Workers or Consumers?

Over the last few decades China, thanks to its transport infrastructure and high levels of productivity, has been able to offer low labor costs in manufacturing. These factors have enabled China to attract foreign investment and become the world's factory for many low-tech and high-tech products.
Things are now changing, especially regarding the competitive factor that has made China world famous: low labor costs.
Since the start of 2012, many firms in the Guangdong province, where most offshore foreign investment is located, have had to increase wages by 10%. Over the last five years, the annual average increase has been 12-14%, and in some areas it has reached 20%.
The phenomenon is not cyclical, but structural. For decades, wages were kept low by the constant inflow of rural migrants seeking factory employment to escape poverty.This was a multitude of people willing to work hard and for very long hours, earning wages lower than the legal standards and enduring harsh labor discipline. The mass of migrants was sheltered in crowded company dorms. Migrant laborers were left unprotected by local administrators, who only cared about factory owners and attracting additional investment. The Chinese miracle was built on the shoulders of these people.
As general economic welfare has improved, younger generations are less willing to subject themselves to the same kind of hardships and sacrifices. The working class is now claiming its share of the pie, while rural migration is declining. The situation is thus ripe for industrial workers to go on strike, make demands and win concessions on wages and working conditions. Firms have shown themselves willing to grant wage increases, in order not to suffer from stoppages and other inconsistencies in production, which have repercussions on delivery times across the global supply chain. A case in point is that of Foxconn, which manufactures many Apple products, including iPads. After a string of suicides among the labor force and ensuing protests on working conditions, the contractor was forced to raise wages by as much as 25%.
How are foreign companies reacting to such scenario? Many no longer consider China a destination for offshore investment for their industrial plants and are turning to Vietnam and Indonesia instead. But growing wages are not making foreign companies flee China. In fact, higher incomes are enlarging China's domestic market. Consequently, companies are seeking workers less and consumers more. But if companies move production out of China and no longer demand employment, they risk shedding workers without adding consumers. This is a situation that Europeans (but also Americans) have already gone through and know all too well.