17 June 2014
Qingyuan: the relocation challenge
|Lucky Industrial Group has invested in Fogang in Guangdong province.|
The Guangdong province authorities made a policy decision in 2004 to urge businesses to move their industrial facilities from the Pearl River Delta (PRD) to purpose-built industrial relocation parks in the mountainous, eastern and western regions of the province. It has now been 10 years since the Hong Kong manufacturers operating in the PRD responded to this initiative and began the process of shifting their business operations. In light of this, a Hong Kong Trade Development Council Guangzhou Office fact-finding mission set out to evaluate the changes.
During the visit to Qingyuan, a mountainous area in northern Guangdong with a population of 3.7 million, HKTDC’s Guangzhou Office analysts spoke to a number of local government officials, as well as several Hong Kong manufacturers operating in the region. The interviews with the Hong Kong companies largely focussed on the current state of their operations, the difficulties they face and the approach they have taken to tackling the various challenges posed by the relocation.
The findings of the study and their implications for Hong Kong companies are detailed below.
Profiting from Qingyuan
Qingyuan Municipal Foreign Trade and Economic Cooperation Bureau statistics show that there are some 380 Hong Kong-invested enterprises operating in the city, accounting for about 70% of its total number of foreign-funded enterprises. The actual utilised foreign investment comprises more than 60% of the city’s total. The Hong Kong investments are principally in four key sectors - textiles and garments, plastics manufacturing, electronic equipment manufacturing and real estate.
Among the first Hong Kong-invested enterprises to have now completed 10 years of operation in Qingyuan are Kingboard Chemical Holdings, Wanda Industrial (Shixing) Co Ltd, Glory Moon (Yingde) Paper Products Co Ltd and Ngai Lik Group. Since the 2009 United States credit crisis, Hong Kong companies have generally slowed their pace of investment in Qingyuan, the largest prefecture-level city by land area in Guangdong.
Initially, Hong Kong-invested enterprises tended to relocate only part of their production, particularly if it was labour-intensive, to mountainous areas. The semi-finished products were then shipped back to the PRD for final assembly, with the completed products exported through Shenzhen. When the cost of production drastically increased, however, and the industrial sites were rezoned for commercial development, Hong Kong companies had no choice but to move their production lines elsewhere. This saw many of these facilities relocated to mountainous areas, alternative provinces and even other countries in Southeast Asia. Many of the Hong Kong companies that had originally relocated just part of their production, gradually moved their entire manufacturing base away from the PRD and up into the more mountainous regions.
The subsequent development of some of these companies has proven rather reassuring. For example, Kingboard now doesn’t just produce copper clad laminates in Qingyuan, but has also diversified into hotel investment in the city. Other Hong Kong-invested enterprises – such as Simatech (Qingyuan) Industrial Co Ltd, Sitoy (Yingde) Leather Products Co Ltd, Techwise (Fogang) Circuits Co Ltd, Kingboard (Lianzhou) Copper Foil Co Ltd and Glory Moon (Yingde) Paper Products Co Ltd – are also making encouraging progress and are among Qingyuan’s leading exporters.
Inevitably, some Hong Kong companies have not fared quite so well since they relocated to Qingyuan. Many of them were badly affected by the financial crisis and the market conditions in the US and Europe, leading to a drastic drop in orders and even to the end of production at certain sites.
Labour shortages: a drag on production
Overall, Qingyuan’s investment environment has significantly improved in recent years. There has been a notable upgrade in transport facilities and general infrastructure, making it a more pleasant place to live. This is due, in part, to local government efficiency, but a number of difficulties remain. One major problem is the shortage of labour, a problem exacerbated by aggressive wage increases.
One manufacturer of moulds and machinery in Qingyuan’s Fogang county reported that a newly recruited worker earns about Rmb3,000 a month, compared with the Rmb3,000-6,000 wage of an experienced worker. Overall, piece rate workers tend to earn slightly more. A workshop supervisor, meanwhile, earns around Rmb5,000-6,000.
Another related factor is the relatively low efficiency of local workers. One Hong Kong toy manufacturer in Qingyuan, who had moved from Shenzhen, said that although its labour costs had been reduced by about 20%, this was offset by a 20% shortfall in the efficiency of local workers compared with those in the PRD. Additionally, local workers are generally unwilling to undertake overtime shifts as they prefer to lead a simple existence and the extra money does not significantly improve their day-to-day lives. As a result, production efficiency is far lower than in Shenzhen and Dongguan. When the costs of moving production into the mountains are also taken into account, operating in such areas does not appear to generate any significant costs savings when compared with operating in the PRD.
It has always been fairly difficult for Hong Kong-invested factories in mountainous areas to hire workers. In the past, some factories tried to lure workers from PRD factories with the promise of higher wages. The problem, though, is that the quality of life is not as high in the mountains and it is difficult to retain those workers that are willing to relocate. There is also a current trend for workers from a number of areas – notably Jiangxi, Hunan and Sichuan – to quit the major manufacturing centres and return to their hometowns. This has seen many of them take up employment more locally or start their own businesses.
These employment problems are unlikely to be resolved in the short term. In the long term, however, the solution is for factory operators to constantly upgrade their production facilities, with a view to replacing manual labour with automated facilities.
Meeting the challenge of change
Another problem cited by Hong Kong manufacturers based in Qingyuan is the frequent changes in the personnel and organisational structure of the government authorities over the past few years. This, they maintain, has had a negative effect on the continuity of stable policies. Added to which there are also issues over the competence of certain government officials.
Zhuang Chaoping, general manager of the Lucky Industrial Group, which has invested in the northern-central Guangdong county of Fogang, said more than half of the Hong Kong-invested toy factories in Dongguan and Shenzhen have closed since 2009 – with the situation in Dongguan being particularly grim.
Responding to the rising operating costs of manufacturing in the PRD, the Lucky Industrial Group relocated its factory from Shenzhen to Fogang, whilst also shifting some production lines further afield to Vietnam. As with a number of other companies, it has had to deal with the problems of inefficient workers and less competent officials when compared with the PRD. Zhuang said that, while most enterprises that have shut down so far are relatively small (with a workforce of just a few hundred people), medium-sized companies (with up to 1,000 workers) will be the next to go. This is largely because China’s toy industry is expected to follow the international trend of consolidating resources and making savings through mergers and partnerships.
With regard to the the mainland market, Zhuang said the purchasing power of Chinese toy buyers still lags behind that of Europe and the US, with most people buying products in the low-to-medium price range as the high-end market is yet to mature. He said the likely relaxation of the country’s family planning policy is expected to boost toy sales and, in response, his company has formed a subsidiary that is focussed on developing the domestic market.
Long-term solutions provide the answer
|Toy manufacturers are struggling to adapt to changing market conditions.|
Based on the team’s observations, the relocation of production bases can only tackle the short-term problems facing Hong Kong-invested enterprises. In the long run, Hong Kong investors have to carefully consider the following issues:
First, labour supply, costs and production efficiency. Labour shortages in the manufacturing sector are not a problem unique to mountainous areas, but are in fact widespread across the country. While the rise in labour costs is accelerating, production efficiency is falling. Given these circumstances, Hong Kong investors should carefully consider their next move. In particular, those enterprises engaged in labour-intensive export processing activities should find ways to reduce this reliance by replacing manual labour with automated and R&D value-added input as soon as possible.
Second, as industrialisation and urbanisation continue to accelerate in China, mountainous areas are expected to gradually evolve from functioning as manufacturing-based to service-oriented economies. The problems facing Hong Kong-invested factories in the PRD today, then, are likely to emerge in mountainous areas tomorrow. Hong Kong companies are, therefore, advised to plan and act in a timely fashion in order to prevent a repeat of this relocation cycle.
Third, Hong Kong companies relying on the traditional markets of Europe and the US to sustain their businesses will likely experience disruption and loss of profitability. A shift to the domestic market, however, will see them positioned in direct competition with those domestic enterprises that have grown stronger over the past decade. As Hong Kong companies cannot compete with their mainland rivals in terms of the development of market channels, mainland sales teams and knowledge of the local culture, they should not only focus on building a competitive edge through product quality, but also look to collaborate with their mainland counterparts in tapping the domestic market.
Edison Lian and Wing Feng, Guangzhou Office