China's problems - from the Economist

Industry in China

Where is everybody?

Mar 13th 2008 GUANGZHOU
From The Economist print edition


Manufacturers struggle in southern China's industrial belt

AT FIRST, the managers of the factories spread throughout Guangdong province thought the lack of returning workers after the Chinese New Year break in early February was merely because they had been delayed by the huge blizzard that disrupted rail and power lines, and left roads impassable. But now that the mess has now been cleaned up, it is clear that the vast annual migration of around 20m people that has fuelled the manufacturing boom in southern China over the past two decades is beginning to diminish.

The Guangdong Labour Ministry reckons 11% of the workers did not return after the holiday; other estimates are as high as 30%. Whatever the precise number, many factories are reeling. Wages were already rising; now they will surely go up further, adding to surging costs for credit, materials, energy, environmental compliance and health care. Meanwhile, revenues are falling due to slowing demand from America and a reduction, following pressure from other countries, in China's complex system of export subsidies.

A survey of conditions in southern China conducted in the aftermath of the Chinese New Year, covering 162 members of the Federation of Hong Kong Industries, produced reams of gloomy figures. Members estimated 10-20% of the 70,000 factories in Guangdong province had closed in the past year, and expected a similar number to close within the next two years. Two-thirds of those polled said they were unsure whether to invest more in the region; one-third planned to cut investment. Only one respondent was optimistic.

To some extent the upheaval in southern China follows a government plan to force dirty, low-paying industries out of business or into poorer interior regions that have so far missed out on the country's growing industrial wealth. The hope is that the gaps in Guangdong will be filled by factories producing more sophisticated, high-value products that are cleaner and less energy-intensive to produce. There are signs that this is indeed happening.

Factories are opening up in China's interior, providing opportunities for those in rural areas to find employment closer to home, rather than having to leave their families for an entire year. This may explain the reduced flow of migrant workers. At the same time, discriminating industrial parks are popping up in Guangdong and Suzhou, among other places, that will only permit factories producing sophisticated electronics and medical equipment. The factories in deepest trouble are said to be in low-cost, low-skill areas: toys, plastics, shoes, clothing and so on. Many are sweatshops with poor working conditions.

Firms that provide relatively high wages and good working conditions do not seem to have problems attracting employees. Nike's sneaker factory in Dongguang, one of the grimier sections of Guangdong, has 27,000 workers, including 4,500 that have returned over the past year and 40% who have been around for at least three years. The workers receive 1,400 yuan a month ($200), well above the minimum wage, receive subsidised food and (for the 7,500 living inside the factory) clean dormitories. Nike is not competing for the low end of the market: shoes produced its is Dongguang factory can cost as much as $185 a pair.

But Nike has been steadily spreading manufacturing from southern China to the rest of the country, and the rest of South-East Asia. Indeed, the idea of shifting away from China seems to be gaining adherents. A study by Booz Allen Hamilton, a consultancy, on behalf of the American Chamber of Commerce in Shanghai, says more than half of foreign firms believe China is losing its edge over other low-cost Asia countries, and 17% intend to relocate.

This shift will be a good thing, as production shifts to Bangladesh, Indonesia, Malaysia and even Africa, spreading wealth and deepening manufacturing skills. Whereas China was once desperate to grow through exports, it is now developing its own domestic economy and has other ways to thrive beyond merely producing cheap goods. But these shifts are at the very least disruptive. Hundreds of thousands, if not millions, of unskilled workers still depend on southern China's low-cost factories for their livelihoods.

And as the rusted hulks of manufacturing plants throughout the Western world attest, the transition to higher-value products can be difficult. Clement Chen, the chairman of the Federation of Hong Kong Industries, says the Chinese government is understandably clamping down on lots of dirty industries—leather tanning, dyeing, finishing, electroplating, and the like—but that this can disrupt the broader manufacturing supply chain, including industries China wants to develop. Business environments, like ecosystems, can be fragile—and once lost, competitive advantage can be hard, if not impossible, to regain.