The Real Cost of Cheap Labor
I once ended up on the same Qingdao–Seoul–Seattle flight as a long-time client whose company had been wildly successful in China—an industry where most foreign companies had failed. The long flights gave us time to talk shop.
He told me about one of his offices in a third-tier Chinese city and how he managed it. He raved about the local manager, to whom he had given full hiring and firing authority and a share of the company’s fast-growing profits. When I asked about this manager’s compensation package and learned the figure, my eyes bulged. I remarked that he could probably pay half as much and still get the same results.
My client pushed back—hard. He said I was dead wrong, that saving money that way didn’t interest him, and that I was approaching the issue with an outdated employer mindset, one completely different from how I ran my own law firm. He made a strong case.
A couple of years later, after two of my other clients independently told me that this was the only Chinese company they would buy a particular product from—even at a premium—I was completely sold.
Why International Manufacturers Shouldn’t Chase Cheap Labor
That plane ride came back to me today after I read an excellent post on the now-defunct blog China Manufacturing Leadership [link no longer active]. The blog, subtitled “Facing New Challenges with Practical Strategies,” focused on China manufacturing but offered insights with much broader relevance.
Author David Levy described his blog as “all about the changes China-based manufacturing executives and front-line managers must make in their leadership to optimize operations amid new challenges.” His post, titled “Coming to China, But NOT for Cheap Labor,” made the point as bluntly as possible: obsessing over low wages while ignoring overall value is a costly mistake.
He’s absolutely right. If cheap labor were the golden ticket, Afghanistan, Somalia, Yemen, and North Korea would be manufacturing superpowers, and Germany and Japan would have given up industrial production long ago. And all of China’s manufacturing would have already shifted to places like Cambodia or Sri Lanka, as some have long predicted.
Case Study: Choosing Value Over Cheap Labor in China
Levy illustrates his argument with a real-world story from his time as sourcing director at a small Southern California-based electronics company:
About 10 years ago, I was hired by ***** Electronics, a small power supply company supporting OEM projects for major medical, commercial, and retail electronics clients. We had no China operations and relied on Taiwanese suppliers to manufacture and deliver our designs. I was tasked with setting up a liaison office in Taiwan to manage development and sourcing and ensure product quality.
Outsourcing in Mexico had failed, and Taiwan was quickly proving equally unworkable. Taiwanese factories lacked the quality controls needed to meet market expectations, and their Chinese plants didn’t have the flexibility to support the company’s high-mix, low-volume, high-value product model.
The results? Missed product launches and damaging product recalls, including units sold to Bloomberg and Kodak.
So in 1999, the company decided to set up operations in Mainland China. When Levy told vendors about the move, they smirked and mumbled “chasing cheap labor”—as if he’d winked and said he was “going for a massage.”
But labor costs weren’t the driver. In fact, the new facility was set up in Shenzhen, one of the most expensive manufacturing hubs in China. The company paid above-market wages, offered better housing, and prioritized worker benefits and safety. Competitors warned Levy he was “spoiling the workforce.”
What we chased—and what we caught—was a stable, flexible, and loyal workforce. In hindsight, cheap labor would have been much more expensive.
That modest Shenzhen operation eventually absorbed all previously outsourced production and added an R&D unit, initially designed as a back office to U.S. R&D. It ultimately became the company’s primary innovation engine. Over time, the firm gained major Fortune 500 clients and increased its market value—culminating in its acquisition by a competitor.
Levy has since moved on, but the company remains in South China—and it’s never once talked about relocating to chase lower labor costs.
Final Thought: Cheap Labor Isn’t Always Cheap
The lesson is simple but often ignored: don’t chase cheap labor—invest in workforce value. In international manufacturing, especially in China, stability, flexibility, and quality are what drive long-term success. The real cost of cheap labor often comes due when it’s too late to pivot.
