The Global Scramble for Cheap Labor

WEST GERMANY'S Rollei-Werke for years has been losing sales to Japanese rivals, whose low wage costs enable them to sell cameras for less than half the price of a Rolleiflex. Fighting to overcome that handicap, Rollei executives recently decided to try to beat the Japanese at their own game. The German firm is investing $12.6 million in a new plant in Singapore. There workers will turn out cameras for sale in the U.S. and East Asia at wage rates only one-sixth as high as in Germany, and two-thirds below those prevailing even in Japanese camera plants.

How long Rollei's advantage will last is problematic. Low as they are by European standards, Japanese wages more than doubled between 1963 and 1969. Logically enough, Japanese industrialists are also discovering the advantages of shifting some production to lands where no wage explosion has yet begun. Within the past four years, at least 40 Japanese firms have set up plants in Taiwan alone. The factories turn out lingerie, computer parts, kitchenware and TV sets--though not yet cameras--at wages averaging only 30% of what their owners would have to pay in Japan.

Willing Workshops. Both Rollei and the Japanese firms seem likely to have increasing company in their new locations. All over the industrialized world, accelerating wage inflation is pushing manufacturers into new efforts to tap the vast pool of willing and cheap labor in poorer countries. They are farming out production of component parts, subassemblies and even finished products, sometimes for export to other areas but often for use back home. In the process they are not only cutting their own costs but speeding the industrialization of underdeveloped countries, some of which are coming to relish the role of workshops for distant, richer lands.

U.S. companies started the trend for in obvious reason: since they pay the world's highest wages, they have the nost to save by manufacturing offshore. They began by subcontracting work to locally owned firms in Japan and Western Europe, and are still expanding that practice. Ford Motor, for example, has signed up Tokyo Shibaura Electric to make most of the generators that will go into its 1971 models, and is dickering to have another Japanese firm, Dieel Kiki, supply many of the compressors needed in auto air-conditioning systems. Lately a growing number of American firms have gone further to set up their own component-manufacturing operations in the lower-wage Asian nations, Signetics Corp., a Corning Glass Works subsidiary, for instance, flies components to Seoul, South Korea, where workers assemble them into integrated circuits that are flown back to the U.S. to be fitted into computers. The operation makes economic sense because Signetics pays the Korean workers only $45 a month v. the $350 or so it would have to pay an employee in Sunnyvale, Calif. Fairchild Camera and Instrument conducts a similar assembly operation for integrated circuits in Singapore.

Changing Roles. As wage costs balloon, a growing list of companies in Western Europe and Japan are seeking similar savings--sometimes next door, sometimes at the other end of the world. Sweden's Saab has just completed a plant in Uusikaupunkt, an undeveloped area of Finland, to roll out 15,000 cars a year, about one-third of which will be sent back to Sweden; the Finnish workers get about half the pay that Saab's Swedish employees do. West Germany's Daimler-Benz has invested $6.6 million in a Yugoslav truck and bus plant and supplies technical help, in return for which it will get spare parts made for Daimler-Benz's German plants at low Yugoslav wage rates. Japanese manufacturers are dickering with India for component parts for sewing machines, autos, radios and bicycles.

Even countries that have themselves been traditional suppliers of cheap labor have now begun to look offshore for still lower-priced labor. Italian manufacturers make many of the refrigerators and other appliances sold in the European Common Market, often under German, French or Dutch brand names, because their wage rates were the lowest in the six-nation community; they also make aircraft parts for U.S. firms. Wage rates in many northern Italian plants, however, have now climbed to equality with other parts of the Common Market, and Italian unions are demanding that the same scales be extended to workers in the depressed south. One result: Societa Generate Semicon-duttori, the country's biggest maker of electronic components, is building a $1.3 million transistor plant in Singapore, where wage costs will be only one-tenth what they are in Italy.

Dividends of Discipline. To the poor countries, such investments offer not only jobs but desperately needed foreign currency earnings and a chance for local workers to acquire skills that home-owned industries cannot teach. Rollei, for example, is already bringing groups of workers from Singapore to its main plant in Braunschweig for training in camera making. Westerners have been impressed by how swiftly unskilled Asians respond to such training. George A. Needham, head of Motorola Korea Ltd., says that it takes only six weeks to teach girls in Seoul to assemble transistors--or two weeks less than the training period for girls hired by Motorola's other semiconductor plant in Phoenix. His explanation: "These girls need the work more and the discipline in Korea is harder. Life is tough here."

For all these reasons, the leaders of several underdeveloped countries, particularly in Asia, have switched from their traditional insistence on developing locally owned industry to welcoming, or even actively seeking foreign manufacturing operations. Besides the Rollei and Semiconduttori plants, Singapore soon will boast $48 million worth of new factories to be built by Philips, the Dutch electrical giant, and Plessy, a leading British electronics firm. Taiwan's Finance Minister, K.T. Li, cites "the availability of inexpensive labor" to foreign manufacturers as a prime reason for locating in a free trade zone that the government has set up. Companies can export products from the zone without paying duty, but they are not allowed to make anything there for sale in Taiwan. Some 120 companies so far have built plants in the zone, including Philips and General Electric.

Political Trouble. How far the trend goes depends as much on politics as on business enterprise. Hostility to "runaway industry" is strong enough in the developed countries so that executives of companies establishing operations in poor lands usually deny that cheap labor is their primary concern; most speak instead of entering new markets. In Italy, where 540,000 workers are unemployed and another 1,500,000 have gone to other countries to find jobs, an official of Semiconduttori is careful to list "the low cost of labor" as only one of six attractions impelling the company to build in Singapore. In the U.S., the A.F.L.-C.l.O. estimates that the shift of manufacturing to foreign soil cost American workers 700,000 jobs between 1966 and 1969. The federation has campaigned unsuccessfully for a change in U.S. tariff laws that would make it more expensive for U.S. firms to manufacture components overseas.

Such attitudes are shortsighted. The economic logic of a production partnership between the industrialized nations and the poor nations is compelling. Each can supply something that the other badly needs: capital and technology on the part of the rich countries, plentiful and cheap labor from the underdeveloped lands. In addition, the trend toward offshore manufacturing is one of the few developments, short of contrived recessions, that hold some promise of slowing the wage-price spiral that in the past year has emerged as the industrialized world's No. 1 economic worry. The flight of plants to Singapore. Taiwan, Korea, Hong Kong and other havens has not yet led workers in the rich nations to moderate their wage demands. At some point, however, soaring wages can lead to sudden unemployment as industry seeks more attractive places for its factories.

Both consumers and workers in developed countries have a self-interest in the global division of labor; it not only acts as a brake on the prices of many goods but enables industrial countries to shift more of their work force into higher-technology products. Most economists figure that such a shift will ultimately increase both productivity and incomes in developed nations.

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