“Peak Toil” in China – What does it mean for your business?

For the first time since records were published, China has announced a shrinking of its working-age population. What does this mean for your dealings with China? The short answer is rising labour costs for companies with a presence in China, and flow-on price rises from your Chinese suppliers.

 Source: The Economist

The fear of rising labour costs, as well as input and land costs, has driven many foreign investors to seek new opportunities – particularly in South East Asia and India. Below is a comparative graph of labour cost increases between China and neighbouring countries. Of course, not all of these are suitable for all types of investment. But companies planning for long term growth must at the very least consider these markets.

Source: alphabric.com

This is true not just for labour cost savings. Indonesia, for example, is one of the fastest growing economies in the world. With GDP growth steady in the mid 6% range for the past few years, and the world’s fourth largest population (250m), many companies in the region see it as a new engine of consumer growth. The key opportunities in Indonesia right now – for which a wide variety of Government investment incentives are available include:

– franchise sector

– manufacturing for consumers (food & beverage, textiles clothing & footwear)

– education

– aviation

China + 1 Strategy

For several years, large corporates in the US have recognised the key risks in dealing solely with China as a production or procurement base. Companies such as Walmart pioneered the so-called “China+1” strategies in the late 1990s to spread the risk, and incorporate manufacturing or suppliers in South East Asia. This approach seems more relevant than ever today, in particular to secure long term growth.

China is still a dynamic and exciting market for many foreign companies – not the least due to the rapid urbanisation and poverty reduction, which creates the world’s largest growing consumer market. It is likely that the Chinese Government will increase its focus on productivity to offset the shrinkage in labour force. So there is still plenty of reason to stay and invest in China.

But by adopting a China+1 or +2 +3 approach, companies can build out their regional supply chains and spread the risk inherent in over-investing in just one country. When planning your next move, it is time to think seriously about Indonesia, Vietnam, Thailand, Philippines, Malaysia, and their neighbours.