Walmart and the Pearl River Delta

Okay for any of you who do not know - The Pearl River Delta are the industrial cities in mainland China that are north and west of Hong Kong.

The factories in the Pearl River Delta (PRD for short) were almost entirely created to meet the needs for cheap consumer products that you will find on the shelves in Walmart (and most other mass market stores). In the late 80’s and 90’s these were inexpensive but labor intensive products that could not be made cheap enough in the US and Europe. This is what allowed this area to build itself up to be the manufacturing powerhouse that it has been.

Living in Hong Kong I have seen the reports about labor rates going up in this area and that there is actually a worker shortage which is further driving up labor prices. I remember in the 90’s labor did not even show up on the bill of materials because it was so small. Now it is showing up and quickly making cheap products more expensive. The labor shortage is also not helped because workers are not returning to the factories because they are owed back wages, in some cases years worth, by the factory workers who have fled with the money. There are also abandoned factories in the PRD as they can no longer be competitive.

So how much longer can the PRD remain as the low cost producer for mass merchants? And what does this mean to the cheap products markets in the US and in some cases Europe?

Lets discuss.

hopefully not long and i hope everything gets expensive so people understand the value of true labor.

I work for a factory that’s in the PRD and I have seen this phenomena first hand. Because of the rapid growth in the area the labor market is overheated. The supply and demand for high quality managers has driven a 200% increase in wages. The good managers can name their own price. We’ve been looking for a high level plastics engineer for FOUR YEARS!!! They jump jobs every 6 months - which ruins any chance for a stable work environment. Those people that do stay are over-stressed by the break-neck pace. Even the factory workers are jumping jobs to find the best living conditions (dorms & food).

Now PRD factories are starting to build new factories further away from Shenzhen in an attempt to find a cheaper, more stable labor force. I don’t think Shenzhen will become a ghost town anytime soon, but empty factories are starting to appear…

I’ve seen the whole life cycle during the last 20 years. The rise and fall of the PRD. Classic economics. This is a Harvard Business Review case in the making!!

Want to rent a factory?

I’ve been in a few conversations lately (beginning in late January) with people who tell me that China is rapidly losing the low cost manufacturing marekt to India and that in Shenzhen and Guanghzhou maybe as many as 1/3 of the factories are now idle as a result. I can’t substantiate this from personal experience. I haven’t seen it with my own eyes - and I haven’t really had time to investigate it online, but I think it ties into the thread that Timf has started. one-word-plastics is probably right, Shenzhen won’t become a ghost town anytime soon, but I’d be interested to know how serious this situation is right now.

some older engineer friends at IBM sometimes used to talk about the days before China became a big industrial center… they used to do almost all manufacture exculsively in Brazil.

granted, it was probably more big mainframes than consumer pcs and products… but it sounds similar to what your talking about.

Anybody know why Brazil became a bad envirnment for manufacturing?

Japan, then Taiwan, then Hong Kong, then China became cheaper.

I started a project in the late '80’s that saw three different countries before we shipped the first part.

Chasing the cheap labor!!!

hopefully not long and i hope everything gets expensive so people understand the value of true labor.

Ah, the value of labor.

I predict a time that labor will even out in 15-20 years. That will be the determinator of work.

From my perspective, Start with a fishtank that has two partitions. One side full, the other side empty. Make a small hole so water flows from one side to the other. Eventually, the tank willl have two sides with even amounts of water.

Labor may even out, but its value will continue to decrease as automation becomes increasingly available and affordable. If anything, this volatility may spur the automation market.

i think before automation becomes affordable and availabe in most sectors there will be a giant halt in manufacturing due to lack of labor.

we’re already begining to see that happening in automotive sector. turning to robotics, closing factories, and therefore halting increase in manufacturing.

it will also affect design because the competition relies on shortcuts that save on manufacturing time hence resources like energy, material, shipping, packaging, etc.

there’s gonna be a conflict in mainstream products which tap on high end to boost their sales.

so think pure and simple design with less parts and lines, bumps, creases, or curves!

I saw a new term used the other day

Fourth-party supplier

This was used to describe the services provided by an outside vendor to track split seconds and larger gaps of time in the chain of manufacturing.

They -the vendor- were promoting their services as something Six Sigma and Lean Sigma activities leave out. I found it interesting that a vendor was making money offering a service that Six Sigma and Lean consultants might have “forgotten”.

Automation is a bare minimum requirement for a lot of MFG processes. For a full factory to out of business overnight probably means that the factory was pretty wasteful by not meeting the bare minimums of effiency.

I tried to find the specs on a capacitive pnp proximity sensor three weeks ago on a small automation project. I found it tough to go on the internet at my location since there was not a needed character set on my computer. The sensors, PLC equipment, and technology is right there in the delta Isn’t it? My sensor did not indicate which city in china, but I know that the automation is there.

Automation has already had an effect on where products are manufactured. Canada has always depended on commodity products, and was hurt bad by the rise of low cost manufacturers and the reduction of trade barriers. However, I’ve heard some surprising stories of late.

One manufacturer of plastic utensils has a 80+ cavity mold and fully automated packaging line. His profit margin is the cost of shipping from China. Another manufacturer in Canada’s rust belt, makes wheel weights (to balance tyres). They too have a mold with something near 100 cavities. They too have an automated packaging line. Basically, their profit is the cost of shipping from China.

I think we are at the begining of a new trend that will result in near 0 labor cost. After all, the word robot does come from the Czech word for slave.

As for a reduction in industrial output, that may very well happen for any number of reasons (social change, environmental change, etc). However, capitalist markets always adjust and in the typical western salary, there is room enough for commodity price increases while maintaining the current standard of living.

I like the fish tank analogy and its very true.

I’m not so sure about becoming soo expensive that it becomes prohibitive. I think is has to do with the area and levels of support. As well as the job scope required.

Shenchen is known for its finished goods and oems, wheres up north in the GuangZhou, they are more in a component level. So therefore it makes sense when you are focusing on finish goods you require a little more expertiste which there are currently a little short off at the moment.

My company has a factory in GuangZhou area, its not for a shortage of engineers increasing the cost, but the problem is getting the engineers to work in the PRD areas raising the costs. Most of them want to work in big cities like hongkong and shanghai, so getting them there requires some kind of infracture support. like housing and food. However once the area develops a little more with somesort of surrounding life, it would be more appealing for engineers to go there.

But in general, skilled blue collar labour for say assembly lines or product painting is still very cheap.

Lingmiester - True, but talking to the Hong Kong engineers that work in Dongguan, they are living a dangerous life. I have been told that they cannot walk the streets because they will be robbed. They are easy targets because they understand the language and the mainlanders know they have more money.

“Labor Shortage in China May Lead to Trade Shift” a good read here:

Labor Shortage in China May Lead to Trade Shift - The New York Times - link to a NYTimes article. Use to get login id if signing up is too much of a hassle

I have heard of GuangZhou described as the Ohio of China for it’s manufacturing ability. Is that an accurate description? High Tech with moderately educated workforce.

I don’t think I would use high tech and Guangzhou in the same sentence.

I interviewed for a job there 12 years ago and did not take it. I would have worked with 75 technicians and 5 engineers I was told. It would have been a reverse engineering job taking 15-20 year old GE X-ray machines apart and making them function again.

Alost like Robot-Wars meets MTV’s Real World

This could have possibly turned into a full medical product design company however the safety requirements and red tape meant the machines would never have sold well internationally. Maybe long term, but not in the short term.

Interestingly a very good friend took the position but only lasted until his boss went into a second bankrupcy
Earlier in the week, Bruce Nussbaum blogged the China-labor situation on BusinessWeek’s site. The two most salient comments/observations he made on the subject were “Already low-value manufacturing is leaving China for Vietnam and elsewhere.” and “China’s economy is booming and the demand for blue and white-collar labor is off the charts.”
This is a link to one of the (short) articles Nussbaum used for reference in his blog. It’s about recruiting labor in China. Pretty interesting - especially the observation about China’s job market being very immature and professional ethics being equally immature. The article cites these issues as contributing factors to the high job turnover rate in China along with strong desire to live in a tier one city (Beijing or Shanghai) and growing ambitions to earn higher wages.

Maybe the most interesting comment of all however was when Nussbaum wrote “China needs to innovate to get to the next level.”

Quite true., one of the big problems of china is this gread divide between the haves and have nots…the other big reason, is if there is an engineer with such skills, he/she is likely educated middle to middle upper class, and very likly wants to live a better life.

Lots of trade journals tend to have obscure numbers on their statistic sources. I must say that I tend to take those numbers as “half-truthes” most of the time.

However, when the story is repeated there must be a trend of some sort going on.

So-goes, I read that 330,000 Chinese scientists and engineers graduated from universities in 2005. Only 60,000 american scientists and engineers graduated in 2005.

Obviously, there are over a billion people in China so it follows a likely logical proportion plus tie in the MFG Boom and voila a need for talented people.

Sounds like getting a sweatshop wage is not cutting it at the rinky-dink manufacturers and it doesn’t cut it at any other place on the planet. Good for those engineers moving to a better wage. The State Censored Maoish news might be telling the truth on this report