IHS Global Insight Perspective
General Motors (GM) India has just ended a short strike at its plant in Halol as workers staged a sit-in demanding higher wages, just as IHS Global Insight's latest Global Manufacturing Compensation Watch study highlights the growing trend in the sub-continent, felt particularly in the auto sector.
Inflation across India, particularly for staples such as food, is putting constant pressure on wages in the region as the economy booms, and combined with the added cost of benefits, it is beginning to affect the country's competitive edge.
Auto workers in China are compensated at around 60% more than the national manufacturing average, compared with India where auto workers earn nearly 20% more. However, despite India overtaking China in real wage cost terms in 2010, China's manufacturing sector pay outstrips India in the long term, although it will compensate for this with greater productivity.
IHS Global Insight Study Finds India's Manufacturing Labour Costs Top China in 2010
Auto Sector Feels the Pinch of Rising Labour Costs
Manufacturing labour costs in India have risen nearly 20% this year and will eclipse those in China as Indian workers have seen their wages increase sharply over the last year on the back of high inflation and a recovery in domestic demand, said IHS Global Insight in its latest "Global Manufacturing Compensation Watch" study. China's manufacturing labour costs are expected to rise 10% this year despite a slowdown in exports to the West as a result of the recession, the study showed. "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 Katherine Lewis, a director at IHS Global Insight and one of the authors of the study.
The publication of the study has added relevance as General Motors (GM) restarted operations at its Halol plant yesterday following a short strike and worker sit-in as employees demanded higher wages, according to a Press Trust of India report. GM's plant workers had downed tools on Friday (29 October), temporarily halting production. Around 600 workers of the 900 or so employed at the plant were involved in the sit-in. State labour department officials and police visited the plant on yesterday and spoke with the workers, who then left for home, according to the statement. P Balendran, vice-president of GM India said: "We expect normal production to resume at the Halol plant from Monday." GM yesterday announced that it now expects normal production to restart today. "There has been no impact of the strike as our Talegaon plant has already been rolling out the two of the most sold small cars - 'Spark' and 'Beat'," Balendran said.
For multinational companies like GM, understanding the labour costs associated with manufacturing facilities around the globe is a key issue when making investment decisions. India and China have long attracted foreign investment given relatively low risk profiles and their high levels of surplus labour. Nowhere has that been more evident than in India in recent years, where various auto companies have invested heavily in small car production to take advantages of the strong local demand, cheap labour, and export opportunities. GM is one of those companies, but is by no means the biggest player; rivals Hyundai, Nissan, VW and market leader Maruti-Suzuki have all invested heavily into turning India into one of their dedicated global small car manufacturing and export hubs. Meanwhile, total labour costs in India's formal manufacturing sector are expected to average US$2.68 per hour in 2010 compared to China's US$2.51. Basic wages have risen fast in India over the last year, but still lag behind China—India averages US$1.71 per hour, to China's US$1.82.
Benefits Are Key Difference
The difference in overall costs between both countries is in benefits. India's benefit structure includes contributions to the Provident fund (social security), survivor insurance, pension contributions, state-mandated 13th-month pay, 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 Global Manufacturing Compensation Watch study, benefits make up roughly 36% 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% of labour costs. This figure is heavily diluted by rural workers, however, who earn only 8% benefits. Urban workers can earn up to 47% 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 wake of the global recession. India's economy, on the other hand, benefits from more diversity and domestic demand, allowing the rising wages to push total costs ahead of China.
Auto Costs Rising Fast
The strike cost GM a production loss of just 300 units. GM India has sold around 83,909 units in January-September and remains a small player in the region, despite the relative success of the Spark and Beat small car models. GM is also a late player in the move to expand in India and is adopting a strategy ironically involving its Chinese joint venture (JV) with Shanghai Auto (see China - India: 23 September 2010: Shanghai-GM to Invest US$250 Mil. in Indian Expansion, Plans to Introduce Five New Models). The JV is planning to invest US$250 million in production capacity expansion at the Halol plant. The company plans to increase production capacity at its facility in Halol to around 100,000 units per annum (upa) from the current 85,000 upa and plans to start production of five new models by the end of 2011. GM's second facility in Talegaon, Maharashtra, has a production capacity of around 140,000 upa. The company currently produces its Chevrolet-brand Spark and Beat small-car models at its facility in Talegaon. Its Halol facility currently produces its Chevrolet brand Tavera, Aveo, U-VA, Cruze, and Captive models.
Key manufacturing sectors, such as auto production, have already felt the pinch of rising labour costs. Auto manufacturing workers typically make more than the average manufacturing worker, and rising costs will continue to pressure manufacturers. The raft of price increases from a number of manufacturers is testament to the impact of the rising input costs (see India: 4 October 2010: M&M to Raise Vehicle Prices in India), including the latest rise to Tata's very price-sensitive Nano model as recently as yesterday (see India: 1 November 2010: Tata Motor Raises Nano Prices).
Outlook and Implications
IHS Global Insight estimates labour cost for auto workers in China is US$4.02/hour, roughly 60% more than the national manufacturing worker average. On the other hand, auto workers in India are compensated at roughly US$3.30/hour, just over 20% more than the national manufacturing average. Chinese wages, which have been 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, Lewis said.By 2020, total manufacturing labour costs in China are expected to be 20% 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 noted. IHS Global Insight's Global Manufacturing Compensation Watch study provides the latest data from the top-50 manufacturing markets around the globe, including regional breakouts and rural versus urban earnings for key economies. Contact your local IHS representative for more information on the study.