Thursday, 23 February 2012

* "Factory of the world" vows to step up

Severe labour shortages, together with high material costs and rents, are forcing small and medium-sized enterprises to relocate or shut down in China's Guangdong province, once dubbed the 'the factory of the world'.

Along the streets of Kang Le, a suburban village on the outskirts of Guangzhou, the provincial capital red job vacancy signs scream out: 'Hiring on good conditions', 'Competitive salary. Includes food and board', 'In need of 3 workers. Urgent'.

The village is mainly composed of small shops or SMEs all geared towards China's export sector.
More than a week after the Chinese New Year, which fell on Jan 23, many enterprises are still waiting for migrant workers to return to Guangzhou. But this year, as has been the case for the past few, many will not return.

Salaries have increased inland, prompting the workers to work closer to home and to their families. And those who do return will have ample choice to work for the highest bidder, or to go elsewhere.

Liu Licai has been sitting on Kang Le bridge - a crossroad where workers meet potential hirers - for five days. His boss who makes light sportswear jackets wants him to recruit 30 workers to meet an important order.

'We offer 4,000-5,000 yuan (S$797-996) a month, full board, against 3,000 last year. But it's not enough,' he says. Consequently, his company might have to start turning orders down. Increasing wages any further would crimp margins to the bone.

Labour shortages in Guangdong, China's richest province, have begun to seriously weigh on its millions of SMEs that are struggling to maintain margins as they have to contend not only with higher labour costs (up 25 per cent this year), inflation in raw materials and rent, but also with a higher RMB rate and falling orders from Europe.

What this means is that in the medium to long term, China's millions of SMEs that make up the industrial hub will have no choice but to adapt, relocate, upgrade or simply die.

A research report released in October last year by Peking University's National School of Development and Alibaba Group said that amid the current difficulties, average capacity utilisation in the delta was 70.9 per cent.

The same report said that 72.5 per cent of small businesses expected profits in the next six months to be flat or fall slightly, while 3.29 per cent expected huge losses or to go out of business.

If the current situation persists, Alex Lai who runs Charming Fashion, a wholesale fabric shop out of a five square metre stand in the same suburban village, says that he will go online to cut costs and offer different products with a value-added service. 'I make one yuan profit out of every metre of fabric I sell,' he complains. 'It makes no sense. I will have to shut down unless I change strategy.'

That's exactly what the local government wants. China's current five-year plan is explicit in wanting the country to gradually shift to a different growth model with more focus on quality and less on GDP growth. High-end, value-added industries will be favoured with tax rebates and subsidies while those offering little but cheap labour will be sidelined. Guangdong is at the forefront of this change.

The province's GDP target has been cut to 8 per cent from 9 per cent for the current five year plan and its party secretary Wang Yang seems determined to take the leap and weed out the weakest - but not without collateral damage.

'It will be an extremely volatile and difficult transition. There is a real conflict between what is written and what it means on the ground,' says Alistair Thornton, China analyst with IHS Global Insight. 'There is a real risk of massive unemployment as factories shut down, which has always been one of China's biggest fears.'

One solution for Guangdong's SMEs is to relocate inland or further out from the centre where wages are cheaper. Already, Foxconn has said that it will leave Shenzhen and move to cheaper provinces. But even that won't be easy. SMEs have complained that the supply chain is incomplete in provinces such as Sichuan that don't have the necessary logistics networks to support big export orders. Some have been there and returned, preferring to pay extra to stay close to suppliers and services.

'The transition will take time. It is difficult to say what the province will look like in the long term. But one thing is sure - it will no longer be the factory of the world,' says Mr Thornton.

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