Outlook on labor cost development in China (Shanghai region in particular) as a road map for multinational corporations (MNCs)

Challenges for MNCs in Shanghai

Research Paper (postgraduate), 2013

43 Pages, Grade: 1,3


Table of contents

List of tables and figures

List of abbreviations

1. Preface
1.1 Problem statement
1.2 Objective
1.3 Research background / methodology

2. Status quo of general labor cost conditions (2011)
2.1 Average wage development within China
2.2 Minimum wage rates within China in
2.3 Government issued wage guidelines
2.4 Unionization and collective bargaining
2.5 Inflation

3. Short-term outlook on labor cost development (2012-2013) 11
3.1 National wage levels
3.2 Regional comparison
3.3 Wage situation by company size and business purpose
3.4 Wage situation by industry

4. Mid-term prognosis on labor cost development (FC 2015) 23
4.1 National wage levels
4.2 Regional comparison – base case
4.3 Regional comparison – moderate growth scenario
4.4 Regional comparison – slow growth scenario

5. Challenges for multinational corporations (MNCs) in Shanghai
5.1 Urban development of Shanghai
5.2 Compensation of increasing labor cost with higher productivity
5.3 Westward migration of MNCs

6. Critical appraisal and outlook

List of literature


List of tables and figures

Table 1 Overview of regional urban average salaries

Table 2 Ranking of provincial minimum salaries in

Table 3 Adopted regional wage guidelines

Figure 4 CPI development August 2011 – August

Table 5 National wage levels, wage development and benchmark

Table 6 Regional labor cost comparison

Table 7 Wage situation by company size and business purpose

Table 8 Wage situation by industry

Table 9 Mid-term prognosis (FC 2015) on national wage levels

Table 10 Regional comparison (FC 2015) – base case

Table 11 Regional comparison (FC 2015) – moderate growth scenario

Table 12 Regional comparison (FC 2015) – slow growth scenario

List of abbreviations

illustration not visible in this excerpt


All gender related formulations in the following are non-gender related without any exceptions.

1. Preface

Many observers, business people and in particular investors see labor cost developments in China as one of the main challenges for their Chinese subsidiaries. Especially in the East-coast region around Shanghai, labor cost has risen significantly within the last decade. For investors having subsidiaries in this region, the outlook on labor market might not look much brighter than it used to.

Nevertheless, this development results from the impressive shift China has made in such a short period of time. China is now undergoing one of the most massive urbanizations in human history, which becomes nowhere more evident than in Shanghai. The population of this city is officially by now almost 24 million and is forecasted to rise to 30 million by 2020.[1] Twenty years ago, the Pudong area was farmland. At present, its futuristic skyline lights up the horizon across the river from Shanghai’s original settlement.[2] With the slogan “Better City, Better Life” the World Exhibition Expo 2010 in Shanghai broke the records with more than 73 million visitors. The main focus of the Expo was based on High-Tech branches. For this reason, five thematic pavilions embraced the mottos: Urban Footprints, Urban Planet, Urban Dwellers, Urban Beings and Urban Dreams. Since the Expo 2010 is history now, the urban development of Shanghai has planned the next major project, called the “West Bank”. Within the district Xuhui on the Puxi side of Shanghai, the huge Expo area will get redeveloped into a high-technology cluster consisting of an Aircraft & Aviation Center, a Media Park with companies like DreamWorks, CBN, HNTV, TVB and many others. In addition to these plans, there is going to arise a Life Science Park, hosting companies like Johnson & Johnson and MSD China, a comprehensive development zone with headquarters of domestic and international enterprises and a culture corridor composed of Art Museums, Waterfront Theater and West Bank Biennale. Apart from the “West Bank” project, there are several initiatives in order to improve the infrastructure for high-tech industries.

Consequently, especially low-tech manufacturing plants in the Shanghai region suffer on the one hand from increasing labor cost, on the other hand from the fact that the government changed its focus to higher value-added industries with less pollution output in order to increase the living standard and quality of the population. In general, this trend means that Shanghai attracts high value-added industries such as Finance and Technology since the city offers well educated workforce as well as for sure an amazing flair attracting multinational corporations (MNC).

1.1 Problem statement

Due to the explained circumstances, raising labor cost is going to be one of the biggest challenges for the secondary industry. Whereas Shanghai will become an international center of economy, finance, trade and shipping, being beneficial for East-China and the coast region, the government is still struggling in letting the West-part of the country participate from this significant upturn.

Several companies with a high value-chain have already migrated their facilities from the coast region to the western part of China. Other MNCs such as Adidas decided to move their manufacturing facilities abroad to Vietnam – a country offering much lower labor cost especially for blue collar workforce.

There are no signs for a reversal of increasing labor cost in the future. With the one child per family policy of the Chinese government, the lack of labor force will aggravate further. Especially coast regions such as Shanghai suffer from skills shortage, especially for blue collar positions. This results in disproportionate growth of salary for lower educated and less experienced staff which is another drawback for the high-value-chain industry. In order to supply the demand of blue collar labor force, the workers are getting acquired from outside Shanghai region or even from West China. These days, China is experiencing its slowest growth rate in three years as it achieved just a 7.6% growth in the second quarter of 2011 after growing 8.1% in the first quarter.[3]

This opposing trend will make a forecast on labor development difficult for MNCs. Since labor cost is one of the most important decision criteria for investors, a prognosis on the development particularly on mid-term (Forecast 2015) will be of great importance in order to plan upcoming but also forthcoming investments. Chapter 5 deals also with challenges that MNCs will experience in Shanghai in the upcoming years.

1.2 Objective

The main objective of this Global Markets Survey is to give the readership firstly an insight on the status quo of the general labor cost conditions (chapter 2) in China, in particular of the Shanghai region. This analysis is based on the previous year 2011. In chapter 3 the survey contains the short-term outlook on labor cost development including the years 2012-2013, whereas chapter 4 is based on a mid-term prognosis with a labor cost forecast for 2015. The analysis spreads the labor development between blue collar and white collar in order to give an appropriate basis for further microeconomic research. Secondly, the survey will show the challenges for multinational corporations (MNCs) in Shanghai (chapter 5). Within chapter 5.1 we will have a closer look at the urban development of Shanghai and at its influences on MNCs. Chapter 5.2 is about forms of compensation of increasing labor costs by higher productivity. Chapter 5.3 is a research about trends for Westward migration occurring.

The aim of this assignment is to give a precise short-term outlook on the labor cost development in China, which can be used by (potential) investors or MNCs having their subsidiary in the country. This short-term outlook will be extended by a mid and long-term prognosis, taking into account different regional wage developments as well as the macroeconomic performance of China. The prognosis should give the previously described target group a valid document for further planning matters.

1.3 Research background / methodology

The research background for this Global Markets Survey was built up during an abroad study period in Shanghai in October 2012. The study abroad was part of the MBA “Management & Finance” program, directed by the dean of the course, Prof. Dr. Kurt M. Maier. During this period, the students visited urban developers of several city districts of Shanghai region, as well as the China Construction Bank, MNCs such as Metabo PowertoolsChina (MPC), VAG Group and others. The experience the author has made during his stay in Shanghai will come into effect within this Global Markets Survey. Many experts from banks, the Municipal Government and economists have been interviewed in order to get their point of view on the upcoming labor development in China and the Shanghai region in particular. In order to prepare a precise analysis of labor developments, it was crucially important to consider the Annual Salary Survey Report which is the latest, most valid and representative analysis that currently exists. This was done by interviewing Max J. Zenglein, Economic Analyst of the German Chamber of Commerce in China, who apart from supplying his survey along with additional information also validated the plausibility of the forecast numbers shown in chapter 4.

Therefore, general basis for this analysis is the Annual Salary Survey Report 2012 of the German Chamber of Commerce in China, in which in total 220 companies participated. The survey was conducted from September 6th, to September 25th, 2012.

The mid-term prognosis is based on the raw data of this report. Forecast numbers for 2014 and 2015 are prognosticated by the author, taking into account the expertise of Max J. Zenglein, who supported this survey by giving his most appreciated advice by verifying the assumptions of the author to ensure validity of this Global Markets Survey.

2. Status quo of general labor cost conditions (2011)

“Whilst the hourly wage is still not that high compared with other areas of the world, it’s the year-on-year compounding growth in wages which becomes a big challenge. “

(Dan March, CFO of McDonald’s, China)

Chapter 2 describes the status quo of general labor cost conditions based on the reporting year 2011. The chapter consists of the average wage development (2.1), minimum wage rates within China from 2012 (2.2) along with wage guidelines issued by the Chinese government (2.3). In addition to that, this chapter ends up with unionization and collective bargaining (2.4) and shows the current situation on the Chinese inflation rate (2.5).

2.1 Average wage development within China

In China, the annual income of blue-collar employees at state-owned enterprises (SOEs), collectively owned business and foreign owned companies increased by 14,3% nominally (8,5% in real terms) in 2011 reaching RMB 42,500 compared to the previous year, when the figure stood at RMB 37,147.[4]

Wages in the more developed eastern regions as well as in Guangdong are the highest, whilst salaries in the central provinces are still being the lowest. In terms of provincial capitals, typically the largest cities in the province have the highest average salaries such as Guangzhou, followed by Beijing and Nanjing, while Shanghai ranks on 5th position.[5] Labor cost growth in lower developed provinces is more likely to be higher than average. Overall, this means that labor cost have continued to rise with double digit growth in most areas in 2011. Nevertheless, the growth rate has slowed down slightly.

Table 1 shows the regional average salaries of 2011. Wages are categorized as non-private sector, including SOEs, collectively owned businesses and foreign funded companies. The numbers include bonuses, allowance, and are pre-tax. The data has been released for 23 provinces, autonomous regions and municipalities as of September 2012.

illustration not visible in this excerpt

2.2 Minimum wage rates within China in 2012

The Chinese government announced in 2010 that the minimum wage should increase on average 13% until 2015. Such adjustments to minimum wage levels puts pressure on employers to increase salary for more highly skilled employees as well, which has a significant effect on overall labor development.[6] Table 2 shows the ranking of provincial minimum wage levels in 2012.

illustration not visible in this excerpt

Table 2: Ranking of provincial minimum salaries in 2012 (Source: Provincial government, news media, GCC, 2012)

In general, adjustments to salaries are made every 1-2 years by the provincial and province level municipality`s government such as Beijing, Shanghai, Chonquing and Tianjin, with exception of Shenzhen, which determines its own minimum wage level.[7] In 2009, the minimum wage levels were mainly frozen, whereas 25 regions increased their minimum wages on average of 22% in 2011. In 2012, 16 regions raised their minimum wage on average of 16.9%.

Currently, no province has announced any adjustments for 2013. Nevertheless, it is expected by expert economists, increases in 2013 will be more moderate compared to previous years.[8]

2.3 Government issued wage guidelines 2012

Wage guidelines are non-binding recommendations, issued annually by some local governments. Those take into account regional economic growth, price levels, unemployment levels and enterprise profits. Table 3 indicates the compounding year-on-year growth in wages according to their guidelines for 2012.

illustration not visible in this excerpt

Table 3: Adopted regional wage guidelines 2012 (Source: Local Human Resource and Social Security Bureaus, 2012)

Whilst the maximum increase represents over-performing companies with excellent economic growth (above average), the minimum increase obviously stands for under-performing companies with poor growth rates (below average). With a national average growth rate of 14%, the majority of issued wage guidelines have decreased wage growth compared to 2011 since falling corporate profits and increasing economic uncertainty were expected.[9] In most cases wage growth has been adjusted downwards by approximately 2-3%, as the Ministry of Human Resources and Social Security has recognized that excessive wage growth will put on difficulties to the profitability of enterprises as operating

costs rise and profitability shrinks.

2.4 Unionization and collective bargaining

In China trade unions must be affiliated to the All China Federation of Trade Unions (ACFTU), whereas independent unions are not tolerated. The ACTFU acts as a governing body for all enterprise level trade unions and is closely associated with the Communist Party. Each employee has the possibility to participate in a trade union. If the company has more than 25 ACFTU members employed, an enterprise level trade union may be established, as alternatively the ACFTU may set up a trade union in the enterprise. This unionization effort cannot be averted by the management. As soon as a trade union is established, 2% of the total salary is getting collected by the tax bureau.

Collective bargaining can be requested by trade unions as well.

The ACFTU used to have the reputation of being “management friendly”. Nowadays, they are becoming a stronger advocate for workers’ rights.[10] Guangdong for instance, after some high profile labor unrests in 2010, was a pioneer in the area of implementing provisions for collective bargaining, even though there does not currently exist a law. According to the ACFTU, in 2011 81% of the 4.100 companies set up by Fortune 500 companies introduced collective bargaining.[11] For 2013 it is aimed to increase this figure up to 95%. Therefore, it should be examined with caution how far this target is reachable for companies. Obviously, the role of trade unions and collective bargaining are changing. Precise details still remain unclear as the government is experimenting with how to implement it.[12]

2.5 Inflation

The inflation rate in China was a major concern in 2011, rising above 6% during the year. Meanwhile, price levels have been dropped in the recent months, reaching 2% in August 2012. Main drivers for inflation used to be rising food prices, but easing in 2012 from 12.3% to 5.9% according to table a in the appendix, which indicates the development of Consumer Price Index (CPI) components. Also prices for items related to residence, which includes rental, have dropped from 6.1% to 1.9%.[13]

Figure 3 shows the CPI development from August 2011 to August 2012.

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Figure 4: CPI development August 2011 – August 2012

(Source: National Bureau of Statistics, China, 2012)


[1] Cf.: Dong, L. (2012, May 05). GLOBAL TIMES. Retrieved December 16, 2012, from http://www.globaltimes.cn/NEWS/tabid/99/ID/707874/Shanghai-population-surges-to-2347-million.aspx

[2] Cf: Lim, L. (2006, December 2011). npr. Retrieved December 11, 2012, from http://www.npr.org/templates/story/story.php?storyId=6600367

[3] Cf.: Zenglein, M. J. (2012). Annual Salary Survey Report 2012. Shanghai: German Chamber of Commerce in China., P. 4

[4] Cf.: Zenglein, M. J. (2012). Annual Salary Survey Report 2012. Shanghai: German Chamber of Commerce in China., P. 5

[5] Cf.: Ibidem

[6] Cf.: Ibidem, page 8

[7] Cf.: Ibidem

[8] Cf.: Ibidem

[9] Cf.: Ibidem, page 10

[10] Cf.: Ibidem, page 11

[11] Cf.: Ibidem

[12] Cf.: Ibidem

[13] Cf.: Ibidem, page 7

Excerpt out of 43 pages


Outlook on labor cost development in China (Shanghai region in particular) as a road map for multinational corporations (MNCs)
Challenges for MNCs in Shanghai
Nürtingen University  (Campus of Finance)
Global Markets
Catalog Number
ISBN (eBook)
ISBN (Book)
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China, Lohnkosten, Shanghai, Labor cost, Challenges, road map, MNC, Outlook, Studie, Gehaltsentwicklung, Asien, multinational, corporation, urban development, westward migration
Quote paper
B.A. Markus Fost (Author), 2013, Outlook on labor cost development in China (Shanghai region in particular) as a road map for multinational corporations (MNCs), Munich, GRIN Verlag, https://www.grin.com/document/211216


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