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Automobile industry

China's Auto Sector Faces Rising Labor Costs and Industrial Unrest

Strategic Insights

— 2 min read

China's auto sector is no longer immune to industrial unrest, as recent strikes at Honda, Toyota, and Tenso Corp plants demonstrate. The rising labor costs, exacerbated by the appreciating Chinese Yuan, have become a significant issue for foreign companies operating in the country. According to Li Jupeng, a labor law lawyer, companies need to consider local consumption levels and living costs when determining salaries, especially with inflation and housing prices soaring.

Key Takeaways:

  • China's labor costs have been rising at double-digit rates in recent years, with the local monthly minimum salary standard in Dongguan city, Guangdong province, increasing by 19.5% from CNY769.80 (USD112.90) in 2009 to CNY920 (USD134.90) in 2010.
  • The Chinese Yuan has appreciated to a record high of 6.79 per US dollar, which could further rise following the G20 and G8 meetings, exacerbating cost problems for foreign companies.
  • The recent strikes at Honda, Toyota, and Tenso Corp plants may be a precursor to further industrial unrest, with workers demanding better wages and benefits.
  • Li Jupeng cautioned that foreign companies are more likely to be targeted by strikes due to their reputation and brand concerns.
  • Volkswagen has taken a proactive approach by paying its Chinese workers above the local average level, offering a basket of benefits and allowances.
  • The Chinese domestic market is expected to continue growing, with 15 million cars expected to be sold in 2010, according to the Ministry of Commerce.
  • The expected appreciation of the Yuan is unlikely to seriously threaten the capital-intensive auto industry, as it would rise no more than 3% in 2010.

Statistics:

  • China's consumer price index (CPI) rose 3.1% year-on-year in May, and 2.8% in April.
  • The local monthly minimum salary standard in Dongguan city, Guangdong province, increased by 19.5% from CNY769.80 (USD112.90) in 2009 to CNY920 (USD134.90) in 2010.
  • The Chinese Yuan appreciated to a record high of 6.79 per US dollar.
  • Volkswagen plans to invest a total of Euro 6 billion (USD7.3 billion) in new products and the expansion of production capacities in China between 2010 and 2012.
  • Kia has eight models manufactured in China, including Soul, Carnival, and Forte.

Sources:

  • The People's Bank of China announced on June 19 that it would re-evaluate the exchange rate.
  • Li Jupeng, a labor law lawyer at the Shanghai-based Jia Hua Law Firm, stated that companies need to consider local consumption levels and living costs when determining salaries.
  • Li Jun, a lawyer of Shanghai-based Juntuo Law Firm, said that today's workers are generally more educated and knowledgeable than their parents, and more conscious of their labor rights.
  • Michael Choo, spokesman for Seoul-based Kia Motors Corp, stated that the company has no intention of leaving China in search of a lower cost operating location.
  • Ben Simpfendorfer, Hong Kong-based chief China economist at the Royal Bank of Scotland, predicted that the expected appreciation of the Yuan would rise no more than 3% in 2010.
  • The Chinese Association of Automobile Manufacturers reported that China sold about 13.6 million cars in 2009, up 46% year-on-year.

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