As labor costs rise, more factories shutting down in manufacturing center

By Liu Tian in the Pearl River Delta Source:Global Times Published: 2016/7/13 19:38:16

The Pearl River Delta has been one of China's major manufacturing centers for decades. But the region's factories have been struggling under the weight of rising labor costs and other factors that have made it harder for them to make things in the region. With the struggling global economy, they have been receiving fewer orders, making the rising costs even more difficult to bear. Consequently, many companies have closed factories in the region to move inland - or outside China. The Global Times recently visited five cities in the Pearl River Delta - Shenzhen, Dongguan, Huizhou, Foshan and Zhongshan - to learn why its manufacturers have been moving out. This is the first in a series of four reports about the Pearl River Delta.

The entrance to the shuttered factory of Philips Consumer Luminaires Manufacturing (Shenzhen) Co stands closed in Shenzhen on July 3. Philips, the world's largest manufacturer of lighting equipment, closed its Shenzhen factory at the end of May. Photo: Liu Tian/GT

Facing rising labor costs and a sluggish global economy, many manufacturers in South China's Pearl River Delta (PRD) region have been struggling and may soon shut down if the situation doesn't improve.

In a factory in Dongguan, South China's Guangdong Province, general manager Luo Xulong has watched as orders have continued to decline of late. Luo's company, Dongguan Yi Long Electronics Co, employed 40 workers in 2015, but has since cut its staff to about 20.

Luo said he may need to lay off even more if no new orders come in.

Still, Yi Long Electronics is faring better than many of its neighbors.

Despite its shrinking staff, the company has become one of the largest manufacturers in the town of Fenggang in southeastern Dongguan.

"That's because many of my peers have gone bankrupt or moved," Luo said with a wry smile.

Many electronics manufacturers in Dongguan have declared bankruptcy over the past year, said a company manager surnamed Yang.

"Low product prices have left the bosses unable to feed their workers," he told the Global Times on July 2.

Yang is one of those bosses. He had his own electronics factory a year ago, but had to close it down and take a job as a production supervisor in Luo's company.

Closures and relocations

It's much the same story across the PRD. In Shenzhen, one of China's manufacturing powerhouses, closures and relocations have grown common.

Shenzhen Fuchang Electronic Technology Co, a first-tier supplier for China's electronics giants ZTE Corp and Huawei Technologies Co, announced its bankruptcy in October 2015.

At the end of May, Philips Consumer Luminaires Manufacturing (Shenzhen) Co also announced to close its Shenzhen factory.

Both stories got a lot of attention and sparked concerns about the plight of local manufacturers.

At the industrial parks the two companies once called home, advertisements offering factory rental space covered many of the walls.

"Many big factories have moved over the past year," a leasing agent surnamed Liu told the Global Times on July 3.

Many have moved to areas surrounding Shenzhen, where production costs are lower, Liu said. Some have even moved to Southeast Asian countries such as Burma.

In the Shenzhen Huaqiang North Commercial Circle, the home of China's largest electronics market, commercial tenants told the Global Times that nearly 70 percent to 80 percent of the businesses there were running at a loss.

"Many tenants have moved out of the area," Chen Wei, a business owner, told the Global Times on Monday.

"My store is only half as profitable as it was in 2015. And in 2015, it made only half of the profit it made in 2014," he said.

In the Pearl River Delta city of Foshan, manufacturers are also struggling.

In Foshan, the number of garment makers has plunged in recent years, said Wu Haoliang, secretary-general for the Foshan Textile and Garments Association.

"There will be another big wave of bankruptcies this year," Wu noted.

Clothing production is a pillar industry in Foshan. The garments made in the city account for about one-fifth of the total clothing production in value in Guangdong.

Soaring costs

It makes sense that manufacturers in the PRD are getting squeezed, said Liu Guohong, director of Department of Finance and Modern Industries at China Development Institute in Shenzhen.

"Labor, land, rent, raw material and financing costs have all soared," Liu told the Global Times on July 4.

Luo, the general manager, has felt the pain.

"My labor costs have nearly risen 35 percent to 4,000 yuan ($597.83)for each person per month this year. In 2015, it was just 3000 yuan," he told the Global Times on July 5.

Meanwhile, Luo's company had to lower the unit price of the mobile phone data cables it makes by 2 yuan.

China's labor costs have jumped fivefold over the past 10 years since 2005, a Deloitte report released on July 2 showed.

At the same time, there is cheaper, younger labor in India, according to domestic media reports.

The proportion of China's population between 15 years old and 39 years old will fall to 28 percent in 2030, down from 38 percent in 2013, according to the Deloitte report.

The other major problem for domestic manufacturers has been the tepid global economy.

"The slumping international market has hurt the traditional build-to-order model that is prevalent in PRD manufacturing," Liu said.

China's exports declined by 4.2 percent year-on-year in the first quarter of 2016, according to data released by the General Administration of Customs in April.

"Besides, low-quality products can't meet strong domestic demand, even if there is economic slowdown," Liu said. "This also makes it difficult to revitalize the domestic manufacturing industry."

Moving out

The rising cost of labor and other factors have made many manufacturers consider moving their factories outside the region, or even outside the country, according to media reports and the interviews with local manufacturers.

But Fan Youbin, CEO of Everstar, a Foshan-based custom-tailored clothing manufacturer in Guangdong, was more optimistic. Fan doesn't think manufacturing will flee the PRD. After all, there is still plenty of market demand that can support local manufacturing.

"But there will be some hollowing out of manufacturing in local areas," he told the Global Times on July 7, noting factory owners may transfer their plants to places where costs are lower.

"This kind of transfer may take place both inside and outside the Pearl River Delta," Fan said.

He would know. Fan already moved his major factory to Central China's Hubei Province.

Wu, the secretary-general in Foshan, was less optimistic.

"The manufacturing industry will continue to undergo structural changes over the next few years," he said. "More small manufacturers will disappear."
Newspaper headline: Leaving the PRD

Posted in: Insight

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