Labor-intensive industries will be forced to move upscale or automate facilities to sustain operations.
With first-generation migrant laborers nearing retirement age, what propelled China to its status as the primary hub for low-cost production is now pushing the country out of this very position.
Labor-intensive industries such as toys, footwear, caps and textile products are expected to weaken in coming years as the current worker pool matures and labor shortages intensify.
Already, the latter has forced many factories in the southern and eastern provinces to close down in the past 12 months. Some plants have moved to second- or third-tier cities in the inland provinces of Jiangxi, Hubei and Hunan. Costs in these areas are about 20 percent lower than in Guangdong province.
Other companies have transferred overseas, including to Bangladesh and Vietnam, where production remains inexpensive. Labor rates in Bangladesh are just one-fifth of China's.
Relocation, however, is a temporary measure as the economies of these alternative hubs flourish and costs start to rise.
China's graying workforce
China's labor pool is older than those in other low-cost manufacturing centers despite the emergence of a new generation of workers, although even that poses a separate challenge.
According to Ben Simpfendorfer, managing director of Silk Road Associates, LLC, the average worker age in China is 35, whereas it is 21 in Laos. Indonesia and Vietnam laborers are the second-oldest at 28.
China itself is aging. In a report on the Elderly Protection Act, the National People's Congress said that as of November 2010, China had 178 million people more than 60 years old. The elderly demographic will exceed 200 million by 2013 and hit 300 million by 2025. Further, in just 30 years, roughly one-third of China's total population will be over 60.
The working-age population, meanwhile, is expected to peak at 1 billion in 2013 then begin shrinking. Over the next 10 years, the number of people in China between 20 and 24 will drop by more than 20 percent, said the UN Department of Economic and Social Affairs, eventually erasing the country's demographic dividend.
Some industry pundits argue that relaxing or lifting the one-child policy will simply alleviate the worker decline, but not stop it.
Climbing the value chain
Moving up the value chain is one of the key steps suppliers will take as they try to improve profitability amid rising labor costs.
Interestingly enough, increased subcontracting is encouraged as emphasis shifts to in-house R&D and design capability and away from heavy OEM reliance.
Shenzhen CHC Electronic Co. Ltd farms out manufacturing to a local electronic products factory and focuses on R&D, a practice becoming more common among similar SMEs in the Guangdong city. Shenzhen CHC offers TV smart boxes and other intelligent devices.
Along the lines of high-value manufacturing, significant growth is forecast for capital goods such as shipbuilding and electrical equipment, and construction and coal mining machinery.
Automation over manual work
A growing number of China suppliers, including those from traditionally labor-intensive industries, are automating various production processes.
In Zhejiang province, makers of hosiery and men's underwear have adopted fully mechanized knitting machines to replace manual work.
Ningbo Heran Import & Export Co. Ltd is equipped with a high-tech production line from Switzerland that can yield 500,000 socks in a week. The system is completely automated, requiring manual intervention only at the start to set up the program and at the end for QC of finished goods.
Export merchandiser Vivian Tong said the production line can replace more than 20 workers.