The High Cost of Cheap Chinese Labor

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This article is from HBR June 2006 issue, page 23.
Written by Paul W. Beamish.

It’s well known that low-skilled Chinese labor is abundant.  Over the past two decades, some 140 millionlow-skilled workers have either moved off the payrolls of state-ownedenterprises into the private sector or migrated out of rural areas into thecities to seek their fortunes.

What’s less well known is that the average worker earns just75 cents an hour.  Migrant workers – who accountfor one-fifth of the 750 million people in China’s labor market – typically earnless than $130 a month.  When you aremaking that kind of money, a five-cent-an-hour raise is a significant increase. No wonder, then, that Chinese workersleave their employers in droves.  Turnoverrates among low-skilled workers are frequently in the range of 30% to 40%annually – and sometimes rise above 100%.  Compare those figures with industrializedcountries, in which annual employee turnover rates in manufacturing are roughly5%.

Companies that seek to exploit cheap Chinese labor may bepenny-wise, but some are pound-foolish.  If your head of manufacturing in China can’teven hang on to a lo-skilled workforce, he will certainly not be able to helpyou if you need more value-added work done.  Companies such as GE have acknowledged thedifficulty of finding mid- and senior-level managers.  L’Oreal China reports that it loses almost allthe new Chinese university grads it hires within three years.

When Chinese employees leave for work that pays better, thecosts to companies are high.  Theseinclude the same problems that plague any firm with high turnover – higher HRmanagement and training costs, greater quality control problems, increasedchances of competitive disruption, and more difficulty establishing a stablecorporate culture.

The lesson in all this? The costs of labor churn should be taken into account when assessing thecots of doing business in China.