Has China, and particularly the factory-rich region of the Pearl River Delta in southern China, lost its edge as a low-cost manufacturing base? Local industry associations report that more than 10,000 factories have closed down. Equal numbers of Taiwanese and Hong Kong factory-owners have fled the area, leaving behind shuttered plants, unpaid workers, and plenty of debt.
There are many reasons for this. For one, rising labor costs: local CFOs report a 15 to 20 percent annual jump in pay for low-skill workers over the past three years, and skilled labor is ever harder to find. Some companies have resorted to professional labor hunters and now accept women in their 30s and 40s, many of whom were once rejected because of their lack of education and more-limited physical capabilities. New labor laws also play a part, in that they give laborers a stronger sense of their rights and inspire heated salary negotiations.
But it is the rising cost of commodities that is really hurting the region. The prices of steel, copper, aluminum, and plastic have all doubled or even quadrupled in the past year. The CFO of an electronics manufacturer in the Pearl River Delta estimates that the cost of raw material has risen more than 12 percent in the first five months of this year alone. Her company now pays some key suppliers in advance to ensure their survival.
The local government's change in attitude toward labor-intensive industries that consume large amounts of energy or produce high levels of pollutants has also been a factor. New policies forbid the import and export of certain highly polluting components, for example, while some companies must now post a bond with customs when they import and export goods — effectively choking their cash flow — which has forced many to abandon their businesses. The goal is to encourage the growth of more high-tech and value-added businesses at the expense of those labor-intensive ones.
As for why many companies simply walk away, that has much to do with governmental policies and procedures. The government often does not recognize the rights to the land that factory owners bought 10 or more years ago, so selling it becomes impossible. That, combined with numerous investigations of taxes and fees and a generally slow-moving system, prompts many manufacturers to flee to other locales.
It is still too early to write off the Pearl River Delta as one of the world's great production engines, but it seems certain that the factories that thrive will be those that produce higher-end goods, not the low-cost, mass-market products that many still associate with China.
Wu Chen is editorial director of CFO China.