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China strikes a worry but no strategy change yet: execs

SINGAPORE (Reuters) - Labor disputes in China, the workshop of the world, are prompting global firms to review their China strategies, but are unlikely to deter them from doing business there since overall costs should remain contained, company executives say.

Workers gather on the grounds of a Honda Lock plant, a supplier of locks to Honda's car-making operations in China, in Zhongshan in the southern Chinese province of Guangdong June 14, 2010. REUTERS/Tyrone Siu

A significant rise in the Chinese yuan may also add to production costs, but greater spending power from Chinese consumers will be positive in the long-term for companies there, according to senior company officials spoken to by Reuters.

Walkouts in recent months have disrupted production at factories in China supplying major foreign firms such as Japanese car makers Toyota and Honda Motor Co.

Danish brewer Carlsberg and U.S. industrial conglomerate Ingersoll-Rand have also been hit by strikes from a more assertive Chinese labor force -- triggering fears that global firms will face higher wage costs, hurting profits in the long run and discouraging them from doing business in China.

“It’s a very important item and it’s one that we’re monitoring carefully,” said Dave Anderson, Chief Financial Officer at U.S. manufacturer Honeywell International Inc.

“What it really argues for is continued flexibility as you look for the best places to manufacture in the world.”

Among the steps companies are taking to lessen the impact are increasing their proportion of local managers and replacing workers with machines where possible.

“This is a difficult problem, but it’s an area Japanese staff cannot deal with,” said Nobuyuki Sugano, head of Chinese operations at Japan’s Sharp Corp.

Chinese staff in management and personnel positions helped to deal with problems more quickly, he said.

“Our labor costs are a small proportion of our total costs -- raw materials are a more important factor for us. But since labor costs are rising, we plan to use more automated and semi-automated production to improve efficiency.”

Labor COSTS SMALL BUT RISING

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Analysts say Chinese labor costs, even with the strikes, are on a rising trend but are unlikely to dislodge China as a dominant player in manufactured exports as labor costs remain a fraction of the cost of goods made there.

A top executive at Honda, which has been forced to suspend production on and off at its four Chinese car factories since late May as workers at local parts makers demanded higher wages, said this month the automaker expects no lasting impact on earnings from the labor disputes.

While wages in China will rise by more than 10 percent, the impact on earnings was seen as minimal because labor costs accounted for just 2 percent of total manufacturing costs there, according to Honda’s Chief Financial Officer Yoichi Hojo.

Junzo Nakakima, head of IT operations at Hitachi, Japan’s biggest electronics maker, said China production costs were a factor for long-term consideration.

“But right now, I don’t think it would rise something like 10 percent a year, so it is a matter we need to address in the mid- to long-term.”

The Hitachi group has about 50-60 factories in China, according to a spokesman.

NEED FOR CHANGE

Still, the labor disruptions in China highlighted the need to improve relations with the local workforce, executives said.

“Changing the way the supply chain works or anything else doesn’t address the fundamental issue,” said Atsushi Niimi, Executive Vice President at Toyota.

“The most important thing we can do is to make sure we have a system in place that fosters good communication between the workers and management.”

Some executives viewed the strikes as part of China’s economic development and said higher wages among factory workers would help fuel consumption, benefiting the global economy.

“The recent strikes mean that living standards are improving,” said Hitachi’s Nakajima.

“China has had an important role in lowering production costs and it has also been a big market, but (the recent movement) can be seen as a part of the process of it becoming a more attractive market.”

Additional reporting by Sachi Izumi in Tokyo; Editing by Lincoln Feast

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