How can Rwanda leverage the rising Chinese wages?

For the past few decades, China has been home to investments in the manufacturing sector worth trillions of dollars.

For the past few decades, China has been home to investments in the manufacturing sector worth trillions of dollars.

The Asian nation, which many had previously described as a sleeping economic giant many decades ago, seemed to rise from hibernation in the 1970s when the ruling Communist party decided to aggressively reform many of its policies that affected the economic structures such as market size, supply of labour, infrastructure development, among others.

Similarly, China reduced barriers to Foreign Direct Investments (FDIs) by liberalising some of its laws and regulations to allow, for instance, foreign companies to own land and plan long term.

Once the reforms took effect, FDI inflows to the country surged from almost nil at the beginning of the reforms to up to $45 billion per year in the 1990s. Last year, it is understood that foreign companies invested $128 billion in China – a figure that dwarfed the United States’ $86 billion in the same year.

These reforms alone, however, do not fully explain the entirety of China’s success in attracting FDIs. Many commentators have argued that, over the years, China has greatly benefited from the supply of cheap skilled labour, which many believe provided the industrious nation with a comparative advantage over her Asian, European and American rivals.

China’s ability to produce goods and services at a lower cost than other nations thanks to its cheap labour, provided companies with the ability to sell goods and services at a lower price than competitors operating from other nations – which resulted in higher profits and more inflows of investment.

Likewise, as wages increased in the Western world, tens of thousands of companies moved their production lines to China where cost of production was considerably lower and yet the required skills-set was relatively above other possible destinations like Africa and Latin America.

However, for a few years now, rising labour costs in China have been setting off alarm bells among investors and officials alike. Until recently, it had been easy for companies to lure a seemingly unlimited number of young, low-wage workers to the richer coastal regions to work in manufacturing.

However, as calls for improved pay have taken China by storm, authorities were forced to declare that the minimum wage in each Chinese jurisdiction must be increased at least once every two years.

Incidentally, reports indicate that since 2014, workers in prominent manufacturing provinces such as Shenzhen and Guangdong take home 13 per cent more wages than they did the previous year. The story has been mirrored elsewhere, including Yangzhou, Jiangsu and other provinces.

Unfortunately for China, wages in manufacturing are only expected to increase further, potentially eroding the country’s low-cost manufacturing advantage and forcing many foreign and domestic investors to look elsewhere – and that projection is already underway;

Dan McDougall, Sunday Times’ Africa correspondent recently articulated: “I think we are certainly entering into an era where Africa, certainly North Africa, starts to become more of a manufacturing hub.

“This is a very interesting development. Tesco (Britain’s largest general merchandise retailer) announced they are going to expand their sourcing operations in Ethiopia, so they are going to start making more clothes in the country, and this follows H&M, one of the biggest clothing companies in the world to also expanding their base in Ethiopia.”

McDougall explained further that another reason these multinationals are moving production in Africa is the geographical proximity of Africa to Europe. “The reason they are actually making clothes in Africa is because it is closer to Europe, closer to their supply base, so they can get the clothes quicker,” McDougall observes.

In addition, as the World Bank recently indicated, China is set to lose 85 million manufacturing jobs in the next decade – of which 200 of those jobs have already ended up in Rwanda.

Recently, the Financial Times reported that Candy Ma, a Chinese invest or looked to Rwanda for her manufacturing needs, by hiring 200 trainee workers to operate sewing machines intended to produce and export up to 30,000 T-shirts a month.

Ms Ma has already attracted the attention of Walmart, H&M, and Tesco as prospective clients for her Kigali garment factory. From her arrival, Ms Ma believed that Rwanda is a genuine alternative to China and plans to expand her workforce to a 2,000 strong workforce by next year.

As we already know, Rwanda’s top leadership is already business-savvy and has for the past few years consistently reformed the country’s business environment to ensure the inflow of FDIs.

It now takes hours instead of months to register a business, access to strategic land has been made easier, efforts to improve labour workforce have been quadrupled with more investment directed to Technical and Vocational Education and Training (TVET), and Rwanda has become an active member of regional markets - a move that widens markets for potential investors.

For now, however, a few questions will persist until we can find answers: For instance; is our private sector ready to showcase its comparative advantage of low cost labour when compared to regional workforce? Also, are our private and public sectors in unison to tackle barriers to FDI and look to attract investors looking for alternative destinations? Similarly, how can we ensure that our workforce is highly driven and able to adapt to international standards of working around the clock, fast, and without fuss?

More, importantly, how can we ensure that we offer, in time, two of the most important factors in manufacturing; electricity and water? In the end, if we are going to have a slice of China’s manufacturing exodus, we have to be fully prepared and appear to be up to the challenge.

Reforms alone will not guarantee FDI inflow; we have to amplify our can-do attitude, improve our skills, and rise above everyone else.