Auto sector faces pinch of rising labour costs

This has affected auto production where workers typically make more than the average manufacturing worker, and rising costs will continue to pressure manufacturers. IHS Global Insight estimates that labour cost for auto workers in China is $4.02/hour, roughly 60 percent more than the national manufacturing worker average. On the other hand, India’s auto workers are compensated at roughly $3.30/hour, just over 20 percent more than the national manufacturing average.

Chinese wages, in the spotlight recently due to a series of high-profile factory strikes, are set to continue rising strongly in coming years -- putting total Chinese labour costs above India by 2013 despite lower benefit payments required from employers, said Katherine Lewis, a director with HIS insight and one of the study’s authors.

In its study entitled ‘Global Manufacturing Compensation Watch’, IHS said China’s manufacturing labour costs are expected to go up 10 percent this year despite a slowdown in exports to the West as a result of the recession. “Labour costs are still rising fast in both markets. Rapid growth, productivity gains, and an explosion in outsourcing have put increasing pressure on wages in developing economies like India and China,” said Lewis. Total labour costs in India's formal manufacturing sector are expected to average $2.68 per hour in 2010 compared to China's $2.51. Basic wages have risen fast in India over the last year, but still lag China -- India averages $1.71 per hour, to China's $1.82.

What impacts overall costs between both countries is benefits. India's benefit structure includes contributions to the Provident fund, survivor insurance, pension contributions, bonus and double pay for overtime. “As basic wages rise, then benefits increase accordingly which can add considerably to companies’ costs, especially in India,” Lewis said.

According to the study, benefits make up roughly 36 percent of labour costs in India. The figures would be even higher if employers did not avoid many of these costs by employing contract workers. In China, benefits make up just over 27 percent of labour costs. This figure is heavily diluted by rural workers, however, who earn only eight percent benefits. Urban workers can earn up to 47 percent additional pay in benefits. All the figures for India and China are based on national averages.

China's manufacturing sector is more heavily dependent on exports to the West, which have suffered in the aftermath of the global recession. The Indian economy, on the other hand, benefits from more diversity and local demand, allowing the rising wages to push total costs ahead of China. By 2020, the study said total manufacturing labour costs in China are expected to be 20 percent higher than in India as wages in China are expected to rise steadily whereas in India growth may be erratic. “China's rising wage costs reflect higher productivity as a result of extensive investment in industrial infrastructure,” Lewis said.