Revealing the dirty secret behind the low ‘China Price’

Blood, sweat, hukous, ‘five-star ‘factories and polluting coal, says author Alexandra Harney

MUMBAI: Made in China is a true-blue global term.
From pitchkaris and colours used to play Holi in India to mobiles, PCs and laptops used the world over, everything seems to be Made in China.
How did China become the factory of the world?

The answer is obvious: China produces goods at such a low cost that no country can seem to compete with it.

Given that, ‘profit-hungry’ corporations across the world find it logical to outsource their production to China.

Which begs the question, how do factories in China produce at such a low cost?
Is access to cheap labour the only answer?

There are some ‘five-star’ factories behind the story, says Alexandra Harney, former journalist with The Financial Times, London, may have found the secret to ‘The China Price’.

Harney, who was the South China correspondent of FT from 2003 till early 2006, has just written wrote a book, The China Price - The True Cost of Chinese Competitive Advantage.

“In The China Price, I tell the story of a Hong Kong man who has a factory in southern China. When he decides to supply to Wal-Mart, he learns that in order to do that, he will have to follow China’s labour law, which is quite restrictive by international standards. This Hong Kong businessman wasn’t following any of those rules, and he didn’t believe he could comply and actually make money. So in order to make it appear that he was actually compliant with the labour law, he maintained two factories: one, which he calls his “five-star factory”, which was fully compliant, and another, a “shadow factory”, which violated every law in the book,” Harney said in an email interview.

It is these shadow factories which allow China to offer such low prices.
“The shadow factory allowed him to offer Wal-Mart low prices, by working his employees around the clock, not paying full overtime wages and skipping insurance payments. And the five-star factory, the only factory Wal-Mart’s employees ever see, made it appear as though he was fully compliant with the retailer’s code of conduct,” says Harney.

Moreover, most foreign companies which outsource to China, buy goods produced by shadow factories without knowing about it or for that matter just ignoring it.

“One auditor who has been monitoring factories in China for over a decade estimates 99% of factories have a “shadow’ to meet the retailers’ demands,” writes Harney in the book. “The shadow and five-star factories are an unbeatable combination,” she adds. 
The other major factor that helps keep prices low is the hukou system —- or household registration.

“The hukou or household registration system dates back to the 1950s. Every Chinese has a hukou.  People born in the countryside have rural hukou, and those born in the cities to legal city residents have urban hukou.

Social welfare benefits are tied to your hukou, so if you are registered in a rural area, your state-subsidised healthcare is available there.,” explains Harney.
So how does it help keep costs low? “When millions of people started moving without government approval from the Chinese countryside into the cities in the 1980s to work in export factories, they moved without a legal guarantee of any social benefits. Today, many migrant workers, who account for 68 percent of manufacturing employees in China, opt out of insurance coverage because they would have to sign up for a pension scheme that is not portable across provincial boundaries. China’s prices have been low in large part because factories have not had to pay these costs,” says Harney.

The other major factor behind the low prices is coal. China is the world’s largest producer and consumer of coal. “Coal, more than any other product, lies at the heart of the China price. More than two-thirds of China’s energy supply comes from coal, a higher ratio than either Japan or United States,” writes Harney.

But burning all the ‘cheap’ seems to be creating its own set of problems.  “I visited a miner’s son who regularly hooks himself up to an intravenous drip, and almost everyone I met in China’s coal country suffered from rhinitis, often known as hay fever. With more than 400,000 people dying every year from pollution-related causes in China according to the official count, I am sure rhinitis is only the tip of the iceberg in the health effects from coal,” says Harney.

They say, what you see is what you get, that clearly does not seem to be the case at least with the China story.