Not so cheap

German firms face staffing woes as Chinese labor costs skyrocket

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Steady flow of cheap workers is no longer on tap. Source: Hansgrohe SE

The days when China offered German firms an endless pool of cheap labor are rapidly coming to an end. Nowadays, staffing problems top the agenda for German executives: How to find good people, how to retain them, and how to afford them.

The ideal employee is someone like Chen Jiaoyi, a product development manager for the bathroom fittings manufacturer Hansgrohe, which has its home base in the Black Forest. Mr. Jiaoyi, trained in Hamburg and a fluent German speaker, is well aware of his value to the company, whose Shanghai plant has been a crucial production hub since 2003.

Some 78 percent of German companies see rising labor costs as a serious problem, second only to finding qualified personnel, according to a survey conducted for the German Chamber of Industry and Commerce in China. Retaining staff was a problem for 65.8 percent.

Labor costs represent one-third of German firms’ costs in China, but this figure is rising fast: Between 2012 and 2017, wages rose an average of 9.8 percent annually.

If employers fail to keep up with increasing wage demands, staff look elsewhere. On average, Chinese employees change jobs every 22 months, according to a LinkedIn study. Millennials’ “job-hopping” is even faster: their average is 18 months, according to a recent report in “China Youth Daily.”

By comparison, Mr. Chen is a grizzled veteran — he has worked for Hansgrohe since 2011.

Changing jobs to get a better salary is not an uncommon phenomenon. Loyal employees can expect an annual rise of around 10 percent. By contrast, job-hoppers average an annual increase of around 25 percent, says Miriam Wickertsheim, a manager with the Shanghai consultancy Direct HR Group.

Pressure to earn big

For young Chinese, Ms. Wickertsheim adds, years of strong economic growth created massive pressure to increase earnings, buy property and climb the social ladder. In the burgeoning cities of eastern China, life is increasingly costly: Between 2011 and 2016, real-estate prices rose 91 percent in Shanghai and 84 percent in Beijing.

Chinese professional salaries tend to start low, then rise quickly. A newly qualified Chinese engineer makes around €1,300 ($1,480) per month, compared to €3,500 for their German equivalent. But after some years of experience, the figures move closer: around €3,000 per month in China, €5,000 in Germany.

The further up the scale one goes, the more Chinese and Western salaries converge. “I know of cases where senior Chinese executives were making more than their German colleagues at the same level,” Ms. Wickertsheim says. And the trend seems likely to filter down through hierarchies, she says. In the medium-term, Chinese middle managers could catch up with German colleagues.

This trend goes along with a more general shift to hire locally. Hansgrohe moved early to localize its white-collar staff, and now has an almost entirely Chinese sales and marketing team in Shanghai.

Robots are cheaper

But this means the bathroom fittings company cannot ignore the upward pressure on Chinese labor costs. As a result, robots are an increasingly common sight on the Hansgrohe factory floor. “We are investing in automation in response to the increases in the annual wage bill,” CEO Hans-Jürgen Kalmbach told Handelsblatt.

Hansgrohe, with worldwide revenues of more than €1 billion, can afford to invest in future technology. But 20 percent of German firms in China say they fear rising productivity will not cover higher wage demands.

Smaller companies are the most pessimistic. For them, different solutions, like moving production to other countries, or to western China, where costs are significantly lower, may be necessary.

The CEO of one medium-sized German industrial firm with a factory in the southern city of Guangdong told Handelsblatt they intended to move their Chinese headquarters to a less expensive neighboring city and to open a plant in south-east Asia. But labor questions make these decisions delicate: “We can’t move the headquarters too far — we don’t want to lose staff,” he says.

China’s western provinces offer firms tax breaks and free land to build on, but it is extremely difficult to find skilled staff there. Some 87 percent of German firms with Chinese operations want to remain in the country – the market is far too big to turn away from. But 10 percent annual labor cost increases are a hard sell to skeptical CEOs back in Germany.

For Ms. Wickertsheim it is straightforward: “German companies simply have to understand that China is not a center for cheap production anymore.”

Sha Hua is Handelsblatt’s China correspondent, based in Beijing. To contact the author: hua@handelsblatt.com.

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