As China wages, yuan rise, exporting to get costly

Bloomberg

Toyota Motor Corp. and Honda Motor Co. suppliers sacrificed earnings in China by raising wages to end strikes, and Beijing’s decision to allow greater exchange-rate flexibility may slow plans to export vehicles from the nation as the currency appreciates.

China’s central bank will allow the yuan more flexibility, it said in a statement Saturday, signaling an end to the currency’s two-year-old peg to the dollar. The currency climbed against the dollar at its fastest pace in 20 months and forward contracts jumped.

The looser currency stance comes “on the back of all these moves to endorse the wage increases,” Jim O’Neill, Goldman Sachs Group Inc.’s chief global economist, said Sunday. “It’s all part of moving to the consumer, more domestic-demand-driven economy.”

Labor unrest that disrupted output at Toyota and Honda plants in China in the past month forced their suppliers in the country to increase wages. In addition to the higher labor costs, an appreciation of the yuan may hamper plans to export Chinese-made vehicles by carmakers, including Honda, which operates an export-only factory in Guangzhou, Guangdong Province.

“Honda probably has to have second thoughts on its export plant,” Koji Endo, managing director at Advanced Research Japan, said Monday.

The Chinese government aims to boost exports of vehicles and parts to $85 billion by 2015 from at least $19 billion last year and the equivalent of 10 percent of the global auto trade by 2020.

Japanese carmakers still plan to build vehicles in China for the domestic market, in part because of import duties, Endo said.

“China will continue to be the biggest car market in the world, and the growth rate will continue to be strong,” he said.

A stronger Chinese currency will help contain inflation, which may reduce worker wage demands, David Cohen, director for economic forecasting at Singapore-based Action Economics, said Sunday.

Japanese carmakers and other foreign manufacturers, including Taiwan’s Foxconn Technology Group, are spending more on labor as a result of recent unrest. Foxconn, which makes iPhones for Apple Inc., said it will double salaries for its lowest-paid workers after at least 10 Chinese employees killed themselves this year.

Toyoda Gosei Co., an affiliate of Toyota, ended a strike Saturday that had disrupted car assembly, said Mieko Iwasaki, a Tokyo-based spokeswoman for Toyota. The company’s car plants in China were operating normally Monday, she said.

Akemi Ando, a spokeswoman for Honda, said the company’s Chinese factories were also running as usual.

Iwasaki and Ando both declined comment on the yuan decision’s impact on their companies.

Higher investment and improved wages in western China are deterring workers from migrating, pushing up pay in more industrialized regions like Guangdong in the south, said David Abrahamson, project manager at the China Center for Labor and Environment.

More than 20 Chinese provinces and cities raised minimum wages this year, the Shenzhen city government said on its Web site. In Shenzhen, which raised minimum wages an average of 15.8 percent, the government said higher pay will help companies recruit workers and will boost consumption.

Honda Lock (Guangdong) Co. ended a strike after employees at the Honda supplier agreed Friday to accept wage increases, said Takayuki Fujii, a Beijing-based spokesman for the carmaker. He declined comment on the raise. Workers at the Zhongshan, Guangdong Province, plant began their walkout June 9 and suspended industrial action five days later as union leaders and management negotiated raises.

Honda ended the first strike at an affiliate June 3 after agreeing to a 24 percent wage increase.

The fourth Honda affiliate to be hit by a walkout in the region, Nihon Plast Co., agreed Saturday to raise wages, Mutsuo Suzuki, a spokesman for the Shizuoka-based parts maker, said Monday.

The pay increase was smaller than workers had demanded, Suzuki said, declining to specify further. The plant lost a day and a half of production before resuming output late Friday, he said.

Nihon Plast is 21 percent owned by Honda, according to data compiled by Bloomberg. The company also supplies parts to Nissan and Suzuki Motor Corp., according to its Web site.

The Zhongshan factory, a joint venture between Nihon Plast and Itochu Corp., makes steering wheels for all models produced at Nissan’s Chinese venture, Dongfeng Nissan Passenger Vehicle Co.

Mitsuru Yonekawa, a spokesman at Nissan, said the company’s car production in China wasn’t affected by the Nihon Plast strike.

Workers at another Toyota supplier in China, Tianjin Star Light Rubber and Plastic Co., also walked out briefly June 15. The issue was resolved when the company offered a pay increase.

Chongqing Brewery Co.’s operations returned to normal Friday evening after workers ended a strike, the Shanghai Securities News reported Monday, citing an unidentified company official.