Minimum wage roulette
Pay hikes may bring success at the polls, but they also raise the risk of layoffs and factory relocations.
After more than three decades as Cambodia’s prime minister, Hun Sen added a new routine to his schedule last August: visits to the garment and footwear factories that employ 700,000 citizens nationwide.
Sometimes he has lunch with the workers. He is happy to pose with them for selfies. And he has been dangling a carrot before them, in the form of a higher minimum wage.
Hun Sen is not the only Southeast Asian leader using wages to woo voters, raising hopes for better living standards but creating headaches for employers. Manufacturers are increasingly asking themselves whether countries in the region offer enough other business benefits to justify paying employees more.
In Cambodia, garment workers and their families are a major voting bloc among the population of 16 million. Hun Sen is personally courting them as he looks to extend his reign in a general election this July — and calm public discontent over his clampdown on the opposition.
“I wish to express my congratulations to workers who in the days ahead will receive a basic monthly salary increase from US$153 to $170,” Hun Sen said in late December, in an address to 14,000 workers from 15 factories in Phnom Penh. Free health checks and treatments in state hospitals are also being provided.
The 11% wage increase took effect on Jan 1. Employers and workers had previously agreed on $165 a month, but Hun Sen tacked on an extra $5.
“I have declared already that I will continue to seek the premiership post for the next two terms,” the prime minister told the workers. “I hope that you, your parents and grandparents, should they be still alive, will continue to vote for the Cambodian People’s Party on July 29, 2018.”
Hun Sen has taken a page from the playbook of the now-gutted opposition. Calls for higher wages had helped the Cambodia National Rescue Party (CNRP) gain seats in the 2013 general election and in communal elections last June. Last year, though, the Supreme Court dissolved the CNRP and jailed its president, Kem Sokha. Now Hun Sen is looking to win over labourers who backed the rival camp.
Malaysia, too, is headed for a general election before August, and there are rumblings of a minimum wage increase. The government will conduct a biennial review of the monthly wages — currently 1,000 ringgit ($253) for peninsular states and 920 ringgit for island states — at midyear.
Prime Minister Najib Razak has focused on lower-income voters in recent years. A number of programmes, including the adoption of minimum wages for the first time in 2014, have been designed to lift the incomes of the bottom 40% of households, which earn less than 3,000 ringgit a month.
A combination of brisk economic growth and political considerations continues to elevate wages across Southeast Asia. Indonesia lifted its wages by 8.7% in major areas including Jakarta in January, while Vietnam increased them by 6.1% to 7% depending on the area, according to data compiled by Bank of Tokyo-Mitsubishi UFJ. Minimum wages in some parts of Southeast Asia have more than doubled in the last five years.
PROTESTS AND HAGGLING
Back in January 2013, the minimum wage in the Jakarta area was raised by 44% from the previous year. Joko Widodo, now Indonesia’s president, had just been elected Jakarta governor four months earlier and was looking to ease frequent labour protests.
Demonstrations again played a role in setting wages this year, with the increase exceeding last year’s in many parts of the country. And in early November, just after new Jakarta Governor Anies Baswedan set the increase, hundreds of union members gathered at Jakarta City Hall to demand a steeper increase and criticise the governor.
In Myanmar, which is poised for the region’s biggest minimum wage increase this year, “[State Counsellor Aung San] Suu Kyi is trying hard to make economic progress at a time when Myanmar is building a genuine democracy,” said Myint Myint Cho, managing director of Min Thiha Jewellery in Yangon. “She is trying to uplift the lives of blue-collar workers.”
The large increase — 33% — is the result of a combination of protests and haggling.
Last August, about 2,000 factory workers marched in Yangon, arguing that their daily minimum wage should be raised to 5,600 kyat ($4.20) from 3,600 kyat — the amount the government first set in 2015. “This can’t cover our cost of living,” a protest organiser said.
Employers sought to limit the figure to 4,000 kyat, and after negotiations, they settled on 4,800 kyat.
The question is, can Southeast Asian economies withstand the side effects?
This year’s minimum wage increases are exceeding expected inflation rates. The International Monetary Fund sees consumer prices rising 3.5% in Cambodia, 3.9% in Indonesia, 2.9% in Malaysia, 6.1% in Myanmar and 4% in Vietnam.
A recent report by the consultancy Korn Ferry Hay Group forecasts inflation-controlled wage increases of 2.8% in Asia this year, topping other regions and almost double the global average of 1.5%.
Minimum wage increases can have positive economic effects — spurring consumption, for example — but Southeast Asia may be losing its appeal as a manufacturing base. In the 2000s, some multinationals moved their plants there from China to escape upward wage pressure and spread risk.
Thailand adopted a 300-baht daily minimum wage nationwide in 2012 and it remained unchanged until last year, when increases of 5-10 baht were approved for some provinces. The cabinet last month approved further increases of 5-22 baht, depending on the province, from April 1.
However, labour groups have said that current levels do not come close to reflecting workers’ real cost of living. They have proposed bumping up wages to anywhere between 450 and 700 baht a day. Employers, not surprisingly, say such calls are unrealistic.
Last October, soon after Vietnam’s congress approved an average wage increase of 6.5% for 2018, employers insisted the timing was wrong.
The Vietnam Textile and Apparel Association demanded a delay of at least two years, noting that the previous increase of 7.3% had already pushed up their members’ total production expenses by 2.9%.
“Manufacturers have to increase salaries and social insurance funds,” said Nguyen Thi Mai, general director of the yarn producer Fortex, which employs 1,000 people. “We are under pressure to balance input costs and profits. If we fail [to balance them], layoffs or production cuts could result.”
Higher wages must go hand in hand with productivity improvements, Mai added.
CONCERN IN CAMBODIA
In Cambodia, there is real concern about the future of the apparel industry, according to Monika Kaing, deputy secretary-general of the Garment Manufacturers Association in Cambodia (GMAC). Urging all sides to minimise the impact of rising labour costs, he said, “While the manufacturers have to increase productivity and effectiveness, the government should have policies to reduce the formal and informal public service fees.”
Sooner or later, businesses will face a choice: become more efficient or leave.
“We need to see the costs of the new minimum wage and find ways to survive, like reducing overtime and unskilled labour,” said Myint Soe, chairman of the Myanmar Garment Manufacturers Association.
Global manufacturers are responding to the pressure with more automation. Japan’s Mabuchi Motor, which runs plants in China, Vietnam and elsewhere, is one. It has seen labour costs per head rise by about 10% every year in both China and Vietnam, and as a spokesperson put it, “We will only lose profit unless we address this issue.”
Yoshio Morishita, general manager of the global business division of Bank of Tokyo-Mitsubishi UFJ, said auto plants in Thailand and Indonesia are also resorting to robots. Foreign “garment and other labour-intensive makers may relocate their production sites to countries with lower labour costs”, he said. Output that shifted from China to Southeast Asia could move to South Asia and on to Africa.
Morishita did say, however, that car and home electronics makers “are unlikely to [make such moves] as they have stable supply chains of international specialisation in Southeast Asia.”
The inexorable rise of minimum wages might trigger still another response: shifting production back to more advanced markets.
Honda Motor last year brought production of its Super Cub motorcycle back to Japan from China after five years, since rising wages had narrowed the cost gap. Similarly, as surging Southeast Asian wages close the cost gap with China, some output could move back in that direction.
Labour is already expensive in Southeast Asian markets, relative to their overall competitiveness, noted Frederic Neumann, co-head of Asian economic research at HSBC. “If you don’t have fantastic infrastructure and competitive legal systems, a marginal increase of labour cost matters even more,” he said.
Countries that rush to lift minimum wages without improving business conditions risk shooting themselves in the foot. This very scenario is beginning to play out in Cambodia, where global manufacturers are growing frustrated with the whims of local authorities.
“We fell for the sweet words of the Cambodian side,” said Manabu Fujimura, a professor at Aoyama Gakuin University in Tokyo, of the prevailing sentiment among Japanese executives with business interests there.
Garment makers and other light-industry manufacturers from Japan, South Korea, Taiwan and China flocked to Cambodia around 2010, lured by monthly per capita labour costs under $100. Now that the minimum wage far exceeds that, some companies are becoming reluctant to invest.
Cambodia and other emerging economies have a major opportunity to accelerate their development, amassing technology and investment through labour-intensive industries. But if companies head elsewhere, without leaving much capital behind, this scenario will go up in smoke. “Populism,” Fujimura warned, “kills the economy.” (Nikkei senior staff writer Kazuki Kagaya in Tokyo and staff writers Thurein Hla Htway in Yangon, CK Tan in Kuala Lumpur and Mitsuru Obe in Tokyo contributed to this report)