Low labour costs in emerging ASEAN markets erode China’s competitiveness

Author: Kate Whitehead | Date: 11 May 2016

Research shows management-level salaries in China are significantly higher than neighbouring countries

Base salaries among emerging economies in the Association of Southeast Asian Nations (ASEAN) are substantially lower than those in mainland China, which is losing its labour-cost competitiveness to ASEAN states.
 
New research by Willis Towers Watson shows base salaries in China across all job grades are up to 44 per cent higher than in Indonesia, the most expensive labour market among the ASEAN economies.
 
The study covered five key emerging ASEAN economies: the Philippines, Vietnam, Malaysia, Thailand and Indonesia. It found that entry-level white-collar professionals in China receive an average annual base salary of US$21,000 – 30 per cent more than their peers in Indonesia who receive an average US$16,000.
 
The biggest difference is at middle-management level, with China paying 44 per cent more than Indonesia, – a gap that narrows to 28 per cent and five per cent at senior management and top management level respectively.
 
“If you look at Indonesia from a top management perspective, they make the most compared to Malaysia, the Philippines or Thailand. One of the things which influences that is the fact that senior management talent is not yet abundant. At a professional level, salaries are getting more competitive across the market,” says Sambhav Rakyan, data services practice leader, Asia Pacific, at Towers Watson.
 
Among the emerging ASEAN countries, Malaysia and Thailand are the lowest payers at senior management and top management levels. For senior management, pay in China is approximately 1.9 times that of pay in Malaysia, while top management are paid 1.6 times higher than in Thailand.
 
While a shortage of talent is pushing up ASEAN salaries at the C-suite level, labour costs for factory workers are relatively low and this is a big incentive for manufacturers to move out of China.
 
“Labour costs in China are rising. If you want to get 20,000 t-shirts made you’re not going to get them made in China any more, you’ve got to go to Vietnam or Cambodia,” says Dorian Gabler, business manager at sportswear maker Weyes Clothing Ltd.
 
Gabler says he has noticed a general shift of cheap labour from China to ASEAN countries over the last couple of years, but added that for more high-end, complex garments he would still use China for the time being because the level of workmanship was better.
 
So is China pricing itself out of the market? Livia Yip, president of Global Sources Fashion Group, which runs the biannual fashion trade shows in Hong Kong, says increasing wages are the inevitable consequence of a maturing economy.
 
“Costs are rising and margins get squeezed. There is now competition from ASEAN countries. If you can’t reduce the cost, then you must increase the value of what you can offer,” says Yip.
 
She says China might look to the example of Taiwan, which used to be a cheap labour market and has succeeded in keeping its manufacturing industry by specialising and offering higher-value products, such as functional fabric.
 
“When I speak to the Chinese sellers at the fair I tell them that if they don’t improve, innovate or make something cool then they may only have another five to 10 years,” says Yip.
 
Rakyan was keen to stress that labour costs are just one part of the equation. He sees China moving into a more mature space where there is a greater focus on research and development and higher end, value-added production.
 
“China also has a more sophisticated supply chain which will continue to attract organisations. It has much better infrastructure,” he says.
 
Yip agrees. And she adds language skills are much stronger in China - not just English, but other international languages - which makes it easier to do business on the mainland than in some emerging markets.
 
Gabler is aware of some brands shifting their manufacturing base from China to Vietnam and installing their China manager in the new operation.
 
“That way you get the benefit of the China manager’s experience, they know how things should be done and can pass on their expertise,” says Gabler.