No more “Chi Ku” for me!!!

Tuesday, July 20, 2010, 3:00 PM ET -

Younger Chinese Workers are Less Willing to Eat Bitterness

by Dan France, GeoTeam Contributor

There is a sea change sweeping across China in the ranks its labor force. Workers, especially younger workers are no longer willing to accept “Chi Ku”, to eat bitterness, when it comes to their wages, working conditions, career opportunities and lifestyles. The time honored tradition of previous generations of Chinese workers to suck it up, accept what is and bear and wear it as a badge of honor is no longer being embraced by the young. Today’s workers are better educated, more mobile due to labor shortages, and better connected via cell phones and the internet. They are also better informed, know their rights and are far more likely to challenge authority than their parents were. Witness the recent strikes at the Honda plants and the salary increases granted to workers after a rash of suicides at Foxconn, the largest manufacturer of electronics and computer components in China.

There are mitigating forces that will dampen somewhat the rise in labor costs. Untold tens of thousands of immigrants have been flooding across China’s borders with hopes of sharing in the China dream. Immigrants will accept lower wages and do jobs shunned by indigenous workers. There are also opportunities for manufacturers to at least temporarily avoid higher labor costs by moving factories from coastal China to its interior. I don’t think, however, immigrants and moving factories will have a material impact on the overall trend. Labor and manufacturing costs are surely going higher in China just as the Yuan will strengthen over time. The genie is out of the bottle!

So what’s an investor to do? Who wins and who loses? First, increased wages and shorter working hours mean higher incomes and standards of living for workers. Various estimates assume up to 70% of wage increases will be spent and the wage increases are going to be substantial. Base wage increases at Chinese factories in recent months have ranged from 30% to 100%. And, Forbes.com recently reported that combined annual wages in China increased from $173 billion in 2002 to $308 billion at the end of 2009. That’s an average annual growth rate of 13.5% after inflation and the speed of growth is accelerating.

In my view the first cut in deciding which Chinese companies to invest in is to focus on companies that operate in China and sell their products or services to the Chinese. Next I would focus on companies that will benefit as China becomes more of a consumer nation. And, finally, more consumer spending, improved standards of living and a burgeoning middle class mean more energy consumption. China has surpassed the US as the greatest consumer of energy. Three names that come to mind that are prominent in my portfolio are: L&L Energy (NASDAQ:LLEN), coal; New Energy Systems Group (OTC BB:NEWN), batteries and power packs for mobile electronic devices; and China New Borun Adr (NYSE:BORN), a leading producer and distributor of corn-based edible alcohol in China. Borun’s products are primarily sold as an ingredient to producers of ‘baijiu’, a popular, grain-based alcoholic beverage that is sold throughout China. In China, consumption of baijiu is generally associated with a higher standard of living. I’ll drink to that!

Positions: At time of article, Dan was long LLEN, NEWN and BORN

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