Most people would say the answer is obvious – – lower wages in China compared to the United States. However, that answer is only partially true. Why? Because labor is only one part of the total cost of a product, and in many cases it’s as low as 20% of the total cost.
Let’s compare two simple products that are primarily made in China: a stuffed toy animal for a baby and a Frisbee. The stuffed animal is comprised of textile material for the cover, stuffing, two eyes and a nose. The material must be cut into pieces, sewn together and stuffed. The nose, eyes and mouth are usually a pattern of thread that is sewn on the face piece before the toy animal is sewn together and stuffed. The cutting of the pieces may be done by hand or by machine, but the pieces are sewn together by a worker using a high speed sewing machine. The stuffing is usually blown into the stuffed toy by a machine, but the insertion point is closed by hand. This type of a product is considered to be a high labor content product with labor being about 70% of the total cost.
On the other hand, a Frisbee is made of plastic resin (beads or pellets of plastic) in a process that is called plastic injection molding in which the resin is heated in a molding machine to a viscous state and is then injected into a mold, after which the molded part is automatically popped out of the machine in a matter of seconds. The mold can be designed to make several parts at once at the push of a button, and a fully automated machine can be set to run continuously 24 hours a day with very little monitoring by a worker. The highest expense in producing a Frisbee is the cost of making the mold (also called tooling), and that cost is amortized into the piece price of the parts so that the higher the volume of production, the lower the cost of the amortized tooling that is added to the cost of the part. A Frisbee is considered to be a low labor product at about 20% of the total cost.
What are other factors of the total cost for the “China price”? First, there are the actual costs of the materials used to manufacture the product, which would be the textile material and stuffing for the toy animal and the plastic resin for the Frisbee. Because of the high volume of materials and resins ordered by Chinese companies, the pricing would be as low as it could be.
Second, there are the wages for the workers directly involved in producing the parts. Labor is abundant and cheap in China because even though 300,000 have risen into the middle class and above, this still leaves one billion people living at the poverty level. At any one time, there are an estimated hundred million workers who are unemployed and underemployed, which is about equal to the number of Americans employed in full time jobs.
All employees in China have the right under law to join the ACFTU, which claims some 170 million members and is controlled by the Communist Party. ACFTU has a monopoly on trade unionizing in China and creation of competing unions is illegal. Party leaders have ensured that the ACFTU has a monopolist position. They don’t want autonomous unions springing up, because of the potential threat to their authority. In 2008, collective bargaining became a requirement of the Labor Contract Law that went into effect, forcing most companies — including most foreign owned ones— to create an ACFTU chaptered trade union within them.
However, there are about 1,000 protest demonstrations occurring every week in China, even at the risk of beatings, demotions, dismissal and even torture. As a result, wages have finally been rising by about 15% per year over the past four years. It took suicides by workers in the summer of 2010 to achieve additional improvement in wages and working conditions at plants that were more like prison camps with dormitories for workers to live on site and fences around the buildings so workers couldn’t leave the premises.
Third, there are the costs of compliance to health and safety regulation and environmental regulations. These costs are less expensive in China than in the United States because the Chinese government imposes few health and safety or environmental regulations. China doesn’t provide workman’s compensation insurance for their workers so workers hurt on the job don’t receive any compensation when they are injured to the point that they are disabled.