PRD factories move inland for cheaper labour
(China Business Weekly)
Updated: 2004-06-21 14:03

Factories in the Pearl River Delta, the heart of China's export engine, are considering shutting up shop and relocating in pursuit of cheaper labour and lower running costs.

But the shift is not going to silence global critics who have blasted China for poaching jobs from the United States and elsewhere, because many of the factories are not leaving the country, just the province.

"Relocation could happen within two or three years if we cannot contain the cost. It's primarily labour, but also utilities," said Willie Fung, chairman of world-leading bra maker Top Form International.

He was referring to his factory in Shenzhen, where wages have doubled over the past decade.

Top Form International makes bras for US brands such as Maidenform. It has already started production in Jiangxi, a largely rural and mountainous province where labourer and electricity cost half of what they do in Shenzhen, a delta boomtown near Hong Kong.

Hong Kong-listed Yue Yuen Industrial Holdings Ltd, the world's largest shoe maker, is also moving production inland, and global brands such as Nike and Reebok have even switched some manufacturing contracts away from China to places like Viet Nam in pursuit of ever lower costs.

"We do face rising costs. They are rising slowly, but surely," said Paul Yin, vice-president of Hong Kong's Chinese Manufacturers' Association.

"Many of our members are talking about moving, although I do not know any who have made the move," Yin said.

Southern Chinese factories, mainly located in Guangdong's Pearl River Delta region near Hong Kong, exported US$150 billion worth of toys, textiles, electronics and other goods last year -- about one-third of the country's total.

To many observers, the delta's grip on global manufacturing is reminiscent of Manchester's dominance in the 19th century, but that could be on the verge of changing.

Manufacturing is the region's lifeblood. Glitzy hotels serving visiting executives dot a landscape dominated by factories.

Residential housing is scarce. The area's 23 million migrant workers often share dormitories distinguishable from the factories only by the factory uniforms hanging outside windows.

Shenzhen, which has China's highest minimum wage, raised its minimum monthly pay last month by 10 yuan (US$1.21) to 610 yuan (US$73.71) in the inner zone nearest to Hong Kong, and by 15 yuan (US$1.81) to 480 yuan (US$57.83) a month in outer areas.

By contrast, Top Form International said the minimum wage at its plant in Jiangxi is 230 yuan (US$27.71), and electricity costs 0.5 yuan (6 US cents) a kilowatt compared with around 1.2 yuan (14.4 US cents) per kilowatt in Shenzhen.

The firm hopes a move inland will help it retain skilled staff. Turnover among migrant workers at its Pearl River Delta plants is high and new staff take five months to train.

Yue Yuen, which makes shoes for Nike, Reebok and Hush Puppies, also plans a production base in Jiangxi.

Labour and utility costs there are 30 per cent less than in the Pearl River Delta, and new roads have halved transport times to southern China's Yantian Port to around six hours, said Terry Ip, the firm's head of investor relations.

Cheaper places?

Tight energy supply and rising wages are prompting some cost-conscious corporations to look further afield.

Half of China was plagued by brownouts -- managed electricity cuts -- last year as power firms failed to meet demand. Manufacturers are bracing for more severe shortages.

US-based sportswear giant Nike produced 43 per cent of its goods in China in 2000, but only 38 per cent in 2003, indicates data compiled by Merrill Lynch.

China's share of Reebok's production stood at 51 per cent last year, down from 53 per cent in 2002.

South Korea's Samsung Electronics Co Ltd said this month it might move microwave oven production from China, where it faces competition from low-cost Chinese rivals, to Malaysia or Thailand.

But the Pearl River Delta, within a few hours' reach of two of the world's largest container ports and four international airports, is likely to remain the world's workshop for the foreseeable future.

"China has grabbed a huge share and it will keep that -- the changes are at the margin," said Jeanine Angell, analyst at Merrill Lynch.

Also weighing in the delta's favour are business-friendly government officials and the prospect of more investment as US trade quotas on Chinese-made textiles are lifted in 2005.

"What we're going to see is the Pearl River Delta move up the value chain and the low-end stuff will move out," said Stephen Frost, a research fellow at City University of Hong Kong.

Frost hosts the Asia Labour News website.