Wage revolution: Domestic jobs go as firms seek cheap labor in China

By Junichi Maruyama, et al., Yomiuri Shimbun, 7 March 2003

This is the last installment in a three-part series focusing on the spring labor offensive (shunto) and changes in the wage system.

In September, Sankyo Seiki Mfg. Co. closed its video camera motor manufacturing plant in Iida, Nagano Prefecture.

The plant was ideally located for a precision instrument manufacturer at the foot of the Kiso mountain range, an area known for its fresh air.

But these days the cool alpine air blows through an empty factory. One of the production lines was moved to another plant operated by the firm's Chinese subsidiary in Guandong Province and 200 workers were transferred to other domestic plants of the firm and affiliated companies. Some employees opted to leave the company under an early retirement option.

This kind of story is now common throughout the country.

According to Japan External Trade Organization, Japanese companies' investment in China totaled about 1.44 billion dollars in fiscal 2001, up 45 percent from the previous fiscal year. Meanwhile, foreign investment in Japan dropped about 38 percent.

Companies from around the world are relocating manufacturing plants to China, lured by cheap labor costs--said to be one-thirtieth that of Japanese labor costs.

The upshot is that employment opportunities in this country have diminished drastically.

In January, the unemployment rate stood at a record high 5.5 percent. It is obvious that the trend to shift production to China is a significant factor.

There also is a growing trend among firms to relocate development departments to China, particularly among computer software firms.

Tose Co., a Kyoto-based video game software maker, has established subsidiaries in Shanghai and Hangzhou that employ about 200 Chinese programmers and software designers.

Hiring Chinese software engineers costs a third of the amount needed to hire Japanese employees.

Tose plans to double the number of Chinese technical experts that it employs by summer of next year.

Fujitsu Ltd. and Sony Corp. also have shifted their development sections to China.

The government's 2002 white paper on labor compared the average cost of labor in all industries in Japan and other countries. It found labor costs in Germany were 81 against a base of 100 in Japan. In the United States it was 78, in Italy it was 60, while in South Korea and Taiwan it was about 33.

However, the Japan Council of Metalworkers' Unions, comprised of labor unions of domestic automobile and steel manufacturers, dismisses the attention paid to the high wage level in this country.

As far as automobile and electric appliance industries are concerned, labor costs are relatively cheap in this country compared with major industrialized countries, a council official said.

Indeed, minor wage differences among Japan, European countries and the United States are not particularly important. What is more significant is that China, with its huge low-paid workforce, is Japan's neighbor.

Prof. Yoshio Sasajima of Meiji Gakuin University said, It's a matter of course that demand for a cheap and good-quality (workforce) will increase just as it does for other industrial goods.

Ideas suggested during this spring's labor offensive to help Japan Inc. retain its international competitiveness include wage cuts, reviews of mandatory annual pay raises and the introduction of merit-based pay system.

These options would maintain and strengthen the competitiveness of Japanese companies.

Meanwhile, two major approaches have been taken to safeguard jobs while maintaining Japan's all-important competitive edge. These are having workers share jobs, which involves cutting workers' hours and base salaries, and employing workers as part-time rather than full-time employees.

However, the work-sharing system does not have a good track record.

Last year, management and workers of Sanyo Electric Co. reached a basic agreement to introduce a work-sharing system. About 1,000 plants and sales branches considered the idea, but only one plant in Hyogo Prefecture with 210 workers implemented it.

Management feared that the introduction of such a system would lead to a drop in the productivity of individual workers and reduce the firm's international competitiveness.

Instead, Sanyo Electric plans to move its production of household air-conditioners, refrigerators and microwaves to China.

Many companies appear to oppose introducing work-sharing system and the practice seems unlikely to catch on in this country.

Meanwhile, the number of part-time workers in the nation reached a record 15.1 million between October and December. The ratio of part-time workers to the entire workforce of 49.55 million, excluding corporate executives, broke the 30 percent mark for the first time.

More than 50 percent of female workers and 15 percent of male workers are currently hired on a part-time basis.

The average hourly wage of part-time workers was 36.9 percent of that of full-time workers in 2001. This marked an increase in the wage gap from 1993 when part-time workers were paid on average 39 percent of the average full-time wage.

The difference in wages of full- and part-time workers is almost equal to that between full-time workers in manufacturing sectors in Japan and South Korea or Singapore.

In an attempt to maintain international competitiveness, Japanese companies are increasing their part-time workforces to bring their wage bills into line with those of firms in other Asian countries.

However, as long as the wage level of full-time workers remains high compared with other countries, attempts to cut costs through increasing the number of part-time workers are likely to have little effect.

Indeed, in this year's wage negotiations many companies have dared to raise for negotiation a previously untouchable issue--the wages of full-time workers.

All Nippon Airways and major banks, including Mizuho Financial Group, are trying to curtail payroll costs by reducing retirement allowances and pension benefits--previously considered privileges for full-time workers.

However, companies cannot compete at an international level simply by slashing wages. It is also very important for companies to develop new products and innovative technology. Also, companies must hire and train people who have special knowledge, skills and experience. These skilled human resources must be compensated with above average remuneration.

Minoru Ito, a senior researcher at the Japan Institute for Labor said, The labor force in Japanese companies will become polarized--into a group of full-time employees who have positions with higher responsibility and higher incomes and another group comprised of part-time workers who handle relatively easy jobs with less responsibility and less pay.

It appears certain that the existing wage system, in which workers are paid uniformly, equally and automatically, will end this year. An era in which salaried workers are selected on the basis of skills and qualifications and classified into hierarchies is about to start.