Media reports of factory closures in the Pearl River Delta are growing. But as Che Xiaohui and Kong Bo report in the China Securities Journal, the “spasm of pain” will lead to a brighter future

The Pearl River Delta (PRD) – China’s top manufacturer – is overhauling it’s traditional manufacturing sector to transform itself into a home for hi-tech manufacturing and service-oriented industries.

Clumps of small and medium-sized manufacturers have come under great pressure from ballooning costs, a changing business climate and orders from the local government to relocate. As a result, ongoing shutdowns, suspensions of production and relocations have combined to send a spasm of pain through the region’s industrial sector.

Reports about massive shutdowns of plants in the PRD have been appearing since the second half of last year. It has been reported that between 6000 and 7000 firms have stopped working. Guangdong province’s foreign economic and trade department has dismissed these reports as “groundless speculation” and “vague theoretical inference”.

However, it admitted some firms had relocated. They were largely labor-intensive manufacturers of metal hardware, toys, clothing, shoes and plastics, producing US$171.39 million (RMB1.2 billion) worth of goods each year and employing 13,000 workers. More than 90% of the relocated firms were funded from Hong Kong and Taiwan.

Although the massive relocation story has not been proven, it is recognized that pressure is being exerted on firms in the region due to external factors like slashed export tax rebates, changes to processing trade policies and an appreciating RMB, and internal factors like stricter requirements for workplace safety and environmental protection. Labor-intensive firms are being forced to either change their business model, shut down or relocate.

Huang Chunming, secretary general of Dongguan city’s leather shoes association, said that raw material costs for shoemaking had risen over 30% in the city in 2007. Land prices were one of key factors. Just 2.67 million square meters is still available in the region for manufacturing use. Given that 200,000 square meters is currently converted to industrial use every year, it will take just 13 years to exhaust available land resources.

Salaries have also emerged as a key problem. Local governments in Guangdong province have raised minimum wages by 12.9% on average over the last year, with Shenzhen’s US$116 (RMB810) per month featuring at the top, although the minimum wage in some counties is just US$64 (RMB450). Minimum wages in the province are second only to Shanghai, where minimum wages are RMB960 per month on average.
However, an average worker at a manufacturing firm in the PRD today earns well above the minimum wage at US$286 (RMB2000) a month. Despite this, some firms cannot attract enough workers.

According to Ye Chunrong, director of Dongguan’s Taiwan-funded enterprise association, manufacturers in the PRD that are shifting production to China’s interior or countries in Southeast Asia tend not to switch off their assembly lines in the PRD. “Production shifting is a long process and it takes time to develop a mature industrial chain,” he said. “So, no massive shifting will be seen for now.”

The province’s focus on labor-intensive manufacturing with little technical content has caused a string of social problems, such as environmental pollution, faulty quality and unrest over workers’ rights.

Foshan city is one of the most important ceramics producers in China. Lan Weibing, secretary general of the city’s ceramics industry association, said the government shut down more than 40 heavily polluting producers in 2007, accounting for 10% of the total. Previously, it used to expel just one or two makers a year.

The toy making industry has also been hit hard by the reshuffle. The fallout from a toy recall in the US last year has prompted the Guangdong government to better regulate its toy exporters. In Zhongshan city, 40 out of 140 toy makers had their licenses confiscated and 50 were ordered to stop making toys until they could show they had overhauled their processes.

While shutdowns and relocation are increasingly common in the PRD, foreign direct investment in the region has been on the rise over the past two years, showing the region’s business climate is still appealing. Statistics show foreign capital invested in the nine cities of the PRD grew 15.4% in 2006 and 16.1% in 2007. Around 70% of the total investment last year was in the service industry and industrial services sector, a stark turnaround from the 70% snared by the manufacturing sector just a couple of years earlier. More than any other indicator, this portrays an impending major reshuffle in the PRD’s economic constituents.

Market observers argue that partial relocations and complete shutdowns are the inevitable starting point for the PRD’s industrial reshuffle. However, the "spasm of pain” is expected to be short-lived. As one of China’s top economic zones, the PRD is able to foresee its best days ahead once it is over the hump. Bring it on!

This article originally appeared in the China Securities Journal on April 8, 2008. The China Perspective takes no responsibility for the accuracy of the original article.