Business in Asia: Labour costs


Labour costs are a major component of most business cost bases and a major factor in deciding the location to build major manufacturing facilities especially for labour intensive industries. South East Asia is fast becoming a centre of manufacturing for a diverse range of industries although some of these countries and industries still face stiff competition from other countries such as China, India and Sri Lanka.

It is quite evident to see how important labour costs are in investment decisions for new manufacturing plants and how existing plants in higher cost regions are closed down such as the recent closures of several car manufacturing plants in Australia[1]. Although these closures are justified by executives and politicians on range of issues not just labour costs as justifying plant closures solely on labour costs are a sensitive issue.

At the same time several car manufacturers are expanding manufacturing operations in lower labour cost regions in Southeast Asia to take advantage of young lower cost labour markets, bigger consumer markets and also to rebase themselves in these regions to export to other countries[2] . The objective is always the same as with most manufacturing businesses to achieve the lowest production cost per unit and be at the lowest point possible on the cost curve relative to other competitor products in such competitive markets such as the automotive sector.

In many countries in Asia labour costs are increasing as more and more companies, many foreign, establish themselves and their operations in Asia, particularly south East Asia and the cost of living increases. Recent wage rises in countries such as Indonesia, Thailand and Vietnam have been substantial in some cases but are coming off a low base and can sometimes barely cover living expenses. These issues have become more pronounced as labour unions have become more vocal in demanding larger increases in wages, but politicians and regional governments have tried to satisfy both sides even though mass organizations in countries such as Indonesia still have substantial power in swaying governments and foreign management teams who sometimes face a myriad of regulatory red tape, counterproductive regulations and restrictions on foreign investors.

Labour costs are still low compared to western economies but are rising at different rates within Asia. This although important is not the only factor to consider when investing in operations and manufacturing facilities in Asia. Different countries within Asia have both different wage standards and productivity levels among their workforce. For example Chinese monthly wages (2013: US$120-$600) are generally higher than countries like Indonesia (2013:$220-$250) and Vietnam (2013:US$115-130) but have higher productivity and output rates per worker than these countries. This is an important factor for businesses considering investing in these regions as productivity per worker may take time to increase due to cultural and regulatory factors such as working rights and laws, work hours and amount of public holidays in each country. These are important to check with relavant manpower minitries and laws in each country.

  1. ^ The Age: Government shifting the blame over Toyota
  2. ^ The Jakarta Post: Toyota to spend 23 trillion on new engine plant
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