Production overhaul

Domestic factors conspire to dampen traditional manufacturing


Is her job being outsourced to Vietnam and Cambodia?

Dongguan’s mayor Yuan Baocheng was putting a brave face on his city’s challenges last month. “This year, we learned that about 500 foreign and domestic businesses have closed,” he said. “[Under] reasonable market competition, it’s normal to see some businesses close and others open.”

City officials have claimed that economic output increased in the first three quarters of the year and that Dongguan will benefit from Xi Jinping’s “One Belt, One Road” economic strategy.

But as we have written previously (see WiC173), others wonder whether the city’s troubles could be a little more terminal.

According to Lin Jiang, professor at Guangdong’s Sun Yat-Sen University and a specialist on the city, Dongguan enjoyed its “Golden Age” between the Asian financial crisis of 1997 and the global financial crisis of 2008. Dongguan’s success was built on an export-oriented model, China Business agrees. A slump in global demand since 2008 brought the “first wave” of factory closures to the city. But now it is domestic factors that are contributing to what the magazine describes as a “new wave” of shutdowns.

In particular higher labour costs are creating difficulties for the small to medium-sized enterprises (SMEs) that dominate Dongguan’s commercial landscape. A survey conducted by the China Centre for Promotion of SME Development found that roughly 79% of businesses considered rising labour expenses as a top concern – an increase of 10% on last year. Economic growth and an aging population have both played roles in higher labour costs, China Labour Bulletin also notes. “Fewer young people are entering the workforce and those that do have higher expectations. Workers have become better organised and employers in many sectors have been forced to pay higher wages in order to recruit and retain staff,” says the Hong Kong-based organisation.

Although an increase in wages will be welcomed by the migrant workers that still form much of the manufacturing labour force, there are obvious consequences on company profitability. The hike in pay has pushed costs at some of the city’s factories above those in Bangladesh, Vietnam and Cambodia, where businesses are now relocating their operations.

This “new wave” of closures includes Microsoft’s shuttering of its Nokia production factories in Beijing and Dongguan – which is estimated to have cost at least 9,000 jobs. The closures are part of Microsoft’s broader plans to relocate Nokia production to Vietnam.

Recognising the rise in labour costs, policymakers in Guangdong (Dongguan’s provincial home) have announced plans to promote investment of $152 billion in industrial robots over the next three years. But some are sceptical of the programme’s benefits, saying that automation isn’t a viable option for many of the region’s businesses.

For instance, Yeh Cheun-rong, the former director of Dongguan’s Taiwan Business Association, says that local businesses would already have introduced more automation if they thought it could keep them competitive.

“Entrepreneurs definitely think ahead of the government. If their manufacturing process could be automated they would have adopted automation long ago. But lots of production cannot be done by machines or robots,” he said.

Dongguan’s challenges aren’t unusual, an advisor at the same Taiwanese Business Association has also claimed. “It isn’t only Dongguan. The whole country’s situation is more or less the same. Ningbo, Changzhou, Wuxi, Kunshan, Suzhou: the factories in these areas that make products for export have all seen their growth rates fall by 40% or more.”

Last month the closure of Farun, a major sheet-glass maker headquartered in Suzhou in Jiangsu, pointed to another new challenge for factory bosses: increased pressure to comply with environmental protection rules.

According to the Australian Financial Review, Farun had been named and shamed as one of the 17 worst polluters in China, with only one of its 18 production lines fitted with the required pollution filters. But the newspaper claimed that Farun’s founder had simply paid the fines for breaching the environmental standards, because the penalties were more than outweighed by the financial benefits of skirting the rules.

Now the context has changed and research from Citic Securities has estimated it would cost $80 million to bring Farun into compliance with the newly toughened regulations, plus an extra $30 million a year in operating costs.

An analyst in the glass industry told National Business Daily: “Starting from the beginning of this year, environmental pressure placed upon the glass industry, especially in the East China region, has become increasingly severe. This can be seen across the industry where, at a basic level, the cost of production has increased by Rmb60 ($9.38) per tonne.”

Farun had an annual production capacity of 400,000 tonnes, translating to additional costs per annum above the $30 million predicted by Citic.

The increases in operating expense are putting pressure on a sector struggling with oversupply.

As a staff member with China Southern Glass Holding reports: “The glass industry – especially flat glass – has always existed alongside a supply glut. Most notably in 2010 the majority of firms were expanding at unreasonable rates, creating fierce competition. Since last year, the price of glass has been in constant decline.”

The slide in glass prices also reflects the slowdown in a separate industry: property. According to CBN, real estate development accounts for 75% of demand for flat glass in China – for Farun it accounted for even more of its production – but growth rates in the property sector have been slowing since 2014.

In looking for a silver lining Beijing News has been drawing on Dickens for inspiration, describing the situation as “the best of times and the worst of times” for manufacturing firms.

The “best of times” is dawning for entrepreneurship and innovation, the newspaper argues, but the “worst of times” has already arrived for some of the most traditional, lower-end factories.

In May, Beijing announced its “Made in China 2025” policy, which aims to promote IT, robotics, aerospace, railways, electric vehicles and other advanced industries in a bid to move the economy away from the low-value model that fuelled growth in the past.

This month the Financial Times explored a similar theme after news of falling orders at the Canton Fair. Headlined “Adapt or die” the article looked at the troubles facing companies in cities like Dongguan. But it also offered a welcome example of a company that has revived its prospects.

Megmeet was a maker of basic components for heaters and power supplies. But its new subsidiary Ikahe now makes its own-brand of ‘smart toilets’ (think of the fancy Japanese ones), which sell for up to $2,000 each.

As an Ikahe executive told the FT, the firm’s move into the world of higher-value consumer products has been a well-time one and the company has high hopes of establishing a new niche market: “Every Chinese person has an iPhone now, even cooks and cleaners, so if rich people want to show their status the best way is with an expensive toilet.”

That sounds a little optimistic, although Dongguan’s local government bosses will be hoping for similarly positive energy as they try to reinvent the city’s economy.

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