Where China Goes To Outsource Its Own Soaring Labor Costs

Tyler Durden's picture

30 years ago, the great outsourcing wave took millions of US low-skilled jobs and planted them right in the heart of China, which was about to undergo the fastest industrialization-commercialization-financialization experiment in history. $26 trillion in bank assets later, the world's biggest housing bubble, and a teetering financial system that every day depends on Beijing making the correct central-planning decision (of kicking the can one more day, of course) or else the biggest financial collapse in history will take place, all lubricated by years of inflation in everything and most certainly wages, and suddenly outsourcing jobs in China is not all that attractive.  In fact, it has gotten so bad that China itself is now forced to outsource its own labor to cheaper offshore markets. Such as this one.

Ethiopian workers strolling through the parking lot of Huajian Shoes’ factory outside Addis Ababa last month chose the wrong day to leave their shirts untucked. Company President Zhang Huarong, just arrived on a visit from China, spotted them through the window, sprang up and ran outside. The former People’s Liberation Army soldier harangued them loudly in Chinese, tugging at one man’s aqua polo shirt and forcing another’s shirt into his pants. Nonplussed, the workers stood silently until the eruption subsided.


Shaping up a handful of employees is one small part of Zhang’s quest to profit from Huajian’s factory wages of about $40 a month -– less than 10 percent the level in China.


“Ethiopia is exactly like China 30 years ago,” said Zhang, 55, who quit the military in 1982 to make shoes from his home in Jiangxi province with three sewing machines and now supplies such brands as Nine West and Guess?. “The poor transportation infrastructure, lots of jobless people.”

Reading the linked Bloomberg article, it becomes quite clear that it is not at all surprising that China has picked Ethiopia as its place to outsource labor: while 30 years ago the Chinese leveraged dragon was only just starting to stir, then-Marxist Ethiopia which back was considered one of the poorest countries in Africa if not the world, was in the midst of a great famine. And while things in China have changed drastically since the 1980s, in Ethopia, and most other African countries, time has stood still, at least when it comes to wages. Which means that having effectively colonized Africa in the past 4 years, as we showed in 2012 with "The Beijing Conference": See How China Quietly Took Over Africa, while the west was busy kicking its own can, bailing each other out and pretending its economy is solvent, China was busy setting up shop across all African nations with plans to do just what Zhang does now: hire an ultra cheap labor force now that China itself is becoming uncompetitive in the global labor landscape.

A combination of cheap labor and electricity and a government striving to attract foreign investment makes Ethiopia more attractive than many other African nations, said Deborah Brautigam, author of “The Dragon’s Gift: The Real Story of China in Africa” and a professor of international development and comparative politics at Johns Hopkins University’s School of Advanced International Studies in Washington.


“They are trying to establish conditions for transformation,” Brautigam said in a telephone interview. “It could become the China of Africa.”


Huajian’s 3,500 workers in Ethiopia produced 2 million pairs of shoes last year. Located in one of the country’s first government-supported industrial zones, the factory began operating in January 2012, only three months after Zhang decided to invest. It became profitable in its first year and now earns $100,000 to $200,000 a month, he said, calling it an insufficient return that will rise as workers become better trained.


Under bright fluorescent lights, amid the drone of machines, workers cut, glue, stitch and sew Marc Fisher brown leather boots bound for the U.S. Meanwhile, supervisors monitor quotas on whiteboards, giving small cash rewards to winning teams and criticism to those falling short.


Huajian Chairman Zhang Huarong said, “Ethiopia is exactly like China 30 years ago.”


China, Africa and global retailers all have stakes in whether Ethiopia and such countries as Tanzania, Rwanda and Senegal become viable production bases for labor-intensive products. Promoting trade, boosting employment and spurring investment are among the topics that will be discussed on August 4-6 at the first White House U.S.-Africa Leaders Summit in Washington.

China may not have hit its second, urban Lewis point yet, but if Ethopia is any indication, labor conditions for the country that needs to create tens of millions of new jobs every year to preserve social stability may get complicated very fast.

African nations have a compelling opportunity to seize a share of the about 80 million jobs that China will export as its manufacturers lose competitiveness, according to Justin Lin, a former World Bank chief economist who now is a professor of economics at Peking University.

Here, instead of alienating the potential labor pool, China is keeping its options very open, and in fact welcomes the ability to outsource to a cheaper location: "Chinese Premier Li Keqiang and Ethiopian Prime Minister Hailemariam Desalegn, who met on May 4, backed the move of Chinese industries to Ethiopia. China is “supporting Ethiopia’s great vision to become Africa’s manufacturing powerhouse,” Hailemariam told reporters at a joint press conference in Addis Ababa."

At the very bottom of it all: surging labor prices. Yes, in China.

Weaker consumer spending in the U.S. and Europe after the financial crisis prompted global retailers to hasten their search for lower-cost producers, said Helen Hai, head of China Africa Consulting Ltd. in Addis Ababa. She ran Huajian’s Ethiopia factory until July of last year.


While China’s inland regions offered manufacturers a cheaper alternative to the export-linked coastal areas, rising costs and a limited pool of available workers now are undermining that appeal.


Average factory pay in Henan, about 800 kilometers from the coast, rose 103 percent in the five years ended in September and 80 percent in Chongqing, 1,700 kilometers up the Yangtze River. In the same period, salaries rose 82.5 percent in Guangdong, where Huajian has its base in the city of Dongguan.


Cost inflation in countries including China has prompted Hennes & Mauritz AB, Europe’s second-biggest clothing retailer, to work with three suppliers in Ethiopia. The nation has “great potential” for production, H&M head of sustainability Helma Helmersson said in an April interview.


China’s average manufacturing wage is 3,469 yuan ($560) per month. Pay at the Huajian factory ranges from the basic after-tax minimum of $30 a month to about twice that for supervisors. By contrast, average manufacturing wages in South Africa, Africa’s biggest manufacturer, are about $1,200.

China is not the only one to have discovered what may be the world's last outsourcing diamond in the rough.

Signs of Ethiopia’s allure include factories outside Addis Ababa set up by leather goods maker Pittards Plc of the U.K. and Turkish textile manufacturer Ayka Tekstil. Foreign direct investment in the nation surged almost 250 percent to $953 million last year from the year before, according to estimates by the United Nations Conference on Trade and Development.

But only China brings with it a certain "flare" to the work ethic it is trying to inculcate within the local population:

Zhang spends about half his time in Ethiopia, he says. During the visit last month, he spoke to about 200 uniformed Huajian supervisors, a mix of Ethiopians and Chinese, gathered in the parking lot. A giant plasma screen mirrored the crowd as Zhang hurried onto the stage.  He berated those assembled for a lack of efficiency, then praised them for their loyalty to Huajian, his words translated into Amharic and Oromo. He ordered them to march on the spot, to turn left and to turn right, all chanting together in Chinese.


“One two one,” they chanted. “One two three four,” as they marched in step. Slogans followed: “Unite as one.” “Improvement together.” “Civilized and efficient.”


They sang the “Song of Huajian,” whose words urged “We Huajian people” to bravely move forward, to hold the banner of Huajian high and to “keep our business forever.” Chinese supervisors led the song, their Ethiopian colleagues stumbling over some words and struggling to keep up.


Later, Zhang explained that he can’t be as tough on the staff as he would like. “Here the management cannot be too strong as there will be a problem with the culture,” he said via a translator. “In China you can be strong, but not here. The conditions here mean we have to show respect. On one hand we have to have strict requirements; on the other hand we have to take care of them. They have their own dignity. They may be poor but we have to respect their dignity.”

What does a typical worker's day look like:

Taddelech Teshome, 24, said her day starts at 7:20 a.m. after her Chinese employers provide employees with a breakfast of bread and tea. When her morning shift ferrying shoes from the factory floor to the warehouse is over, she gets fed the national staple, sour bread, for lunch. After work, a Huajian bus takes her to nearby Debre Zeit, a town where she rents a room with her sister for $18 a month.


She came to Huajian just over a year ago from her home 165 kilometers away in Arsi region after her sister started at the factory.


The work is good because I pay my rent and I can look after myself,” she said, wearing an aqua Huajian polo shirt. “It’s transformed my life.” Taddelech said she wants to work for two more years at the plant and become a supervisor. She eventually aspires to build her own house.


With inflation at 8 percent -- down from 40 percent in July 2011 -– saving cash is tough. Mohammed al-Jaber, who earns $30 a month for gluing shoe linings eight hours a day six days a week, said he can add to his pay with perfect attendance each month -- a $7.50 bonus -- and overtime. Any extra gets sent home to his family in the Arsi region.

As for higher level arrangements, the two countries are certain to get along: One appeal for China: Ethiopia follows a similar tightly controlled, state-heavy economic model. Opposition parties won only one out of 547 parliamentary seats at the last election in 2010. Ties are strong between the Communist Party of China and the Ethiopian Peoples’ Revolutionary Democratic Front: On July 10, Central Committee Political Bureau member Guo Jinlong visited Ethiopia and met with Prime Minister Hailemariam. The two pledged to enhance cooperation, the official Xinhua news agency said.

Meanwhile, China is doing what the west was so efficient in its heyday: providing all the loans to fund this international expansion:

Ethiopia’s heavy public investment in infrastructure using credit from Chinese state banks promises to relieve some key bottlenecks. The Export-Import Bank of China is funding a railway from Addis Ababa to landlocked Ethiopia’s main port in neighboring Djibouti. Ethiopia lost its coastline when Eritrea became independent in 1993.

The Chinese and Ethiopian governments also are investing in hydroelectric plants -- including what will be Africa’s largest, the domestically funded Grand Ethiopian Renaissance Dam on the Blue Nile -- that should increase Ethiopia’s power supply five-fold by 2020.


That may help overcome obstacles including the supply of electricity and cumbersome customs and tax procedures. In May, a World Bank team went to visit a textile factory in the Eastern Industrial Zone, where the Huajian plant is located, and found they are faced with daily power outages lasting for hours, Ethiopia country director Guang Zhe Chen said.

Perhaps the biggest shocker here is that while China was colonizing Africa, first with infrastructure, then with debt, and now with local labor, neither JPM nor Goldman did the same. Perhaps the US truly is losing it to China which managed in a decade to take over the continent without firing a single shot (the US does have a few drone bases in central Africa but they won't last). And even if the "west" tries to steal Africa from under China's nose, it is far too late  now.

Rising Chinese wages that Zhang calls “an inevitable trend” are pushing Huajian to try to increase its workforce in Ethiopia to as many as 50,000 within eight years.  A model of a planned new plant at the edge of Addis Ababa is displayed at the factory. The 126-hectare (341-acre) complex, partly financed by more than $300 million from Huajian, will include apartments for workers, a “forest resort” district and a technical university.


At the gathering in the parking lot, after supervisors sang Huajian’s company song, Zhang dismissed the Ethiopian contingent. Then he continued haranguing the Chinese managers. To make his point that structure was needed to keep employees in focus, he thrust a broomstick toward them repeatedly, then toward the remote camera that was feeding to the plasma screen, the image blurring with each prod.


Then he left the stage, laughing and raising a triumphant fist.

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Shizzmoney's picture

This has been known for quite a bit, although China is still the tech sectors' numba won choice.

I'd say more than 35% of the of the textile/clothing work that started in the mid-90s has now gone to Indonesia, India, Bangladesh, and Malaysia.  And will probably be at 50%+ by the end of the decade.  Especially since the Chinese have to keep their QE4EVA program to fund their shadow banking system.

Keyser's picture

How long before Al Sharpton and Jesse Jackson condemns this movement as racist and employing slave labor practices... May the circle be unbroken...


NoDebt's picture

Productivity per worker be damned.  Just give me the cheapest, most unskilled labor available.  

max2205's picture

I take back the idea that robots will replace us all soon.....this is shit

Stackers's picture

Next up: Papua New Guinea Canibal Hill Tribes !!! ... gives new meaning to the term "head hunter".

FilthyPhil37's picture

in 10 years, calling a Papau New Guinean recruiter a head hunter will be a racist term.

Save_America1st's picture

soon enough they will be looking to the Banana Republic of the Divided States of 'Merika, and our new class of 100+ million illegal invaders for their cheap labor.  We will experience a "rennisance" in cheap worthless manufacturing for pennies on the dollar all across 'Merika. 

And don't forget the fucking unions.  With all these new desperate, starving, uneducated, poverty-strickin', illegal invaders will come swarms and swarms of scumbags trying to rebuiled their Socialist labor unions for everything across the board.

Massive tax exemptions for these facotories will follow from the gov-scum who will cater to them as "rebuilding" 'Merika while the very few left in the "middle" will be forced to support higher taxes and inflation before they are finally wiped out and forced to become just like the 3rd world illegal invaders...desperate to find anything to make a few pennies to live off of.  Slavery again will become the accepted norm, for there will be no other choice for the slaves, and nowhere else to go...no other way try to live. 

It will be like the movie "Hunger Games" where an elitist, pompous, ruthless, authoritarian, mentally deranged, psychopathic class will prey on the impoverished, helpless sheeple; treating them like cattle to be abused and slaughtered at their amusement.  No law...no justice...no dignity...no basic human rights. 

Once America goes down this path 100%, the rest of the world will follow.  Done deal.  No turning back.  The Dark Ages all over again for hundreds of years or forever until this planet finally destroys itself. 


We wake the fuck up...stand up....and wipe these mother fuckers in D.C. out before they complete their destruction of AMERICA.

If not...

GAME OVER.  Wash, rinse, repeat. 

Tick tock, bitchez...it's not too far over the horizon at this point. 

Herd Redirection Committee's picture

Here I am wondering where all the jobs are, no wonder I couldn't find them!  They are all over in Ethiopia!


NoPension's picture

How many Ethiopians can fit in a phone booth?

What's a phone booth?

Lost My Shorts's picture

Ya, what is a phone booth??  No wait, I'll google it on my iphone.

old naughty's picture

"...the workers stood silently until the eruption subsided. "

Outsource its own soaring labour costs, perhaps...

b, b, but, its in the tradition of perpectuating slavery, by turning the "working class" to slav-ples.

They get that from somewhere else, not from the workers-PLA, don't you think?

wallstreetaposteriori's picture

I see slavery is back in favor.

detached.amusement's picture

actually saw one in nyc last weekend....I was like wow, a fkn phone booth!  *points*  lol..

Four chan's picture

we shipped our wage inflation to the slave nation of china decades ago, its never coming back.

the slave nation china will have to ship their wage inflation to some other slave nation like

the low iq countries, vietnam or maybe mexico or africa. the main take away from this is:

the only thing the fed looks at is wage inflation in its grand gamble "printoramma" in light of 

the previous fact of wage inflation is never coming back it shows the fed are fools who will only 

succeed in destroying the dollar..but maybe that has been the rothschild plan for we the people all along?

TMLutas's picture

You're at least six years behind the times. They've been outsourcing to the US since at least 2008




Ni Hao y'all

Zeta Reticuli's picture

Your list of "low IQ countries' should include America. Even a poor peasant child in rural China is better educated than the average American.

Four chan's picture

china does have a higher iq than the states i didnt say otherwise.

Urban Redneck's picture

Just give me relatively steady wages and I'm happy. This running around the world to find the cheapest labor is 1) insane and 2) ONLY possible with cheap bank money- not only the CapEx incurred when relocating factories and management outrageously expensive, the added costs of sourcing and transporting inputs and production eat into margins. Without cheap money from the banks this insanity wouldn't be possible.

Cheduba's picture

"ONLY possible with cheap bank money"

Exactly!  We as human beings think linearly and only see that current trends will continue, but with decentralized systems like P2P lending, 3D printing for manufacturing, and farmers markets, localized systems will return and the free market will take care of our jobs crisis when this whole shitbag Federal Reserve crony fascist system fails.

rsnoble's picture

Best possible outcome.  Problem is what the criminals will do between now and that point and will your scenario even be possible after they are done fucking us over 10,000x?

They'll go to war, drop bombs, run around screaming like little kids, have gazillions of us locked up etc trying to avoid what you have described.  

Herd Redirection Committee's picture

Don't forget the complicity of local governments.

You think China is paying any corporate tax over there?  Of course not.  Thats why the factories are always in 'special export zones', so the locals don't get any ideas.

So once you come to the country, you get 7 years taz free (for example).  So what happens Year 7?  The companies shut down.  New ones may or may not take their place, depending on the level of blackmail they can force the local gov't to accept.

Nations are no longer sovereign entities.

giggler321's picture

A more common problem for Africa in general is the worker mentality.  It's typical to pay a guy for labor on Friday and then not have him turn up on Monday for work; only when he has spent the cash does he return.  Perhaps that will change with industrialisation of Africa.

rsnoble's picture

That's everywhere. Plenty of people in the US do that.  As far as i'm concerned fuck most employers.  Try as they may they'll never break the human spirit.  Not with today's technology anyway lol.

rbg81's picture

Somehow, I really, really doubt that Ethopia is like China 30 years ago.  If the Chinese think they can make Africa work, let 'em have at it.   Looking forward, I think robots are the way to go--and they're just going to keep getting better.

AnAnonymous's picture

We need to get rid of that mentality. Matching your level of consumption to the environmental support? No savings? We need people who understand the American concept of producing more than consuming.
If we cant get rid of the mentality, then we must get rid of the people with that mentality.

Signed: an American.

orez65's picture

"Just give me the cheapest, most unskilled labor available"


There is a big difference between the "cost of wages" and the "cost of labor (cost of wages plus supporting machinery)"

In order to compete with the low wage countries in manufacturing you have to bring your "cost of labor" lower than "their cost of labor".

You do this by augmenting the higher wage workers with machinery.

For example, if you are framing a home with one skilled worker using a nail gun, your cost of labor will be lower than the cost of labor of many workers with hammers.

Also, getting rid of as much government related overhead as possible helps a lot.

Juno Rock's picture

@Shizz  They who live in a glass QE house should not throw stones! lol

robertsgt40's picture

Maybe in another 30yrs Ethiopia will outsource some of their manufacturing to the US

darteaus's picture

Africa - the last frontier.

astroloungers's picture

"Africa - the last frontier."


End of the road I'd say

Seasmoke's picture

So that rusty fucking can is going to end in Ethiopia..

max2205's picture

Geez when the time comes Ethiopia will outsource to the USA......FUNNY HUH?

Publicus's picture

The circle of life. Checkmate.

g speed's picture

hell I've been buying "made in the USA" boots since my first real pair I got from the Army--I don't buy any Chinese slave made footware ever. My feet treat me well because of it. I did buy a pair of Italian loafers once cause I saw a guy with a Lamborgini Muria who was wearing a pair and I thought he was cool.

PT's picture

Oh those lazy, greedy Chinese workers!  Just you wait, we're gonna replace all their burger flippers with fully automatic hamburger-making robots!!!!  That'll learn 'em!

And no mention that all the pay rises can not keep up with the increases in the price of real estate, which must never go down and which guarantees that a geographic area will be non-productive for many decades to come.  On the plus side, eventually the richest 64 million Chinese may be able to afford to buy one of them empty apartments and the Chinese rich will finally be able to see a return on their "investments".

Pay no attention to the little contradiction in that last paragraph!  You know it still stands.

Herd Redirection Committee's picture

Yeah, good point.  Just a couple years back the local gov't would be dying to sell you some vacant land, now they are well into a property bubble and only the most risk-prone of business owners would open another factory, given the real estate costs.

A Nanny Moose's picture

All things are cyclical. Though in the case of sub-Saharan Africa, I would make an exception. That fucking shithole has been shit on for hundreds of years.

DirkDiggler11's picture

Yep. Travel all that way and what do you end up with at the end of the trip?
A nasty Ebola virus for your trouble. Nothing like bleeding out of your ass, mouth, ears, nose, and even out the end of your dick by the end of your shift in the shoe factory. Go China !

If the vampire squid GS set this one out at a turn to make some "easy money" in Africa, that should tell you something.

NoPension's picture

Been there, done that.

Europe colonized and built up ( also pillaged, just like the chinks) most of Africa in 19th and early 20th century.
And as soon as the " natives" won independence , most of Africa went Detroit.
Say it like a Frenchy, day-twa.

South Africa was doing ok, until they too,succumbed.

Go ahead China, build infrastructure. Wanna bet how this turns out?

AnAnonymous's picture

The infrastructure was designed and built to support the loot.

The perception that things were better before only comes because 'americans' feel they are losing something.

'Americans' are extorters and as such, are not interested in the condition of the extorted.

Herd Redirection Committee's picture

Things indeed WERE better in Rhodesia and South Africa than they are currently.  Why do you think Zimbabwe's population was increasing like crazy through the 70s and early 80s (until MAOgabe's 'policies' took hold)

AnAnonymous's picture

Of course they were better. For the extorters. Losing a stock of extorted is never good news for the extorter.

If 'americans' were interested in the fate of the extorted, why should they run a business based on extortion?

Che Guevara is Dead's picture

Africa will break Chinese hearts and shatter Chinese dreams just as it has those of every empire, colonial power, and do-good NGO. It is a siren that seduces everyone who comes too close, only to break their hearts and drain their wallets. That's the reason our distant hominid ancestors GTFO of Africa. They realized no matter what they did, no matter how hard they tried, the place would never stop sucking their souls dry.

Tulpa's picture

Sorry, I count as a good thing desperately poor people getting a chance to live a better life (even if that life looks horrid to us, it obviously is better than what they had before).

Won't satisfy the "humanitarian" leftists who think it should always be the 1950s where Americans get $20/hr plus a fat pension for turning a bolt all day and the rest of the world starves, but I'm not concerned with those miscreants.

Freddie's picture

If they can get themselves to Michigan - Obama, the Democrat Party and UAW will get them jobs at GM-UAW or Chrysler-UAW.   On their lunch breaks - they can go to the Quickie Mart to get malt liquor and go to the local park to smoke crack/meth or chew chat.  

They can drive their new GM-UAW or Chrysler-Fiat-UAW pile of shit to the Quickie Mart.

Four chan's picture

if you're not related you wont get a job with the big three. i live here i know.

PT's picture

The truth has been out a fucking long time now:



Herd Redirection Committee's picture

"Under capitalism, any one can get rich."

"Really?  How?"

"The most popular methods are crime and inheritance."

"What do you recommend?"

"Let your parents commit the crime, you get the inheritance."