Is China the Answer for Austrian Business?

For decades, companies have ventured east in search of cheap labour. Now, they find a confident workforce, burgeoning consumer markets, and an appetite for high-technology. The shift is slowly being greeted with confidence, rather than fear

News | Philippe Schennach | February 2012

Photo: Frederic J. Brown/AFP/APA (left), AT&S (right)

A swift, 30-minute drive separates Shanghai’s bustling city centre from the gleaming flagship factory of Austria Technologie & Systemtechnik (AT&S ). As I put on my safety goggles, I am told that the machines here run for 360 days a year – allowing five days’ rest for the Spring Festival, the most important holiday in the Chinese calendar. At all other times, the white-washed production halls are teeming with 4,800 young Chinese workers, sitting at their stations, turning out 160 million conductor boards per year. Thanks to their work, AT&S has become the world’s largest manufacturer of conductor boards, supplying eight of the ten largest smart-phone manufacturers.

As Europe teeters on the brink of recession, China is becoming increasingly important as Austria’s largest trading partner outside the EU. But the relationship is changing: For a long time, it was China’s cheap labour that attracted foreign investors, and allowed Austrian companies to sidestep onerous welfare contributions at home. But Chinese wages started to rise sharply at the beginning of last year, workers are making increasing demands, and the state is flexing its muscles towards the rest of the world.

An exploited workforce?

On the factory floor at AT&S, I am surprised to see just how many young women are operating the heavy, high-tech machinery.

"When these women get married, they leave the company," explains Markus Potzinger, the chief financial officer, following my gaze. "The staff turnover is as high as 30 per cent a year. What we’ve learned is that the Chinese work-force doesn’t forge the same close relationships with their companies as workers do in Europe. As a result, after Chinese New Year many workers just don’t come back at all."

Even though recruitment firms are helpful with finding new employees, AT&S has observed a notable increase in worker turnover. Most of eastern China, which remains the crucial region for foreign direct investment, is seeing the fluctuation of workers increase, just as the supply of qualified labour is getting tighter.

"When there is something that the workers are unhappy about, they leave," adds Peter Griehsnig, chief operation officer at AT&S. "From one day to the next they can earn double their wages for the same work somewhere else. We have learned to live with this."

The shift is forcing managers to change their assumptions. Workers no longer put up with 12-hour-days, seven days a week. And China’s work force is becoming increasingly expensive. Although Chinese law sets a national minimum, wages are still determined locally to reflect differences in regional development. "We have [recently] raised the wages by 15 per cent," recalls Florian Kuntner, general manager at Linz Textil’s plant in Nanjing, the capital of Jiangsu province on the eastern coast.

According to figures published by Wiener Zeitung last October, the median wage in Nanjing is about €300 a month. In Shanghai it is €600. "For our workers to stay in our factories, we need to ensure they are offered incentives to stay," says Potzinger at AT&S. The company provides its staff with a shuttle bus service, free lunchtime meals, health checks, inter- net access, employee clubs, sports facilities, as well as leadership training and a career planning service.

Yet the shortage of skilled labour, and rising wages in China’s coastal hubs are pushing factories ever further inland. AT&S is building a plant in Chongqing that will start production in 2013. Once com- pleted, AT&S will employ over 12,500 work- ers in China – nearly 10 times as many as in Austria.

However, "low wages are not the only reason why AT&S is setting up in Chongqing," emphasises Hannes Androsch, chairman of the supervisory board and former Social Democratic (SPÖ) politician. "We can no longer manufacture the volumes requested by our clients with the current factors of production."

Customer is king

Another way in which Austria is benefiting from growing bilateral economic relations is by selling expensively to China. The two most valuable Austrian brands, Red Bull and Swarovski Group, are widely known in China: in Nanjing, I have often met local students who, keen to display their knowledge of Austria, list first Mozart and then Swarovski.

The company’s fashioned glass jewellery and trinkets have become a coveted luxury commodity in China. With over 200 official outlets – 22 each in the country’s boomtowns Beijing and Shanghai alone – Swarovski products change hands at almost double the European price: "Recent Bangle M", for example, is priced at €160 (¥1,298) on Swarovski’s European website, but at €271 EUR (¥2,200) on the Chinese counterpart.

While Swarovski’s headquarters in Wattens, Tyrol, declined to comment, the profit margin is likely to be huge: The glass items are produced at a low cost in eight different countries, including China, according to the company’s website. Nonetheless, Swarovski’s Beijing representative assures me that their entire stock is imported from Austria, as that is where the design is carried out. Clearly, the Austrian origin is viewed as essential to the luxury of the brand.

Yet while China’s burgeoning middle class can’t get enough of Austrian-designed glass jewellery and Vodka Red Bull, the Communist government’s interest in the Alpine Republic lies 32% elsewhere: its know-how in environmental sustainability and high-tech engineering.

This reflects China’s desire to become a global high-tech power. "As there has already been a migration of low-paid jobs to Vietnam and the Philippines, the government is trying to promote investment in advanced technology," explains Raymund Gradt, Austria’s trade commissioner in Shanghai. The Chinese government, he says, is seeking to speed up the process, "even going so far as supporting workers’ protests for higher wages."

China is no longer content with doing the assembly work for rich countries, seeking instead to shift to higher-paid, skilled work. With success: In three years, Gradt reckons, the wage level on China’s east coast may already be higher than in some regions in Eastern Europe.

The new imperialists?

For Austria, China’s growing demand for high-tech goods and services is a golden opportunity, as the economic recovery in America and Europe goes from slow to sluggish. Yet the shift has been accompanied by fear-mongering that China is buying up Western companies whole- sale, and gaining power by financing the debt of Western states.

It is true that China has invested more than $800 billion in foreign firms, and holds the world’s largest foreign currency reserves (mostly in the form of U.S. government bonds), standing at $3,180 billion in January, according to Neue Zürcher Zeitung, a Swiss daily.

But the more China invests in Europe, the greater its interest will be that the continent’s economy is doing well. This is clear from the response by China’s state news agency, Xinhua, to the recent downgrading of nine European countries by the rating agency Standard&Poor’s: "The news was like dropping a rock into a tranquil pond, causing strong market reactions. The news may reverse upward market tendencies gradually built up over the days." Moreover, China’s government has been signalling that it wants to help Europe’s economy recover – which should come as no surprise, as Europe is the big- gest buyer of Chinese products.

"Without the profits, the assignments, and our Chinese customers, we would have had to close down the factories in Austria," explains Hannes Androsch as my tour of the factory is coming to an end.

Before Europeans become too afraid of Chinese companies taking advantage of Europe’s current weakness by picking its assets inexpensively, they should bear in mind that they too have been capitalising on China’s cheap labour.

China still remains the workshop of the world. But foreign businesses will have to adapt to the country’s changing priorities and rising wage levels. For Austria – and Europe – the shift holds more promise than peril.

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