Dismantling Factories in a Dreamweaver Nation

The current factory system is unable to realize the dreams of today's young people. China's factories are often in isolated locations and self-contained. Youths who leave villages for these jobs find themselves more isolated than at home, with little hope of integration into urban communities. Indeed, they are neither in city or village. It's the most isolated life possible.

The compensation system makes their lives extremely difficult as well. Base pay is low, and only with massive overtime can they expect close to 2,000 yuan a month. They have no time for self improvement or integrating into modern urban life. In a few years, they will lose their youth and jobs, but they still will not have the ability or financial resources to live in cities.

Business leaders and government officials, of course, are asking why these workers aren't willing to accept these conditions, like the workers of a decade ago. They grew up in poverty and rule the country with a view that marginal economic improvement is the purpose of life. They don't appreciate, however, that times have changed: The previous generation focused on economic benefits for relatives in villages, not their own futures.

The unusual relationship between factory owners and local governments makes it difficult to resolve or prevent labor problems. Most coastal factories have workers from interior provinces. The governments have few ties to workers, but they are very connected to factory owners through tax revenues and other benefits. Local governments, therefore, side with the businesses when dealing with workers.

To improve the situation, the central government should limit these major, isolated factory sites. In the future, they should be located close to cities. As in other countries, workers should be encouraged to rent housing rather than live in factory dormitories. They should have a chance to integrate into urban life.

For example, future factories should locate close to provincial capitals such as Changsha, Chengdu, Hefei and Nanchang, which until now have been supplying workers for coastal regions. As a general rule, these cities should discourage factory dormitories but instead build public transportation systems to link factories and residential areas.

For many, these sorts of solutions to China's labor challenges may be apparent. But government and business leaders may not understand them at all. They are blinded by the urge to continue operating within the confines of the old model while protecting businesses from potential buyers in the West. So, when dealing with crises such as those at Foxconn and Honda, they try temporary fixes.

I'm afraid similar yet greater problems will eventually surface. Ultimately, market force will bring down the current system. Workers don't have to show up for factory jobs. They can join the urban service sector instead, where wages may be a bit lower but lifestyles are much better, and have a chance to integrate into urban life.

Rising labor costs will ultimately force factories closer to labor sources, and working conditions will turn more humane. The biggest losers will be coastal governments that side with the factories to protect their revenues. If they refuse to change, they will lose the factories and all those nimble fingers.

Andy Xie is a board member of Rosetta Stone Advisors Limited