China this week is marking a milestone along the road to its remarkable economic rise: the creation of a special economic zone in the city of Shenzhen 30 years ago. From a small backwater just across the border from Hong Kong, it has become a city of more than 10 million people, a home to many of China’s richest people, and a headquarters for many of the country’s most successful foreign and non-state-owned businesses.

Recently, however, the city has been in the news in connection with a spate of suicides at Taiwan electronics manufacturer Hon Hai Precision, a company better known by its trade name, Foxconn. Reports say the big supplier to companies such as Apple and Nokia has decided to move some manufacturing to other parts of China and reduce its workforce in Shenzhen.

What’s ahead for Shenzhen and global electronics companies that outsource there? What does that tell us about electronics outsourcing in China? What does it mean for consumers? I exchanged by email today with Douglas P. Menelly, a vice president at electronics outsourcing company SinoHub. The four-year resident of Shenzhen this month published a book that draws on his China experience, “Lessons in Communication.”

Forbes: The Chinese media is celebrating Shenzhen’s success this week, but Hon Hai, one of its biggest employers, is said to be looking to hire in other parts of China, and other companies have been moving north. What does that tell us about the city’s and China’s competitiveness for electronics manufacturers today?

Menelly: It appears that Hon Hai and others are moving north and west for three key reasons. First, labor costs continue to increase regularly in Shenzhen, especially within the SEZ. Our company in particular, which specializes in sourcing electronic components and manufacturing private-label mobile phones, has experienced annual wage increases of 10% per year for the past 3 years. Substantial by percentage, that trend will lower the competitiveness of the city if this trend continues. But for SinoHub, the increase from $150 to $165 per month for our 600 factory workers is minimal compared with the lack of infrastructure and logistics networks within inland China, or alternatives like Vietnam.

A second reason is that Shenzhen’s policies and regulations for labor have been rewritten several times in the past five years. When employees are let go, many are suing employers for contractual disputes and other reasons, virtually non-existent just five years ago. It has been estimated that labor cases in Guangzhou and Shenzhen are ruled in favor of the employees more than 90% of the time. Thus, the court system is evolving, but understanding and implementation of the new labor laws is oddly applied. And third, cities further inland, are beginning to complete nfrastructure projects. For example, Chenzhou in Hunan, has recently completed massive logistics and transportation hubs, allowing companies like Hon Hai to escape the restrictive labor laws, rising labor costs, and unpredictable reform legislation in Shenzhen for places like Chenzhou.

Forbes: To what extent is the global electronics supply chain going to move inland with Hon Hai or others that have been eyeing lower cost inland locations?
Menelly: The electronics supply chain will move inland, more for the larger players with the capital to negotiate long-term deals with inland logistics and industrial parks, since they have modern, brand new facilities, and local governments like Chenzhou are offering incentives for large foreign firms to move inland. These incentives, which often include enticing tax-incentives, can last several years.

For smaller electronics firms, like SinoHub, Shenzhen makes the most sense for the foreseeable future based on the ease of connection to Hong Kong, a free port, which our business depends on for processing imports of $1billion of electronic components, on an annualized basis, for use in our mobile phone production facility, along with our distribution network for the same components to customers throughout China. For now, I only see the top-tier players considering major moves inland.

Forbes: Do you see differences in the reaction among larger U.S. electronics companies to what is happening with Hon Hai and other companies?

Menelly: Not much. A lot of U.S. electronics shops in Shenzhen and the surrounding area are making moves based on the reasons I mentioned earlier. In general, many seem to be staying where they are.

Forbes; I’ve been told recently that companies are having trouble getting their former factory workers to return to Guangdong after they’ve downsized in the past couple of years. Do you see any sign of that?

Menelly: Yes, definitely! In manufacturing, and especially electronics, attrition is routine, and it always spikes during the Chinese New Year. Many folks return home for the major holiday, and decline to return to their jobs in Shenzhen. Many times, in recent years, it is because they can find better paying jobs closer to their hometowns, whereas those opportunities did not previously exist. Further, many employees have been burned by Chinese managers during the financial crisis. For example, my former company was in a Free Trade Zone in Shenzhen, and there was a time in late 2008 when police cordoned off the entrances to the zone due to worker riots. Allegedly, two companies inside the FTZ had some financial difficulties and asked their employees to defer wages for several months, promising the employees a bonus if they allowed wage deferment. Then one day, workers arrived to vacant facilities, with the Chinese managers apparently vanishing with company cash and assets, leaving workers furious, with many resorting to street protests and demands of government intervention. Of course, the Chinese government in Shenzhen kept it quiet, but photos and on the ground views displayed what was really going on. And this was all across Shenzhen, Dongguan, and Xiamen.

In sum, workers are now “flexing their muscles” a bit more by using new labor laws to be picky with new jobs, and pushing for contracts with clauses in their favor, many of which did not exist just a few years ago. I’m curious to see how this transpires over the next 12-18 months.

Forbes: There have been reports that Hon Hai is passing on its higher wage costs to its customers. In general, do you see any general trend toward rising wages right now at other companies? And rising prices in electronics?

Menelly: There hasn’t been much rise in prices in electronics in general, from our view. Rising wages are a given, especially in a rapidly evolving city like Shenzhen, whether you consider Hon Hai, or other electronics firms like SinoHub, where annual wage increases of roughly 10% are normal, and Companies are offering unique, creative incentives to entice workers to stay productive, loyal, and want to stick around for awhile. SinoHub, and others, try to boost efficiencies to minimize the need to pass the increased labor costs onto customers. But the reality is, many are doing it, at least to some extent.

Forbes: What’s your expectation for the U.S.-dollar-RMB exchange rate in the next two years? How will that affect electronics outsourcing from China?

Menelly: I believe the RMB will continue to appreciate, at a slow rate, over the next two years. I think Beijing understands the need to accelerate the appreciation, however, Beijing’s top priority is social stability. Every increase in RMB to the US dollar will drive hundreds of Chinese companies out of business because they export on such thin margins to begin with. Thus, Beijing wants to minimize, or slow, the effect of this RMB appreciation to ensure social stability and jobs for the millions running businesses on razor thin margins.

Electronics outsourcing from China will ultimately hit the American consumer, as the RMB appreciates, because they will pay more for the goods on shelves, potentially driving a shift towards boosted electronics manufacturing in places like Mexico. I think China is ok with this, because Beijing has a been working for seven or more years on balancing it’s economy, reducing the reliance on exports by boosting internal consumer demand. Big foreign electronics firms, and local OEM shops, are targeting new brands, and mid-tier and low-end electronics brands to cater to the growing middle class, monopolizing on their increased buying power.