to 1,100 yuan (HK$1,320).

Li & Fung, which supplies retailers such as Wal-Mart and Target in the US, sourced 57 per cent of its merchandise from the mainland and the rest from other parts of the world last year. Its sales revenue in the year amounted to HK$124.11 billion, and net profit HK$4.27 billion.

Rockowitz said putting more money in migrant workers' pockets was 'a good and right thing' in building up a consumption-driven economy. 'Migrant workers no longer just work and go back to dormitories,' Rockowitz said. 'Factories have to be more humane to workers.'

Like Rockowitz, Morgan Stanley chief economist Wang Qing also believes China will remain one of the world's most important manufacturing bases, given the high labour productivity, strong infrastructure and economies of scale.

Wang said labourers were gaining more bargaining power and would take a larger share of national income in the coming year. Some Hong Kong factories in Dongguan and Shenzhen, which have been complaining about rising wages and labour shortages, have started offering a range of incentives.

Workers are promised training in Hong Kong, better living and working conditions, and a variety of entertainment.