Toyota in Guangzhou

I got a chance to visit Guangdong this week, and it's a pretty amazing place.  You get a very vivid feeling for globalization when you see dozens of container ships lined up off Kowloon, preparing to off-load and reload in several container ports in eastern Guangdong and the lower Pearl River delta.  I visited the district of Nansha in an eastern area of Guangdong that was primarily agricultural only five years ago.  Now there has been extensive development, with the population going from 40,000 to 260,000 in just a few years.

One of the largest parts of the development in Nansha District is a large Toyota factory, opened in 2006 and now producing 360,000 cars a year.  This plant is a joint venture with Guangzhou Automobile Group. The factory employs about 7,000 workers in two shifts, and it embodies one of the most recent examples of the Toyota production system. A vehicle passes by every 68 seconds, so a new Toyota exits to the test track every 68 seconds as well. 1,000 cars a day roll of one of the production lines and another 500 exit the second line.  (Here is a 2004 news release on the venture from China Daily.)

But here is the first surprise. Every car produced in Nansha is headed for the domestic Chinese market -- along with the output of the other major Toyota factory near Beijing.  Toyota plans to sell more than half a million cars in the domestic Chinese market in the coming year.  Compare that to European and American production for China, and you get a sense of Toyota's worldwide ambition. Fiat just celebrated its millionth car sold in China. Toyota will exceed that number from just this factory every three years.

The factory is highly automated, with numerically controlled welding machines and other robotic assists, and it appears that the skill level of shop-level workers is low.  Training is brief for the regular line worker.  Workers are largely recruited from Guangdong Province, and the factory boasts of its conformance to the highest standards of worldwide vehicle quality. The company representative wasn't able to share information about workers' wages, but someone familiar with the local economy estimated a monthly wage somewhere around 3,000 RMB. That works out to an income of about $5,100 a year -- significantly higher than China's per capita income, but not a middle class lifestyle either.  That's about $2.33 per hour, and it works out to about $87 in direct assembly labor costs per vehicle.

This is a fairly good factory environment, though it's a bit Chaplin-esque to watch hundreds of workers rushing to return to their stations after a 10-minute break during which the line is turned off. But it's no sweatshop, and it appears that workers are likely to be grateful for their jobs. Safety, efficiency, and quality seem to be the guiding management goals. The recent strike at a Honda plant in Guangdong makes it plain, of course, that Chinese workers have important demands. But realistically, this plant is good for China's goals of improving the standard of living for poor people. It seems a bit analogous to GM or Ford in Detroit in the 40s and 50s.

At the same time, the numbers here document the challenge faced by manufacturing companies in the US and Europe.  A similar factory in Michigan would have direct labor costs per vehicle in the range of $450, and no amount of labor concessions can erase that difference. So to compete on price American producers need to find more efficient ways of handling the other cost components of the manufacturing process -- but those efficiencies are equally available to producers worldwide.

I suppose one way of reading the situation is to see Guangdong as one of the leading change points in a longterm evolution towards a common global wage for unskilled or semi-skilled labor. Wages and quality of life have certainly gone up for Chinese workers in Guangdong in the past 10 years -- just as they've gone down for industrial workers in the US.  And the living standard gap that existed between Hong Kong and Guangdong has substantially narrowed in the past decade as well, according to longterm observers. And this makes the point about education and talent in a very pointed way: the only thing that commands a premium in the world labor market is talent, skill, education, and innovative capability. We are certainly not doing nearly enough in the US to take the steps needed to prepare our population for this basic reality.

So what's next for Guangdong? Will the region be content to exploit its labor cost advantage and continue to gain market share as the world's low-cost manufacturer?  I don't think so. The economic development official I talked with in Guangdong was eager to discuss the region's plans for the expansion of universities, increasing support for research and development, and moving into the industries of the twenty-first century. She specifically cited growing knowledge capacity in sustainable energy and electric vehicles, advanced logistics systems, electric battery breakthroughs, and information technology enhancements in life sciences and healthcare. The province and the central government want to make the investments in education and research that will position the region for a talent-based economy of innovation. And the infrastructure investments you can observe in the region -- new sea-water port facilities, major apartment complexes, new university facilities, extension of passenger rail -- suggest the region is taking the long view about its economic future.