To end the labor strikes in its China plants, Toyota Motor Corp. and Honda Motor Co. were forced to sacrifice earnings as they increased their workers' wages. Eroding profits even further is the Chinese government's decision to let the yuan strengthen. In a statement, China's central bank said that this will give more flexibility to its nation's currency.
This statement also indicates an end to the yuan's two-year-old peg to the dollar. In a Bloomberg Television interview, Jim O'Neill, Goldman Sachs Group chief global economist, said that the Central Bank's decision is influenced by "all these moves to endorse the wage increases."
He added that this is part of the transition to the "consumer, more domestic-demand-driven economy." Toyota spokeswoman Mieko Iwasaki said that Toyoda Gosei Co., an affiliate of Toyota, had recently ended a strike that had caused its car assembly operations to be disrupted. Honda's assembly plants were also affected by labor unrest.
Both Toyota and Honda agreed to increase wages at suppliers to prevent further stoppages. Foreign companies in China, including the Japanese carmakers and Taiwan's Foxconn Technology Group, have higher labor expenses.
In fact, Foxconn, which makes iPhones for Apple Inc., revealed that the salaries for its lowest-paid workers will be doubled after 10 Chinese employees committed suicides this year. David Cohen, director for economic forecasting at Action Economics, said that a stronger Chinese currency will add to operating costs for foreign businesses, whose margins are already under pressure from rising wages.