March 2008
Guangdong Exodus
by Alexandra Harney
Chinese factories, whose ultra-low prices have been blamed for
millions of job losses and countless plant closures around the world,
are falling on hard times. A confluence of unfavorable factors--rising
energy, material and payroll costs, an appreciating currency, higher
tax rates and tougher environmental and labor regulations--are driving
thousands of factories in southern China's Guangdong province out of
business. Some plants are reopening in cheaper areas in inland China;
others are packing up and moving to countries like Vietnam and
Cambodia. Still others are closing their doors for good.
The Federation of Hong Kong Industries estimates that 10% of the
60,000-70,000 factories Hong Kong-owned factories in Guangdong will
close this year. In 2007, nearly 1,000 shoe factories left the region.
In any other country, an exodus on this scale would be a national
political issue. There would be angry pickets by laid-off employees
and complaints from labor unions about how the government's trade
policies were crippling manufacturing.
But in China, the popular response seems to have been relatively
muted. "It won't be too big a problem for the workers," says Liu
Kaiming, executive director of the Institute for Contem****ary
Observation, a labor advocacy and consultancy group in the southern
city of Shenzhen.
How could this be? The short answer is that China's economy is growing
at such a staggering pace that it can absorb the loss of even
thousands of factories. While it is difficult to determine precisely
how many factories have left Guangdong, those that have closed appear
to be small by Chinese standards, employing hundreds, rather than
thousands of workers each. It is likely they were not the region's
most efficient or profitable plants.
The longer and more surprising answer is that there are plenty of
people who actually wanted these factories to leave anyway. How
Guangdong came to be weary of the same factories that Western workers
still fear says much about China today. The country's ex****t
manufacturing sector is in the midst of a historic transition as the
government reins in preferential policies and costs spiral higher.
While this ****ft is likely to cause some disruption, it is mostly good
for China, if not the rest of the world.
In the late 1970s, as China began to reform its economy after decades
of turmoil and relative isolation, Guangdong was among the first to
see the op****tunity. Beijing gave the province more freedom to manage
its economy and to attract foreign investment. Chinese leaders also
put three out of four of the first "special economic zones" in
Guangdong. They hoped these zones, which offered preferential tax
rates and exemptions on im****t duties, would serve as a kind of Venus
fly trap for foreign technology and investment.
Their plans worked. Hong Kong investors, facing rising labor costs in
the then-British colony, poured millions of dollars into the region,
setting up factories and workshops near the border. Tens of millions
of workers flooded out of the countryside and into Guangdong. By the
mid-1990s, Guangdong was a booming light industrial center, producing
a growing share of the world's consumer goods. Its success also
persuaded Taiwanese businessmen like Terry Gou to invest. Today, Mr.
Gou's Shenzhen factory, owned by Hon Hai Precision Industry, employs
some 270,000 people and counts Apple, Hewlett-Packard and Nintendo
among its customers.
The ex****t-processing industry made Guangdong one of China's
wealthiest regions. But it also brought serious social and
environmental problems. With so many cities vying for foreign
investment, local officials often looked the other way when factories
violated labor and environmental laws to keep investors happy. The
tens of millions of migrant workers, living for years at a time in
factory-owned dormitories, tested the public infrastructure and the
management skills of their employers.
Labor protests and strikes are now common in Guangdong. A yawning
income gap and growing pool of disgruntled migrant workers have lifted
crime rates. Factories in Guangdong have been struggling to find staff
for five years, driving up wages at double-digit rates. Turnover is so
high that some factories have to replace their entire workforce every
year. The province's air and water are now filled with the noxious
side-effects of its industrial success. And a generation of factory
owners from Hong Kong and Taiwan is reaching an age and a standard of
wealth that allows for weekday golf games. Many of their children see
their future in finance, not factories.
It's hardly surprising, then, that Guangdong's leaders, like many
senior leaders in Beijing, want to propel the economy up the value
chain, away from polluting, resource-draining, labor-intensive light
industry and towards innovative, high-technology and service
businesses. Over the past two years, Beijing has rolled out a series
of policies that effectively end the last three decades of
preferential policies toward many ex****t manufacturers. It has slashed
ex****t tax rebates, the lifeline of many otherwise unprofitable
factories. And it has allowed the yuan to float higher. The Chinese
currency rose almost 7% against the dollar in 2007.
And while China still has a long way to go to improve law enforcement,
local governments have started monitoring factories' environmental
impact more closely and creating new regulations to better protect
workers' rights. On Jan. 1, Beijing introduced a new contract-labor
law which tightened requirements for employers and gave more power to
the state-backed union. Foreign investors in southern China say some
local governments are now refusing to license highly polluting
industries such as leather tanning. Soaring raw material prices have
added to the pressure on factories. Even in labor-intensive
industries, raw materials can account for 70% of production costs. For
the first time in years, manufacturers of many consumer goods are
raising their prices to foreign buyers, who are in turn raising retail
prices.
None of this means that China will cease to be the workshop of the
world. Its advantages--modern infrastructure, a large pool of
relatively cheap labor compared to developed countries, and an
ecosystem of raw material and parts suppliers--cannot be quickly
replicated elsewhere. And the lure of producing for China's 1.3
billion customers in their own market remains.
The rising costs in Guangdong do mean that ex****t manufacturing will
be dispersed more evenly around the country. Kenneth Chan, whose
company, Gates 2 China, manages design, supply chains and logistics
for multinational companies, says he relies increasingly on factories
in the northern city of Tianjin as well as the eastern cities of
Ningbo, Wenzhou and Nanjing. Goods from factories in those areas are
cheaper than Guangdong, Mr. Chan says, but only by 5% to 10%. As these
areas develop, wages have started to rise. In Wuhan, in Hubei
province, the urban minimum wage has nearly tripled since 1995.
Nor are workers in inland China pushovers. One of the pillars of
Guangdong's success in ex****t manufacturing has been its reliance on
migrants. Because their hukou or household registration was in their
rural hometowns, these farmer-workers had no access to state-
subsidized health care, education or housing.
Living far from their families, migrants have been willing to log long
hours on the assembly line for low pay. Their 18-hour days have been
one of China's key advantages in producing goods so cheaply. But
factories that employ local laborers in inland China are less likely
to work those hours. Their employees live at home, rather than in
dormitories. They have children and parents to care for. Working
conditions tend to be better in inland areas, says Mr. Chan, in part
because both factory managers and employees are local. It's harder to
crack the whip on somebody you grew up with.
At the same time, China's younger generation of workers is
increasingly willing to stand up for itself. Born after Beijing
introduced its one-child policy in 1979, China's Generation Y comes
from smaller families and has grown up in a more prosperous economy.
Factory managers and labor advocates say that workers born after 1980,
in particular, tend to be more selective about where they work, more
assertive and more interested in developing a career instead of just
earning money as their parents did.
These workers, while undeniably harder to manage, augur well for
working conditions in China's manufacturing sector because they are
more willing to voice their opinions. Employees who care more about
their workplace might be tomorrow's whistleblowers, raising the alarm
about product-safety problems or labor and environmental violations.
The current transition should be good for China's factories in other
ways. Many sectors still struggle with excess capacity, which holds
prices--and margins--down for everyone. "In the household appliances
industry, where I have 30 years' experience, I still can't count all
of the brands in this sector," says Yu Yaochang, deputy vice president
of Galanz, the world's largest microwave manufacturer. "But there are
certainly hundreds, if not thousands." Knocking out the least
profitable tier of manufacturers should help those left standing to
survive. It might even help improve the quality of Chinese ex****ts.
In short, the transition in China's manufacturing sector will make it
seem less exceptional. The challenges facing China's manufacturing
sector and industrialized areas will begin to more closely resemble
those of more developed countries: How can we attract the best talent?
How do we motivate these people to perform? How do we move from being
a producer of commoditized consumer products to design and
development, technology and services? What is our competitive
advantage?
Guangdong province is already asking these questions. "We have been
trying to put quality over quantity in economic development," the
China Daily, the government's official mouthpiece, quoted Guangdong
governor Huang Huahua as saying in February 2007. But innovation is
hard to achieve by diktat. Guangdong could, however, do more to
protect intellectual-property rights to persuade more high-tech firms
to invest there. And to keep the factories it has, it will need to
improve its image with migrant workers, who have been moving to other
provinces in pursuit of better working conditions.
As Guangdong and other parts of China invest more in higher value-
added industries, they will need more engineers, skilled technicians
and managers. But China's labor shortage in this area is more severe
than among semi-skilled factory hands in Guangdong. For China's
economy is developing more quickly than its universities. In a 2005
re****t, McKinsey & Co. argued that though China had 1.6 million young
engineers, their education's emphasis on theory rather than practice
left only 160,000 who were suitable to work at a multinational
company.
So far, China's size has been an asset to its progress. But it must
balance the need to move into more sophisticated industries with the
political and social imperative of keeping the m***** gainfully
employed.
Ms. Harney is the author of The China Price: The True Cost of Chinese
Competitive Advantage (Penguin Press, March 2008).
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