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Investors grapple with higher wages in low-cost China

Reuters, Beijing
US lawnmower manufacturer Briggs & Stratton is used to worrying about turnover - just not the human kind.
Like many foreign investors in China, the Milwaukee-based firm has been hit by a steady rise in wages - which puts it in the same boat as many US businesses in China responding to a survey released on Monday by the American Chamber of Commerce.
After decades of aggressive expansion in China, foreign employers like Briggs & Stratton face a relative shortage of experienced, English-speaking engineers and managers, and find it increasingly expensive to recruit and retain good staff.
Rather than waiting around for extra digits on their paychecks, China's white collar workers are creating their own pay raises by jumping ship at the slightest temptation.
"Turnover is a huge issue for anyone in China. Our turnover is 9 to 10 percent," said Mark Plum, Asia president for Briggs & Stratton in Shanghai. He added that in Shanghai, turnover rates were generally around 18 to 20 percent.
"Anywhere else you'd say that was terrible. Here, it’s not half bad."
On the factory floor as well, cheap labour no longer looks limitless, prompting manufacturers to consider moving from the country's prosperous coast to poorer, cheaper inland regions. Some are even taking their lowest-margin, most labour-intensive operations to other countries altogether, such as Vietnam.
Employees and wages now top the preoccupations of American investors in China, according to AmCham's annual businessclimate survey of390 companies.
"I think it speaks to the economic transition that China is in now that it will not be able to rely on cheap labour to drive exports into the future," AmCham Chairman Ted Dean said.
"Management-level human resource constraints" ranked as the biggest business challenge in the survey, cited by 43 percent of respondents compared with 30 percent last year. "Non-management level" constraints were ranked third.
Labour costs ranked as the third greatest challenge, after an economic slowdown in China and the wider global economy.
Though 39 percent of respondents surveyed by AmCham said their Chinese operating profit margins were higher than their global margins, only slightly fewer firms -equal to a third - said their Chinese margins were actually lower. For the rest, Chinese margins were comparable with their global operations.
In a similar survey released by AmCham in Shanghai last month, 90 percent of respondents saw rising costs as a hindrance to businesses. About the same number said finding skilled labor was a challenge.
"There's been an absolute explosion of consciousness of this issue," said Kim Woodard, of consultancy InterChina.
"It's not just because the media have covered it but also in internal budgets they are seeing a 20 percent rise in wages."
Government statistics show that average monthly urban wages rose by 13.3 percent between 2009 and 2010, although companies' actual cost structures can vary considerably.
As the number of adults flowing into the workforce slows, China can no longer attract manufacturing with the promise that an unending pool of rural migrants will keep its wages down.
China's population of 20-year-olds to 30-year-olds fell to around 200 million in 2005. It is expected to climb through 2015 but then fall off again, to below the 200 million mark by 2020, according to a presentation by China International Capital Corp.
That, plus competition for workers by expanded domestic and foreign-invested industries, should help shift more bargaining power to workers to get higher wages and better benefits.
InterChina used to build in simple wage rises of 5 to 8 percent a year when helping clients carry out feasibility studies for new operations in China, Woodard said.
That calculation is now a lot more complicated, with investors having to weigh China costs against Vietnam or India.