A 15% raise? Try China or India

By Jim Jubak

The cost gap that has sent so many U.S. jobs overseas is closing.

Not the wage gap, mind you. The difference between what a U.S. and a Chinese worker makes will still be huge when the current generation of U.S. workers retires.

But, fortunately, wages aren't the only costs that drive corporate decisions about where to locate a job. As I sketched out in my previous column, "Why fewer U.S. jobs are going overseas," a global logistics crisis is driving up the cost of sending jobs to low-wage countries. That's slowing the flow of U.S. jobs going offshore.

Rising wages in countries such as China and India, while not enough in themselves to slow the movement of jobs overseas, are making the logistics crisis much worse at a speed that few companies can successfully manage.

Rising wages abroad

In this column, the second part in my series on the end of the offshoring jobs crisis, I'll explain how rising wages in low-cost countries are accelerating the logistics crisis. In part three, I'll outline the next big threat to U.S. jobs. And it's not coming from overseas.

The average worker in India's manufacturing and service sectors got a raise of 13.8% in 2006, according to Hewitt Associates. And wages are projected to climb an additional 12.3% to 15% in 2007. Workers in the Philippines are doing almost as well, with raises of 8.6% to 9.3% projected for 2007. And the picture is only slightly less rosy for workers in the booming export zones of China: Wages in the Zhu (or Pearl) River Delta between Hong Kong and Guangzhou have climbed 20% in the past three years.

That's great news for U.S. workers who have seen their own pay rise at a much lower rate -- or even fall -- thanks to competition from low-wage countries such as China and India. U.S. workers saw raises of 3.5% to 3.7% on average, depending on whose survey you believe, in 2006 and are looking at another year of sub-4% raises in 2007, if projections from Hewitt Associates, Mercer Human Resources Consulting and the Conference Board are accurate.

Wage gap closing . . . very slowly

All U.S. workers need to do is be patient, and soon the wage gap that has sent so many U.S. jobs overseas to low-cost countries such China and India will be gone.

Yep, if U.S. workers -- or their children -- just wait a little while longer, then after a mere 32 more years of 10% raises, a Chinese worker making $100 a month -- well above the current official minimum wage of $87 a month, I admit -- will have closed the wage gap now separating the Chinese worker from the U.S. worker making $2,000 a month.

That assumes, of course, that the U.S. worker will not have received a single raise in those 32 years. If the U.S. worker has averaged even a 3.5% annual raise, the Chinese worker will need 50 years to close the wage gap.

If you're not quite that patient, however, there's still hope. Rising wages in areas such as the Zhu River Delta are pushing Chinese and overseas companies to move factories and jobs to lower-wage regions of the country. These regions all have two things in common. First, they're farther away from the ports that send parts, sub-assemblies and finished goods to the United States, Europe, Japan and the rest of the world. Second, the infrastructure of roads, rail lines, warehouses, terminals, shipping expediters and the like that's required by the global economy these days is less developed and sometimes virtually nonexistent in these more distant lower-wage manufacturing centers.

Manufacturing moves farther afield

Consider, for example, the 2006 decision by Japan's NEC (NIPNF, news, msgs) to move -- because of rising wages in Beijing and Shanghai where it now operates -- some of its software development work to Qingdao, a city better known for Tsingtao beer, the Taoist temples on Mount Laoshan and its beaches. (Since 1968 the city has also been home to part of China's fleet of nuclear submarines, but the government doesn't go out of its way to promote that to tourists.)

It's a perfectly wonderful city, but it is 600 miles from Shanghai and 1,200 miles from Guangzhou and the existing export infrastructure. Kintetsu World Express, a trucking, logistics and freight company, estimates travel time to Shanghai at 22 hours and to Guangzhou at 47 hours. But at least NEC Qingdao is on the coast, and NEC isn't shipping heavy goods for export.

India, where offshoring by the West has meant service jobs, often in the information-technology sector more than in manufacturing, is seeing the same trend. Rising wages in booming economies in Mumbai, Delhi, Bangalore, Pune, Hyderabad and Chennai are pushing jobs into smaller cities in Punjab, Rajasthan and Uttar Pradesh. The governments in those states are building software parks and offering deals to entice companies to relocate part or all of their Indian operations.

Even lower wages

And then, finally, some companies are handling the rise in wages in countries such as China and India by moving operations to even lower-wage "platforms" such as Vietnam. Intel (INTC, news, msgs), for example, has decided to open a major test and assembly plant outside of Ho Chi Minh City. Vietnam beat out China, Malaysia and the Philippines in the contest for the 1,200-worker plant.

Intel is betting on the Vietnamese government's promises to upgrade infrastructure. To end chronic power shortages in the country, for example, AES Corp. (AES, news, msgs) is building a 1,000-megawatt power plant at a cost of $1 billion. Cisco Systems (CSCO, news, msgs), Nortel Networks (NT, news, msgs) and Motorola (MOT, news, msgs) are all at work upgrading a badly outdated and bureaucratic telecommunications network. And it is also important to note that Intel is building its plant near the former Saigon, the export capital of the country, and not in the north. As someone who has endured a 30-mile, three-hour trip from Hanoi to a nearby provincial capital stuck behind ox-drawn carts for much of the way on the only highway, I can understand why. Some logistical costs are just too high to pay no matter what the savings in wages.

Workers in demand

Wages wouldn't be rising so quickly in areas such as Bangalore and the Zhu River Delta if the same logistical problems hindering the efficient movement of goods weren't impeding the movement of workers. It's not just that wages are rising in the Zhu River Delta, for example. The region, which employs 2.5 million workers in 15,000 plastics factories alone, is suffering an acute labor shortage.

In 2004, the Chinese government reported that 19 million migrant workers had jobs in the delta, but the region was still short about 2 million workers. Shenzhen was short about 400,000 workers and Dongguan, another factory center, needed an additional 270,000 workers.

It's hard to imagine that a country with 200 million unemployed (by some accounts) and with more than another 200 million underemployed could have a labor shortage, but it does. Because development has been concentrated in a relatively few areas, new workers have to travel long distances from their homes. They then suffer not just low wages but companies that demand six or seven 12-hour days and provide worker housing that stacks eight workers in a dorm room. Many companies have been struggling to recoup part of the cost of rising wages by charging workers more for company-provided housing and food. No wonder that the incidence of worker demonstrations over working conditions is on the rise. No wonder that many of the country's underemployed do not see a job like this as an attractive option.

India's education problem

The work force logistical problem in India seems to be education. Despite the country's, vaunted system of technical higher education, which graduates a whopping 350,000 engineers a year (five times as many as the United States), there's actually a shortage of qualified information-technology workers. A 2005 McKinsey & Co. study released by the National Association of Software and Service Companies (NASSCOM), India's information-technology trade association, found that only a quarter of India's college graduates have the skills to work for multinational corporations or their Indian outsourcing partners. The problems range from weak spoken-English skills to a poor understanding of basic techniques of engineering problem-solving. Add to that an infrastructure of roads, phone lines, airports and railways that lags that of its competitor China, and India needs to solve a huge set of logistical problems.

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