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Ballooning Population Offers China
A Low-Cost Chance to Lead in Tech

By PETER WONACOTT
Staff Reporter of THE WALL STREET JOURNAL


ZHUHAI, China -- Six years ago, Li Guangxiang was a starting engineer at a chemical factory in Hunan province. He usually finished his day's work in a couple of hours and spent most of his first year sipping tea and reading newspapers. He daydreamed about being a real engineer with a challenging job. "I couldn't stand the thought of another 20 years there," says Mr. Li, now 30, pushing the wire frames of his glasses up on his round face.

Without telling his parents, he quit and found work 400 miles away in Shenzhen. For a beginning engineer, pay was low -- about $240 a month -- and demands high. Mr. Li shuffled through three jobs, and even was fired from a Chinese brush factory; he says it was for "inexperience." But after gaining experience, he got a job at a computer-parts plant outside nearby Zhuhai that was later bought by the big contract manufacturer Flextronics International Inc.

Since he came to the computer-parts plant, Mr. Li has seen his annual salary more than triple, but still to only about $10,000. As a senior engineer and an assistant manager at the plant, he supervises five production lines manned by women wearing red kerchiefs, white lab coats and sleeve protectors. Last year, he persuaded his younger brother to come here to Zhuhai and start working his way up in electronics.

All over the factories along this stretch of China's southeastern coast, the same extraordinary scenario is unfolding: workers move into more and more sophisticated jobs, while their pay stays relatively low. It's not what happens in most other developing nations, where pay jumps as workers get smarter -- driving employers away to nations with cheaper labor. But China's population is so vast that it can stay smart and cheap -- a formula that's making it a new superpower in high-tech manufacturing.

It's also key to China's challenge to modernize and still keep social unrest to a minimum, as worker protests become more common at creaky state-run industries. Beijing's moves toward a free-market economy produced years of double-digit growth and an increasingly mobile, ambitious and better-educated work force. For many, the opportunities in coastal areas favored by foreign investors and bolstered by economic reforms are a step up no matter how low the wages.

The result: Other countries increasingly are ceding high-tech industries to China as well as low-tech ones. That spells trouble for impoverished garment producers in Pakistan and for software developers in Japan. Foreign direct investment in China last year totaled $46.8 billion, according to the United Nations Conference on Trade and Development. That was a 15% gain from 2000, the highest FDI total the country has seen yet and the most received among developing countries in 2001. The comparable figures declined last year for South Korea, the Philippines and Malaysia. Taiwan stayed about the same, and Indonesia saw some divestment.

Foreign investors expect to benefit from the double-edged work force for some time. "I tell my customers we don't have to worry about China for the next 10 years," says Ash Bhardwaj, president for the Asia-Pacific region for Flextronics. The Singapore-based company, the world's biggest contract manufacturer, makes phones, circuit boards and other gear for a long list of electronics companies. "There's enough talent in the poor interior that prices will stay really low."

Flextronics has become a leading investor among a belt of factories around Zhuhai largely because of the low labor costs. These plants have tapped not only cut-rate engineers such as Mr. Li, but also some of the cheapest unskilled workers in the industrialized world. Mr. Bhardwaj compares the market rate of 60 cents an hour for unskilled labor in China to $2.50 in Malaysia, $5 in Singapore and $25 in Japan. Flextronics has slashed jobs and production in places such as Singapore, while expanding its campus just outside Zhuhai. Next month, it starts construction on a $100 million plant in Shanghai.

The phenomenon of persistently low wages amid fast growth defies the laws of economics. "Wages should be rocketing," says Andy Xie, a regional economist at Morgan Stanley in Hong Kong. He notes that while inflation-adjusted wages rose 88% in the past decade, that was much slower than the 162% increase in economic growth during the same period. The decisive factor is the pool of labor. The "effective labor supply is rising as fast, if not faster," Mr. Xie says.

Stream of Labor

It begins with the millions who abandon farming or menial jobs in small towns and provide a constant stream of cheap factory labor. At the same time, China's education system has met rising demand for skilled workers, too. Vocational schools have responded to the rise in tech jobs by offering more engineering classes. So have universities, where 37% of graduates in 2000 were engineers, compared with about 6% in the U.S.

More than two decades of economic reforms have helped by relaxing Chinese resident-permit restrictions, known as the hukou system, left from the days when the communists wanted farmers rooted in the land and workers welded to state factories. With relaxation has come mobility. Coastal governments see the movement of labor as a powerful spur to investment and growth, keeping wages low and helping create jobs.

Manufacturers have grown adept at finding the cheapest talent. Flextronics managers began by hiring near Zhuhai itself. As wages rose, the company widened its recruiting radius. Company headhunters now drop by struggling state enterprises up north and travel west to top-flight universities, which turn out more engineering graduates than local economies can absorb. As a result, executives say, starting salaries at Flextronics have barely budged in three years.

At the same time, the plant in China has gone from making simple mobile-phone chargers to advanced miniature printed circuit boards. The plant's workers now electronically design the boards and cut them with lasers, underlining the shift to skilled labor at toy-assembly prices. Flextronics might even start producing Microsoft Corp.'s sophisticated game console, Xbox. If it does, employees boast that they'll make it more cheaply than plants in Mexico can.

China's city and provincial governments have pitched in by keeping costs down for foreign exporters. They offer tax breaks on investment and lower tariffs on imported components.

Last year, China's high-tech exports, including goods made by foreign-owned plants, accounted for 17.5% of the country's total exports, compared with 5% in 1985, according to government figures. China also is outpacing other East Asian countries in the growth of high-tech exports, according to Shahid Yusuf, head of research for development economics at the World Bank. Between 1985 and 1998, China's high-tech exports grew 43% a year on average, compared with 18% to 28% for other East Asian countries.

At the Flextronics plant outside Zhuhai, 20-year-old Wu Liying works a four-to-midnight shift on the line. Although Flextronics won't discuss the wages of individual workers, Ms. Wu, a machine operator, says she earns about the same $60 a month she did when she started three years ago. The nearly flat salary is typical for the unskilled.

But Ms. Wu has no thought of returning to her village in Jiangxi, one of China's poorest provinces. "What would I do back home?" she asks, sitting in the dormitory room she shares with three other women. At the factory, Ms. Wu has friends and feels in touch with the modern world. At night, crowds gather at the Flextronics recreation center for table tennis, pool and dancing. It's a place to meet unattached young people. "They have karaoke here," she adds softly, as a roommate behind a bed-sheet curtain giggles.

Beyond Toys

The odysseys of Mr. Li and Ms. Wu, repeated by countless others, have transformed the cities along the southern coast. Ten years ago, sugarcane fields surrounded Zhuhai. Hong Kong and Taiwanese companies vied to make toys and garments. Today, the focus is consumer electronics, and the city is ablaze in neon signs for companies such as Canon Inc. and Panasonic, a brand of Matsushita Electric Industrial Co.

In a hamlet near the Flextronics factory, traffic ties up roads that once were mud tracks. New arrivals from other parts of China have tweaked tastes and fashions. "These are the shoes the girls from the interior like," says Liu Fang, a salesgirl, pointing to a black-vinyl platform boot. "We're more conservative -- lower heels."

There are other signs of change. South of the shoe shop, the Shunxing Hotpot used to offer only dog specials, but it has diversified. It now caters to the palates of people from Hunan and Sichuan, places known for fiery foods. "We're serving spicy lamb and rabbit," declares proprietor Zeng Zhajian, as one of his cooks pops a cucumber from a customer's plate into his mouth. "And everyone likes cat."

Foreign high-tech manufacturers acknowledge the value of China's work force. "We can do anything here that we make anywhere else," says Tony Capretta, Flextronics' resident general manager in China who came out from the company's San Jose, Calif., plant. "The learning curve is a fast ramp."

As Mr. Capretta scans dozens of production lines, workers buzz around computerized equipment and put together sophisticated products. Motorola cellular phones come off one line. Another turns out printed circuit boards for Dell Computer Corp. Another line assembles about 300 fax-modem cards an hour for 3Com Corp. Construction noises upstairs signal expansion.

For Flextronics, the low labor costs make this the most profitable of the 28 countries in which it operates. The contract manufacturer's transport costs are falling, too, as more corporate customers relocate to China and domestic sales channels open. Printers once shipped overseas to Hewlett-Packard Co., for example, now go to a distribution hub in China.

Some Restrictions

Many multinational manufacturers have had a tough time selling in China because Beijing likes to steer them toward exports, which boost foreign-currency earnings while reducing market competition at home for domestic companies. The government has been especially stingy on licenses to permit high-tech equipment sales in the domestic market, so the hot-selling mobile-phone brands that Flextronics makes here go overseas. Other multinational manufacturers face similar restrictions.

Still, Flextronics' expanding position in China has helped it pick up new business during a global technology downturn. Bucking an industry slump, the company announced in January that fiscal third-quarter net income rose 21% to $82 million from the year-earlier period. It has passed Solectron Corp. of Milpitas, Calif., as the world's biggest contract manufacturer in terms of revenue, which rose 6.6% to $3.45 billion for the three months ended Dec. 31.

Other multinationals are taking similar steps to expand in China. In deals announced in the second half of 2001, Motorola said the company as well as its partners and suppliers would invest $6.6 billion in China during the next five years, even as it cuts its work force elsewhere. Japan's Hitachi Ltd. will boost investment by $800 million over five years, to $4 billion, and Intel Corp. will spend $302 million on chip assembly and testing, doubling its Shanghai investment.

Some see China's investment pull as an ominous sign for workers elsewhere. As other countries feel pressure to match China's low wages, there's a risk that wage stagnation will spread to Malaysia, Mexico and elsewhere. "China is going to set the floor," says Anita Chan, a senior research fellow at Australian National University's Australian Research Council, in Canberra.

But there is a downside for China, too: the danger that low pay breeds disenchantment. For two decades, exports have fueled China's growth while a repressive leadership has quelled potential labor unrest. But with 18 million people coming into the work force each year, and economists predicting that unemployment and the wage gap will continue to grow for the next 10 years, tensions could increase. Few see the government lifting wages; that risks driving investors away and cutting the main engine of the economy.

"The Communist Party is now the development party," says Mr. Xie of Morgan Stanley. "Their whole legitimacy is built on economic development."

Mr. Li's experience offers one antidote for social friction: upward mobility. Besides his own success in Zhuhai, he has helped his brother start up the corporate ladder, in sales and marketing at another electronics company in the city. The elder Mr. Li also brought to Zhuhai a former Hunan classmate, who quickly hooked up with a Japanese electronics factory as an engineer. Mr. Li himself bought an apartment last year. It was something he and his wife, a co-worker he met at the Flextronics recreation hall, have dreamed about and scrimped for three years to afford.

On a recent Friday evening after work, Mr. Li reflected on his good fortune as he prepared the flat for his parents' first visit to Zhuhai. From his balcony, he peered out at the mountains of nearby Macau and watched a man with a wheelbarrow move toward a flickering fire to join other migrant workers camping nearby. "Maybe they are like me," he says, "looking for an opportunity."

Write to Peter Wonacott at peter.wonacott@wsj.com

Updated March 14, 2002更多精彩文章及讨论，请光临枫下论坛 rolia.net