Wed, Jun 16, 2004 page12

• China's manufacturers sing Pearl River Delta blues

  EXPORT ENGINE Relatively expensive electricity and rising wages in Shenzhen, a delta boomtown near Hong Kong, are prompting some corporations to look further afield

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

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

  "Relocation could happen within two or three years if we can't contain the cost. It's primarily labor but also utilities," said Willie Fung, chairman of world-leading bra maker Top Form International, referring to his factory in Shenzhen, where wages have doubled in a decade.

  

  Chinese workers sew at a factory in the southern Chinese city of Shenzhen. Factories in the area are considering shutting up shop and relocating in pursuit of cheaper labor and lower running costs.

  PHOTO: REUTERS

  Top Form makes bras for US brands such as Maidenform. It has already started production in Jiangxi, a largely rural and mountainous province where labor and electricity cost half 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 Vietnam 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 don't 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 a 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 to 610 yuan (US$73.71) in the inner zone nearest to Hong Kong and by 15 yuan to 480 yuan a month in outer areas.

  By contrast, Top Form said the minimum wage at its plant in Jiangxi is 230 yuan and electricity costs 0.5 yuan a kilowatt, compared with around 1.2 yuan 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.

  Labor and utility costs there are 30 percent cheaper 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.

  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 and manufacturers are bracing for more severe shortages.

  US sportwear giant Nike produced 43 percent of its goods in China in 2000 but only 38 percent last year, according to data compiled by Merrill Lynch. China's share of Reebok's production stood at 51 percent last year, down from 53 percent in 2002.

  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.
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