Shortages of factory workers in China’s high-rolling coastal manufacturing centers are forcing companies to hike wages and improve working conditions. Some Chinese manufacturing companies are investigating lower-cost regions for their next factories - not only cities in China’s interior such as Wuhan, Hunan, and Chongqing, but also portions of Vietnam, India, and Bangladesh. " We’re very bullish on Vietnam," said one Goldman Sachs economist.

Ken Werner
Senior Analyst and Editor
of MDTV Retailer

Stories of labor shortages in coastal China were first picked up by the international press in the summer of 2004, but were largely shrugged off as episodic and temporary. Now, as reported in a cover story in today’s New York Times, those shortages are seen as systemic, resulting from a stabilization or reduction in China’s young, working-class population; workers who are rapidly becoming skilled and moving up the employment ladder; and incentives for rural agriculture that are creating more opportunities for young people in the interior so they are not forced to look for manufacturing jobs on the coast.

The result is that manufacturing is getting more expensive in China. That means that balance-of-trade issues between China and developed countries may moderate. For the display industry, it may mean that the stampede of labor-intensive LCD and BLU module assembly operations to China from Korea and Taiwan will be routed elsewhere.

The shortage should not have much of an affect on LCD panel fabrication, which is highly automated. But the expansion of LCD manufacturing beyond one Gen 5 line each at SVA-NEC and BOE-Hydis has not proceeded smoothly, even with strong support from the regional and national governments. Despite the problems, the ambitions continue. SVA announced today that it would join with NEC and two other LCD companies to raise $2B to build a next-gen - probably Gen 6 - line that would begin production in 2008. (In other words, the parties are still in the talking stage.) Panasonic also announced plans for a new PDP line in China too by 2009.

However, it could be an advantage if the panels you make are assembled into modules locally. If Chinese display companies can’t afford to do that in the future, they will be in the same position as their Korean and Taiwanese competitors. And if you don’t do your module assembly next door, you can do it wherever labor is cheap or import restrictions make it beneficial, which is why LG.Philips LCD is building a module assembly plant in Poland.

If China can’t automatically trump its competitors with the world’s-lowest-cost card, the display supply chain of the future gets a lot more interesting.