Actual Labor Cost Comparison of China vs. Mexico
Do you know the total cost of labor in China? It's not just the minimum wage rate you need to consider, there are many additional costs that are not as well known. Similarly, are you familiar with the actual labor costs in other regions in the world? In this article we will compare for you the total labor costs of our two affiliated factories in China and Mexico, including the minimum rage rates and the other costs and factors to consider.
The minimum wage rate of Dongguan City in Guangdong province China reached RMB920 in 2010. Simply comparing it to the 44.54 peso/day; the minimum wage for Guaymas City, in the state of Sonora Mexico, in hourly wages converted to Japanese Yen (based on the current exchange rate), the wage rate in China is one fifth (1/5) of Mexico's. This simple comparison of the minimum wages indicates that labor costs are still competitive in China. From this point of view, it is an attractive enough difference to give the edge to China, however, this appealing point will be less attractive in the future, if Chinese wage rates continue to increase at the present rate.
The data 1 "comparison chart of wages", shows minimum wages and other factors to be recognized as labor costs when comparing wage rates between locations. In addition to the costs required by law and governmental regulation, there are additional costs originating from the local customs or common practices listed on the chart.
|Currency against US$ (5JAN, '11)||0.08161||0.1511|
|Currency against Japanese Yen||6.69||12.39|
|Legal Min. Wage
(by hour in local currency)
|Legal Min. Wage
(by hour in US$)
|Legal Min. Wage
(by hour in JPY)
|Average Wage actually paying in US$||1070.54||377.75|
|Average Wage actually paying in JPY||87816.56||30975.00|
|Recent wage increase rate||2008:4.0%
|Extra wage rate for overtime work||Additional 100% for the first 9 hours after 48 per week and 200% after the 9th hour||Additional 50% for all hours over 8 hours per day|
|Bonus||Christmas Bonus: 30 days of salary||None. Some companies in Guangdong provide Chinese New Year Bonus as much as 1 month salary.|
|Extra wage for working on holidays||Additional 100%||
Additional 100% for Saturday and Sunday
|Maximum legal working hours||
3OT over 8 regular hours (11in total/day)
|Paid vacation||7 days||Max15 days depending upon length of service|
|Meal provision||Bring own lunch box||Breakfast+Lunch+Dinner and late supper for night shift|
|Pension Fund||2% of annual salary||RMB185.82 for state and local panesion supported by company while RMB96 is paid by employee|
|Insurance||3 sorts of insurance are to be supported. Company support portion for Life&Disability, Medical for Retirees and Daycare are amounted about 5.0% of annual salary||Flat RMB26.222|
The data 1 : Comparison Chart of Wages
*This data is as of January 15, 2011. The exchange rate used here is also from the same time
**Although the data is as much accurate and fresh as we can obtain, please double check for actual use.
Additional points to consider on the chart:
1) The additional wage ratio for overtime and holiday work is higher in Mexico. However, Mexico provides greater scheduling flexibility because the maximum number of overtime hours are regulated in China.
2) In Mexico, most of workers live near the factory and commute to work everyday. In China, facilities to house and feed employees are needed since most workers are migrant workers from areas outside the factory location. In addition to the housing and meal costs (breakfast, lunch, dinner, and night meal), Companies need to consider employee well being. In the area where factories are located, workers' after-work activities are limited and they have few opportunities for relieving stress. Stressed workers can result in lower productivity, or in the worst case, the workers could sabotage or strike the company.
3) The Chinese government has been putting a great deal of effort into the fulfillment of social welfare. The additional burden of pension and insurance costs borne by employers are still small at this time, however, these costs are also increasing rapidly, and will continue to do so in the years to come.
The total actual monthly costs for workers minimum wages and additional costs paid at the factories of our affiliated companies in China and Mexico are listed on line 14 and 15 of the comparison chart. Although a direct comparison is difficult to make due to the different operating systems of these factories, the actual cost in January 2011 in China was 35.3% of that in Mexico based on the exchange rate of that time. However, considering that wages in China have been increasing every year, how long will it be before the gap between the two closes?
The wage increase rate in Mexico for the last three years is between 4.0-5.5%, which is a little higher than the wage increase rate in the USA. Considering that the business in Mexico is primarily for the US market within NAFTA, the wage increase in Mexico is under control. When compared with Brazil or other countries within the region where the wage increase rate is much higher, wage costs in Mexico are still very appealing.
In Dongguan city, minimum wages increased from RMB830 in 2006 to RMB920 in 2010. This calculates to a compounded annual increase of 9.92%. In the neighboring city Shenzhen, with its wage of RMB1,100, the minimum wage in the coastal area of China has been increasing at about the same rate. In addition, the Chinese currency's revaluation against the US dollar in recent years has been around 4%. Given that the minimum wage is catching up with Mexico at an overall annual rate of 9%, and the currency increasing 4% per year; the wage cost gap between China and Mexico will close within 9 years. It was officially reported recently that the wage increase rate in Shenzhen City in 2011 was way beyond the average of the past three years, making the minimum wage RMB1,100 (year-on-year increase of 19.6%). If the wage increase rate continues to go up more than that of past 3 years; let’s say if the overall increase rate is 14%, China’s wage rate will be on par with Mexico in 7.5 years. If you are exporting to the US alone, the attractiveness of the low wages in China will not last long especially considering the disadvantages such as additional delivery charges and longer lead times associated with importing from China.
Since 1980, the production industry in the Pearl River (China) area has shown rapid growth exceeding the capacity of the local labor market. This unbalanced supply and demand of labor resulted in the dependence on migrant workers who left their hometowns far from workplaces. There are several typical problems for migrant workers.
1) The Employees do not stay at one company for long because they tend to earn enough money for a few years and then return home.
2) The Employees communicate with employees of other companies and exchange job information. Once they find a job with better conditions, they change companies frequently.
3) Skilled workers are difficult to foster because employees do not stay at one company for long.
On the other hand, Mexico's border with the United States is wide and workplaces subject to Maquiladora operations are spread all over. This means that there isn’t a necessity to depend on a labor force from outside the region. Employees tend to stay at one company for a long time because most of them are commuting from neighborhoods where they have established homes and families.
A few decades ago, it was difficult to find and keep high-skilled and qualified management staff in China; however, today it is easier to find management level employees with fluent Japanese or English speaking skills in China than in Japan. Mexico is very similar in that it is not difficult to find a number of management candidates who studied in the US and are fluent in English. However, in both China and Mexico, the salary of these skilled people is expensive, possibly as expensive as Japan depending on the skills.
Beyond wages and costs, there are other issues in each region. Specifically, the drug problem in Mexico and ethics question in China.
In Mexico, the drug issue confronts businesses in several ways, for example, businesses need to conduct drug testing when recruiting a new worker at an additional cost to the business, or the costs associated with security checks when crossing the border. The closer to the border the more serious the drug problem can be, but the further from the border the higher delivery cost and the more difficult in securing highly skilled employees.
In China, business ethics may create problems for your business. For example, concerns over the purchasing staff using their positions for personal gain, or concerns over the sales staff being requested to provide additional payments to prospective customers are not uncommon. In addition, businesses must be very diligent in carefully monitoring the incoming and outgoing quality of raw material and products. Since quality standards can vary somewhat throughout the regions, it is essential to have strict quality control procedures in place, and documented processes for the handling of sub-standard product or raw material.
In conclusion, operating factories or doing business in any developing area of the world requires a certain amount of "courage". Take the time to study carefully the whole picture relative to cost and the risks doing business in these areas. The time invested in understanding all of the conditions in various areas will result in a substantial return later by avoiding surprise costs and problems.