Trading Places
With escalating labor and rental costs as well as manpower shortages on the mainland, ‘relocation’ has become the new buzzword for HK factory owners. Sophie He talks to them about their experiences.
Around 25 years ago, many Hong Kong factory owners, including Willy Lin Sun-mo, managing director of Milo’s Knitwear (International) Ltd, moved their manufacturing facilities from Hong Kong to Guangdong province on the mainland to take advantage of cheap labor and low rental costs.
At that time, a worker’s wage was as little as 8 yuan per day. Currently, wages at Lin’s Dongguan factory have risen beyond 60 yuan per day – almost more than seven times what they used to be.
Today’s mainland factories, especially those located in the Pearl River Delta, find it hard to recruit enough workers.The trend started with millions heading home annually for Chinese New Year holidays, only for large numbers to refuse to return to work. The workers preferred to stay at home for lesser-paid jobs and be nearer their loved ones and families, enhancing the jobless situation in many cities – a phenomenon that has become increasingly common these days.
As many factories in Guangdong face the triple challenges of rising labor costs, labor shortages and strong increases in rental, many factory owners, including Lin, turned to relocation or investments in factories on the mainland’s hinterland, or even transplanting to neighboring countries as a solution to their problems. By moving factories to where labor was both adequate and cheap, owners expected to offset their challenges and be rewarded with bigger profit margins. And while some have benefited from such moves, others have not.
Lin told China Daily that Milo’s Knitwear, whose Dongguan factory was established over 20 years ago, faced labor shortages several years ago, a problem shared by many such plants. As most of his workers in the Dongguan facility are from Jiangxi province, Lin invested more than 30 million yuan to set up a plant in Jiangxi four years ago, while answering the central government’s call to companies to invest in the central and western area of the country. But he simultaneously invested in automation at his Dongguan factory, replacing semi-automatic machinery with its fully automatic equivalent.
When the Jiangxi factory went operational, Lin planned to recruit as many as 2,000 workers. But despite four years of production, the factory has only hired 300 workers, Lin says, explaining that few young people who lived in the area also wanted to work near their hometown.
“Most of the young people (who are born in smaller cities) on the mainland wanted to experience life in big cities, and thanks to a well-developed transportation system in the country, they can work in big cities and return to their family overnight,” Lin says.
For those who choose to work near their family and loved ones, factory owners found these workers are easily distracted by domestic chores.
“The workers (in the Jiangxi factory) never want to work overtime, as they want to go home, prepare dinner, or take care of their children,” Lin points out, adding that such distractions from home means the Jiangxi workers are not as efficient as their Dongguan counterparts.
The Jiangxi factory still hasn’t broken even after four years. However, Lin has no intention of giving it up, as Jiangxi labor costs are still lower than those of Dongguan, and the local government is supportive.
So Lin improvised change. “Recently, it crossed my mind that since Jiangxi workers are having such a hard time adapting to our business model, maybe we should change our business model to adapt to them,” he says.
Lin says that instead of producing entire garments in the Jiangxi factory, his company decided to produce only part of the garments there, thus making it easier for workers; meanwhile, the company can also lower its requirements to adapt to their production habits.
Relocation outside the mainland
Another company Top Form International, a Hong Kong-listed brassiere manufacturer, has two production plants; one in Foshan, Guangdong province, and the other in Jiangxi province. Both were established 30 years ago to manufacture lingerie for export to the United States and Europe. The two factories have a combined labor force of some 4,300 workers.
Top Form used to have a third factory in Shenzhen, but it closed down last year, as workers’ monthly wages doubled from 2,000 yuan five years ago, to more than 4,000 yuan today. Difficulty recruiting sufficient numbers of workers was another reason for the plant’s closure.
Four years ago, the company decided to close down the Shenzhen factory as part of a “strategic shift” to reduce capacity in high-cost areas and increase capacity outside the mainland where costs were lower.
According to Top Form chairman Willie Fung Wai-yiu, producing brassieres requires numerous manual procedures, so the company is heavily dependent on workers and is highly sensitive to workers’ wage fluctuations.
Top Form then set up a factory in Thailand where it has since doubled the number of workers to 4,000 as of 2011. The company also established a factory in Cambodia in early 2012 and hopes to staff it with 2,000 workers. Average production costs in Thailand and Cambodia are 15 percent lower than on the mainland. The company expects to have two thirds of its total production capacity outside the mainland eventually, up from the current 47 percent.
But the relocation of Top Form’s factory to Cambodia brought trouble from the outset.
Fung says that by September 2012, the factory had up to 700 workers, but then out of the blue, they downed tools and went on strike.
Illegal strike
“The strike was illegal.We had to take the workers to court, and the final ruling was in the company’s favor, but by that time we had already paid dearly for the incident,” Fung explains, adding that the strike action saw the company close its factory for weeks and release the majority of the workers.
Top Form’s Cambodia factory is already back into full swing and currently has around 300 workers. But the incident forced Fung to do some serious thinking. As a result, he wants to share what he has learned from the relocation initiative with factory owners who may also want to expand their manufacture into Southeast Asian countries.
In retrospect, Fung says it is far better to train a local management team in the country the factory is relocated to, than to introduce a new management team from Hong Kong or the mainland to the country. “As it is hard to keep a non-local manager away from his family for many years, it is better to train a local manager who will ensure smoother operations,” he says.