Chinese factories face survival of the fittest
Higher costs and new labour laws are forcing plants in Guangdong to close or relocate farther inland, leaving previously bustling factory compounds empty like ghost towns with little investment interest or prospective buyers.
At its height, the Changdeng Shoe Company employed 7,000 workers in the eastern district of Dongguan, a manufacturing centre in China’s southern Guangdong province. Today the company’s factory compound is a ghost town, populated by only a few dozen bored security guards, ground keepers and technical personnel overseeing the dismemberment of its assembly lines.
In a communal area surrounded by Changdeng’s abandoned worker dormitories, a beauty salon, table-tennis room and medical clinic have been stripped bare. A notice for an auction, held last December, invites anyone interested in the factory’s five cars to come and bid.
“The Taiwan boss was in his 70s and wanted to get out of the business,” said Pang Wei, as he gave the Financial Times a tour of the compound. “He has gone back to Taiwan.”
Mr Pang, an entrepreneur based in the nearby provincial capital of Guangzhou, paid Rmb10m (EUR943,000) for Changdeng’s capital equipment and is re-selling it to other manufacturers. At the factory, technicians supervised the removal of sewing tables and other machinery from upper floors to ground level, for easier inspection by potential buyers.
Equipment is not the only thing to have been scavenged at Changdeng. “Most of the workers here were hired by other factories in the area,” says Chen Qingwen, who also runs a business selling shoe manufacturing equipment. “They were very happy to take them.”
Basic monthly salaries have doubled
According to Zhang Huarong, chairman of both the Asia Footwear Association and the Huajian group, one of China’s largest shoe companies, basic monthly salaries in the industry have doubled to $200 since 2006.
However, the difficulties encountered by Changdeng and thousands of other factories across the Pearl River Delta, where Guangdong’s manufacturing industries are concentrated, do not suggest that China’s export engine is facing crisis. Guangdong’s exports grew 22.3 per cent to $369.3bn last year, accounting for 30 per cent of the national total.
The indistrial struggle in Guangdong has been compared to survival of the fittestWhat is happening is a survival-of-the-fittest struggle affecting primarily smaller factories in relatively low-tech, labour-intensive industries. In other cases, companies are redistributing some lower value, less time-sensitive tasks to new production facilities in cheaper inland areas. Reflecting China’s resilience, in January the country’s national trade surplus surged 23 per cent year on year to $19.5bn.
Large factories that have shifted some of their operations to China’s interior, as Huajian has done, usually retain sizeable facilities in Guangdong, which are better at turning around higher value orders with shorter lead times. “I never think about closing our factories in Dongguan,” Mr Zhang said. “We want to upgrade them by focusing more on research and development, new fabrics and new manufacturing techniques.”
Mr Pang’s buyers provide a glimpse into the industrial migration that is occurring as higher costs take their toll on factories such as Changdeng. One of them, Chi Shiqing, runs a small, 300-worker shoe factory in Shaoguan, a city in northern Guangdong near the border with Hunan province.
Another factor behind recent company closures in Guangdong has been the implementation of a new contract labour law”It’s not easy to get workers in Shaoguan either,” Mr Chi says. “Nobody wants to move there so I have to hire the locals.”
He adds: “Wages in Shaoguan are not much lower than those in Dongguan now.”His workers earn Rmb1,200 ($170) a month.
Mr Chi can take some comfort from the fact that he manufactures for the domestic market only. That means he is not exposed to another key cost pressure – the rising value of the renminbi, which has appreciated about 15 per cent against the dollar since mid-2005.
Another factor behind recent company closures in Guangdong has been the implementation of China’s new contract labour law. By closing before January 1, factory owners could avoid having to pay higher compensation costs mandated by the new law.
Changdeng at least did the right thing, folding up its operations in an orderly manner and in compliance with Chinese law before the end of 2007. According to local media reports, the company paid some Rmb40m in worker compensation.
Across town, Lu Yongyuan, a 32-year-old migrant labourer from Guizhou province, was not so lucky. The Taiwanese head of his company, Dongguan Hongsheng Mould Factory, simply absconded. The factory’s 300 workers returned from the traditional Chinese New Year holiday to find the factory gates locked and their salaries unpaid.
“Most of us found out on February 14,” said Mr Lu, who had worked for Hong-sheng for 10 years. “The government will auction the assets. Costs were just too high.”
A notice posted on Hongsheng’s gate instructs workers to contact the local village government office to collect one month’s basic salary. Under the new contract labour law, Mr Lu should have received the equivalent of 10 months’ wages in compensation.