Standing on a street corner near Foxconn Technology Group'splant in central China that makes iPhone 5 handsets, employee WangKe says he'll quit if his wage doesn't double.

“I don't have high expectations, I know I'm a migrant worker,”said Wang, 22, who earned 1,600 yuan ($258) in December, afterdeductions for lodging. “But I want to make 3,500 yuan a month,net. That's a fair price.”

Wang's attitude springs from a labor-market squeeze across thecountry after China's pool of young workers shrank by almost 33million in five years at the same time as industry added 30 millionjobs. The resulting wage pressure means Foxconn, Apple Inc.'sbiggest supplier, pays the same basic salary at the Zhengzhou plantit built in 2010 among the corn and peanut fields of Henanprovince, as it does in Shenzhen, the southern city that spawnedthe nation's industrial boom.

“China's advantage in low-cost manufacturing will end muchsooner than expected, I believe within five years,” said ShenJianguang, Hong Kong-based chief economist at Mizuho SecuritiesAsia Ltd. “Wages are rising faster inland than on the coast. Morecompanies will consider moving to countries such as Vietnam,Indonesia and the Philippines.”

Higher pay and the relocation of factories are underminingChina's three-decade export model that concentrated production,cheap labor, infrastructure and supply chains in one place,allowing savings that made it the world's supplier of low-endgoods. As manufacturing costs rise, price increases will be passedon to the world, said Tao Dong, head of Asia economics excludingJapan at Credit Suisse Group AG in Hong Kong.

“The days of China as the anchor of global disinflation haveended,” said Tao. “When global demand picks up, global inflationmay arrive sooner rather than later. This will affect everything,from the Italian housewife to Federal Reserve monetary policy.”

China's pool of 15- to 39-year-olds, which supplies the bulk ofworkers for industry, construction and services, fell to 525million last year, from 557 million five years earlier, accordingto data compiled by Bloomberg News from the U.S. Census Bureau'sinternational population database. The number employed in industryrose to 147 million from 117 million in the five years throughSeptember.

The labor squeeze means wage costs inland are fast catching upwith the industrial belt in the south and east. Average factory payin Henan, about 800 kilometers (500 miles) from the coast, rose 110percent in the past five years and gained 84 percent in Chongqing,1,700 kilometers up the Yangtze River. In the same period, salariesrose 78 percent in Shanghai on the east coast and 77 percent inShenzhen's province of Guangdong.

“The wage differential between inland and coastal regions isdown by more than half since 2006,” said Jitendra Waral, aBloomberg Industries analyst in Hong Kong.

Pay pressures are set to intensify with the supply of youngworkers forecast to shrink by 20 million to 505 million by 2015 anda further 22 million by 2020.

In Wuhan, the capital of Hubei province, Japanese automakersNissan Motor Co. and Honda Motor Co. pay a basic wage of $333 amonth, compared to $352 in Guangzhou and $317 in Shenzhen,according to an April 2012 report by the Japan External TradeOrganization.

'Tipping Point'

The gap between manufacturing costs in the U.S. and China hasalmost halved in the past eight years and will fall to 16 percentthis year, according to Hackett Group Inc., a Miami-basedconsulting company. That's a “tipping point” that will prompt somecompanies to shift factories back to the U.S. or to destinationsnearer consumers, says Hackett, which lists customers includingPfizer Inc., Microsoft Corp. and Boeing Co. on its website.

Nations including Vietnam, Cambodia and Bangladesh already arereaping gains. Vietnam's foreign investment increased more thanthreefold to $7.4 billion in 2011 from five years earlier,according to the United Nations Conference on Trade andDevelopment. In Cambodia it surged 85 percent to $892 million andin Bangladesh 43 percent to $1.1 billion.

Hong Kong-based bra maker Top Form International Ltd. shutteredits factory in Shenzhen last year and is expanding production inPhnom Penh, Cambodia's capital.

We are “trimming down our expensive capacity in China,” ChairmanFung Wai Yiu wrote in the company's 2012 annual report.

The average monthly pay for a factory worker in Guangzhou was$352, compared with $111 in Hanoi, $82 in Phnom Penh and $78 inDhaka, the Japan External Trade Organization's survey said.

Other producers, such as automaker Great Wall Motor Co. inBaoding, are investing in automation to reduce headcount.

“The hard fact is that unless China moves up the value chain thefuture contribution of exports to economic growth will decline,”the World Bank said in “China 2030,” a report released last year incooperation with the Development Research Center of the StateCouncil.

Foxconn was one of the first of China's big exporters to buildplants inland where the bulk of the nation's migrant workforcecomes from. More than 90 percent of the 250,000 workers in its 5.5square-kilometer Henan plant are from the province's population of94 million.

“Every company I talk to has been taken by surprise by thetightening of the labor market,” said Auret van Heerden, presidentand chief executive officer of the Washington-based Fair LaborAssociation. “Foxconn chose to shift to very populous provinceswhere they thought there would be a deep pool of labor. Whatthey're finding is that the younger generation simply doesn't wantto work in factories.”

Zhuge Leilei, 24, signed on with Foxconn in Zhengzhou two yearsago and was sent to the company's Shenzhen plant for four months totrain as a team leader.

“The pressure is huge,” Zhuge said in January. “Once I get myyear-end bonus, I'm going to quit.”

The new factories have denuded many rural communities of youngworkers. In five central provinces, more than 90 percent of men invillages and about 76 percent of women between the ages of 20 and40 now work elsewhere, according to a poll of 2,020 ruralhouseholds conducted by Beijing Forestry University, the ChineseAcademy of Sciences and Stanford University.

“Young, mobile labor is gone,” said Scott Rozelle, head of theRural Education Action Project at Stanford in California. “Movinginland helps, but only a little. It is mainly for tax purposes andcheap land, not cheap labor.”

Search Reward

On field trips since 2008, Rozelle offered about 300 studentsand interns a 100-yuan reward for every person they could findbetween the ages of 20 and 40 who worked on a farm.

“I have never paid out one cent,” he said. “In northern Sichuan,Guizhou or Gansu, there are zero people between 20 and 40 on farms.My students have looked long and hard.”

Thirty kilometers from Foxconn's Zhengzhou factory is thevillage of Mengzhuang, surrounded by orchards of jujubes, orChinese red dates. On the dusty main street, Hao Yong crouches inhis one-room store over a metal stove to keep warm, surrounded byboxes of jujubes he hopes to sell to passersby.

“All the young people have gone,” said Hao, 30, who says he wasturned down by Foxconn because of a disability.

Foxconn increased its China workforce by 50 percent in two yearsto 1.2 million. The company has suffered suicides, riots andstrikes in the past three years. Employees, who work up to 12 hoursa day, complain of difficult demands from managers.

As many as 4,000 workers walked off the job at Zhengzhou inOctober, according to advocacy group China Labor Watch. A disputeoccurred when employees became frustrated trying to preventscratches on iPhone casings, according to two people familiar withthe matter.

“Workers are becoming increasingly demanding,” said Li Qiang,executive director of the New York-based labor group. “They want tospend, they don't want to work long hours.”

After pressure from Apple and the media, Foxconn more thandoubled wages in 2010 for some workers in China and employedcounselors. The company is giving workers greater representation inunions. Its dormitory complex in Zhengzhou looks like a privateresidential development, with shops and a karaoke lounge.

“If you want to exist for a long, long time, you must create asystem providing not only jobs but also lifestyle,” said Liu Kun, acompany spokesman, in an interview in Zhengzhou.

Factories shifting inland also face other challenges. Movingaway from subcontractors and parts makers stretches supply chainsand often increases transportation costs.

Jeans maker Yi Ding Hong Clothing Co. shifted production toHuaxian in Henan in 2009 from Guangzhou, lured by tax incentivesand cheaper land, said founder and chairman Kang Xunda. Two yearslater, Kang moved back to the coast.

“It cost us millions,” he said. “There were virtually no savingson wages and the logistics was a nightmare.”

Kang said he could find 30 suppliers on the coast for each onein Henan.

“In Guangzhou, delivery promised in three days will be deliveredin three days,” he said in a telephone interview. “In Henan,delivery promised in a week can take a month.”

Companies that do move inland often worsen the labor shortage onthe coast because many of the staff they hire are former migrantworkers.

Henan resident Wang Xiaohong used to work at an electronicsfactory in Hangzhou, south of Shanghai, before taking a job lastyear at Foxconn in Zhengzhou. After deductions for food and board,Wang earns the same starting wage as she did in her previous job,about 1,500 yuan a month.

Homemade Noodles

“It's nice to be a bit closer to home,” said Wang, 23, fromDengfeng, a nearby wheat-growing county. “I can go home often andhave my mother's homemade braised noodles.”

China still has advantages for manufacturers other than cheaplabor, including the scale of its domestic economy, superiorinfrastructure, proximity to component suppliers and establishedlogistics networks, said Beijing-based Fred Hu, founder of privateequity firm Primavera Capital and former Greater China chairman atGoldman Sachs Group Inc.

The share of exports produced inland rose to 8.7 percent inApril last year, from 5.5 percent in December 2010, Goldman Sachssaid in a Dec. 11 research note. Last year, exports from centraland western China rose 22 percent and 38 percent, respectively,compared to a 5 percent gain on the east coast.

After a leadership change this month, new Chinese Premier LiKeqiang promised on March 17 to open the economy more to marketforces to achieve 7.5 percent annual growth through 2020.

Expansion may slow to 6.2 percent annually by 2030, or less ifemployment gains weaken or investment drops as a share of grossdomestic product, Jane Haltmaier, an economist at the U.S. FederalReserve in Washington, wrote in a research paper posted this weekon the central bank's website.

International Monetary Fund researchers Mitali Das and PapaN'Diaye say China's cheap labor may last longer than five years.The nation has a pool of 150 million unemployed or underemployedworkers that probably won't be exhausted until between 2020 and2025, they wrote in a paper released in January.

Still, they say forecasts may understate prospects of a laborshortage because the pool of workers below 40 years old will shrinkfaster than the overall workforce.

Older workers “don't want to work in factories and factoryowners don't want to hire them,” said Stanford's Rozelle.

As farms in central China give way to factories, Tao at CreditSuisse estimates China will face a shortfall of almost 18 millionworkers by 2020. The shift of labor-intensive industry will onlydelay the loss of China's comparative advantage, said Cai Fang,head of the Institute of Population and Labor Economics at theChinese Academy of Social Sciences in Beijing.

“The surplus labor pool is diminishing,” said Cai, a member ofthe National People's Congress. “Central and western regions cannotafford more factories of Foxconn's size.”

Bloomberg News

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