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China's labor woes impact hobbies

By Tim Kidwell
Published: April 13, 2010
Guandong province is a manufacturing and shipping powerhouse hit hard by the labor shortage.
Even with the world’s largest population, 1.3 billion people, China’s factories are facing a severe labor shortage. The shortage has driven wages up almost 20%, and companies now offer other enticements, such as free lunches and prepaid living quarters, to attract employees.

In the past, China’s factories have been manned by migrants from the country’s interior. But after China’s government passed a $500 billion stimulus package that poured money into infrastructure projects — including railroad building — many of those migrants have decided to stay close to home. The official China Daily newspaper conducted a survey of employers that showed one in 12 migrant workers was not expected to return to work in Guangdong province. Guangdong alone has estimated its labor shortage to be approximately 900,000 workers.

As cost of labor increases, there is the question of how much can be passed along to the U.S. and Western Europe, two of China’s major importers. As prices for home appliances and electronics are sure to go up, it’s unclear to what extent the labor shortage will affect the hobby industry.

According to one industry professional familiar with the subject, CML (a supplier of model railroad products to the U.S.) has typically seen a 10–15% labor loss after the Chinese New Year. This year, it saw a 40% shortfall. We were told that Affa Technologies, another Chinese supplier of model railroad products to many popular U.S. brands, has announced a 30% increase in prices linked directly to the sudden labor crunch.

“Horizon has a number of partners in China who traditionally have experienced a turnover of workers following Chinese New Year,” said Horizon Hobby’s Chief Operating Officer Kurt Bock. “We have seen these partners continue to address turnover through improved manufacturing processes relying on higher skill levels and lower workforce numbers as they move wage rates higher to retain skilled workers.”

Model railroad manufacturer Craig Martyn, owner of BLMA Models, says that the labor shortage is affecting everyone, but downplays its part in price increases, attributing it more to supply and demand.

“We’ve been looking at steady wage increases for years, and they’ll continue,” Martyn said. “My hope is that with a billion people in the country, more ‘mainlanders’ will move towards the manufacturing regions in hopes of better-paying jobs.”

Better detail, short product runs and a multitude of variations have all been factors in pushing prices higher in both plastic models and model railroading. However, streamlining production by offering fewer variants doesn’t seem to be in the cards.

“If [customers] demand products a certain way, we’ll cater to them and produce as specified,” Martyn said. Similar sentiments have been expressed by importers in the plastic model hobby segment too.

Beyond the labor shortage, another issue looms on the horizon: a stronger yuan. The U.S.’s argument has been that China’s currency, the yuan, is artificially cheap. As reported in BusinessWeek, some of China’s leading business executives have come to agree with that thinking and are now pushing the Chinese government to allow the yuan’s value to appreciate.

A stronger yuan would increase the buying power of Chinese consumers, but would consequently reduce the dollar’s purchasing power. Bloomberg said that contracts linked to the yuan’s future value “predict the currency will break its dollar link by July.” A sudden increase in the yuan’s value could be detrimental to low-margin operations in China, perhaps even forcing some into bankruptcy.

Dragon Models USA was contacted for this piece, but didn’t respond by the time it went to print.