In China a move away from low cost factories

Companies here in China’s industrial heartland are toiling to reinvent their
businesses, fearing that the low-cost manufacturing that helped propel the
nation’s economic ascent is fast becoming obsolete.

The TAL Group, which
operates an immense garment-making plant in this coastal boom town, is moving
beyond piecework by helping J.C. Penney electronically manage its inventory of
dress shirts, from factory floor to retail shelves as far away as Connecticut.

Chicony, maker of a
power device used in the Xbox from Microsoft and a major supplier of computer
keyboards to Dell, is diversifying by opening department stores, with three so
far around China and seven more planned.

And after years of
assembling vacuum cleaners and rechargeable toothbrushes for Philips and other
Western companies, Kwonnie Electrical Products is planning its own line of home

“We want to do more
original design and build our own brand,” Benjamin Kwok, a company founder,
said during a recent tour of a sprawling factory complex that has 3,000
workers, a huge warehouse and labs for testing juice makers, vacuum cleaners
and other appliances.

“Many customers won’t
be happy with the decision to compete with them,” Kwok said. “But we have no

It is too soon to
know whether such make overs will succeed. But economists consider such efforts
necessary – and overdue.

For years, factories
here in the Pearl River Delta region have served as the low-cost workshops for
global brands, turning this part of China into the nation’s biggest export
zone. The city of Dongguan, about 55 kilometres northwest of Hong Kong, has
long churned out toys, textiles, furniture and sports shoes – including
hundreds of millions of sneakers a year for companies like Nike and Adidas.

But now, with
manufacturing costs rising and China looking to create a consumer middle class,
experts say the revamping of this region’s industries could help reduce the
nation’s wide income gap and encourage more balanced and sustainable economic

“It is my hope that
China’s comparative advantage as a low-wage producer does disappear – the
sooner the better,” Fan Gang, an economics professor at Peking University,
wrote in a recent essay, adding that China needs to upgrade and embark on “the
next stage of development.”

Manufacturing costs
have risen rapidly here in response to nagging labour shortages and worker
demands for higher wages to help offset soaring food and property prices.

Those pressures were
evident a few months ago, when a series of big labour strikes in southern China
disrupted several Japanese auto factories and resulted in hefty pay raises.

There is also the
looming prospect that China’s currency, the renminbi, will strengthen against
other world currencies in the coming years. That would make goods produced here
even more expensive to export, and further erode what manufacturers say are
already thin profit margins.

Seeking lower costs,
some Pearl River Delta factories are relocating to poor inland regions of China
where wages are as much as 30 percent lower than in coastal provinces. Other
factories are moving to lower-wage countries like Bangladesh and Vietnam.

But for companies
that have invested billions of dollars in factories here, simply packing up and
pulling out is not always financially feasible.

That is why many
owners of Dongguan factories are experimenting with other solutions.

“We’ve decided that
we’re not going to be on the low end,” says Roger Lee, the chief operating
officer at TAL Apparel, part of the TAL Group.

TAL, which is based
in Hong Kong and says it makes one of every six dress shirts sold in the United
States, is expanding into supply-chain management for J.C. Penney, one of its
big shirt-buyers. Through an extensive computerized system, TAL can stock and
restock shirt shelves in all 1,100 of Penney’s retail stores in the United
States, as demand warrants.

“Too much inventory
kills retailers,” Lee said. “Now, we’re managing inventory in each store. We
gets sales data. We know what’s in the warehouse, what’s on the boat. We help
reduce inventory.”

TAL is a fortunate
survivor. After the global financial crisis hit, Dongguan’s exports plummeted
by about 25 percent. Thousands of factories simply closed. Now – even though
exports have rebounded to 2008 levels – there are worries that regional growth
is slowing drastically.

“Since 2008, the
investment environment has worsened in Dongguan,” said Lin Jiang, a professor
of finance at Sun Yat-sen University in Guangzhou. “A lot of companies don’t
see a future in Dongguan. And they feel pressure from the government to

In Qingxi, an
economic zone in the southeastern part of Dongguan, district government
officials are trying to help desperate factories adjust to the new realities.
If many companies are reluctant to leave, the local government is just as loath
to lose the companies and their tax revenue.

145-square-kilometre Qingxi district is crowded with textile and electronics
factories, mostly backed by companies from Hong Kong and Taiwan, that produce
for global brands like Burberry, Hewlett-Packard and Sony.

The country’s export
boom helped Qingxi transform vast tracts of farmland into bustling factories
with noisy assembly lines. That created enormous wealth for the country and the
local region. But the labour equation is rapidly changing.

Years ago, migrant
workers lined up outside factories here hoping to apply for work. As a result,
90 percent of Qingxi’s 350,000 residents are migrant workers. Most of them
travelled from China’s poor interior provinces to find factory jobs that today
often pay about 90 cents an hour, which is the typical wage in the
Shenzhen-Dongguan area.

But a demographic
shift tied to the nation’s one-child policy means fewer young people are
entering the work force. And government efforts to improve conditions in the
interior provinces have lifted growth in those regions and persuaded many young
workers to find jobs closer to home.

So companies here can
no longer pick and choose among workers.

“We used to prefer
women because they are easier to manage,” said Frank Chen, a manager at a
Qingxi factory called Lite-On Technology, which makes Internet-access cards for
Wi-Fi devices. “Before, we wanted three females for every male. But because of
the labor shortage, it’s hard to get that ratio now.”

Chicony, trying to
drum up workers, has taken to sending a bus around Dongguan with a loudspeaker
blaring, “Chicony is the best.”

Because of labour
shortages and government efforts to raise the minimum wage to improve the
livelihoods of migrant workers, pay rates in the Shenzhen-Dongguan area have
nearly doubled in the last five years.

Still, factories here
often have to pay middlemen and vocational schools to find migrant labour. The
Qingxi government has also tried to step in, organizing recruiting drives into
the country’s poorest regions.

But longer term,
district officials want to encourage innovation.

Zhu Guorong, the vice
director of the Qingxi Office of Trade and Economic Cooperation, is among those
trying to remake Qingxi. Recently, he drove a sparkling blue Toyota FJ Cruiser
– a kind of miniature Hummer – through the city’s economic zones, talking about
the shift under way.

“Every company now
wants to be a high-tech company, and we want to encourage them,” Zhu said, as
he headed for an electronics factory, where he would inquire about

The national
government has preferential tax policies to encourage technology companies, and
the Qingxi district government has a research and development fund – officials
decline to say how much money it has – to support efforts.

One company that has
already received government money for research and development is a division of
Lite-On Technology, the electronics supplier.

But even for
innovators like TAL, the garment maker, success is far from guaranteed.

“The price of a shirt
has gone down,” Lee said. “But our costs have gone up.”