Will your manufacturer be here in April?

If you aren’t keeping up with your Hong Kong suppliers they may not be taking your call in April. Especially if the supplier is small to medium sized.

Because of a) lower available labor, b) new labor laws in China where you have to pay on time or laborers can strike, c) higher cost of labor and materials and d) reduction of export subsidiaries for “low value” and “low tech” products many Hong Kong companies may be shutting their doors after this Chinese New Year. According to an article in the South China Morning Post here are a few interesting quotes:

  1. “They (many Hong Kong businesspeople) will wait and see how many migrant workers come back, how much they will ask for in wages and how high the rents and inflation will skyrocket.”

  2. Peter Chai Kwong-Wah, president of the Hong Kong Small and Medium Enterprises General Association estimated that at least two-thirds of Hong Kong entrepreneurs will close their factories in the delta or move their businesses to other areas after the Lunar New Year.

Much of the above was taken from an article in the South China Morning Press.

So where does that leave your company?

  1. Well, living in Hong Kong I can tell you that your factory will not warn you that they are closing ahead of time. Expect that all of a sudden the email and phone and fax no longer work. One clue will be if your supplier suddenly becomes frantic about receiving their money.

  2. Some of you will start the migration to Vietnam and other places for as long as they stay cheap.

  3. Join the Chinese government in stopping the manufacturing of cheap junk and start producing higher value goods.

I would be interested to know your thoughts on all of the above.

Here is the entire article

Drastic changes have HK firms fighting to survive
He Huifeng
Updated on Jan 15, 2008

Hong Kong entrepreneurs expect this year to be toughest yet for their businesses in the Pearl River Delta and see little the upcoming Guangdong People’s Congress can do to ease the pain.

Peter W. H. Chan, managing director of Shin Ho Cable Holdings Company, who also serves as vice-chairman of the Shenzhen Enterprises Association of Foreign Processing and Assembling, says the crunch time will be March. “Whether to close down the factory, to move out or to try to survive in the delta, March will be the key time for our Hong Kong enterprises in terms of finding out the answer,” he said.

Mr Chan, a member of the Shenzhen People’s Political and Consultative Conference, says all things will be clear for Hong Kong bosses at that moment because all the after-effects of the Taiwan election, the economic downturn and the new labour law will begin to be felt.

He says many Hong Kong businesspeople are postponing their final decision about whether to stay or go.

“They will wait and see how many migrant workers come back, how much they will ask for in wages and how high the rents and inflation will skyrocket,” he said. "There is only one thing we all have confirmed. The
short-term business environment in Guangdong is getting worse for Hong Kong factories.

“If you can make a profit, just stay. If not, leave. This is what is happening in Guangdong’s manufacturing industry, and it is also the attitude of local governments.”

In the past two decades, more than 90,000 export processing firms have been operating on the mainland, with nearly 70,000 of them in Guangdong. Of those, about 57,500 owe their existence to investment from Hong Kong and employ 9.6 million workers, according to the National Bureau of Statistics.

Guangdong authorities have been spurring these factories to upgrade or move to other areas at a time when labour shortages, rising raw material
prices and new standards set by importers mean the industry’s best times are behind it.

In the hope of surviving in the delta, Mr Chan has spent years improving his products to increase his profit margin.

“I came to Shenzhen and established the factory 29 years ago, expanding my business from 26 workers to 1,800 workers,” he said.

“Now we are focusing on high-value products, like the cables for high definition multimedia interface and minimally invasive surgery.”

Large-scale manufacturers are likely to have the room to stay in the delta but small-scale ones are another story.

Peter Chai Kwong-wah, president of Hong Kong Small and Medium Enterprises General Association, says there is a rising trend of Hong Kong factories leaving the delta. Heavy taxes, the roll-back of tax rebates and the new labour law are most to blame for the worsening manufacturing environment, he says.

From July 1, the central government cut or eliminated export tax rebates for 2,831 commodities, representing 37 per cent of the total number of items listed on customs tax regulations.

The government also said that the cost of producing the 2,831 commodities would increase as a result of the changes to the export tax rebate regime. The aim was to shift capital investment towards other “high-value-added and hi-tech” industries.

The new labour contract law puts greater emphasis on protecting employees and will also increase the labour costs of most Hong Kong-backed enterprises. “The labour law will be a big blow to us since workers can leave our factories anytime and go on strike,” Mr Chai said.

“The official corruption, the new tax and labour regulation changes come together to snatch away our poor profits. More than 10 per cent of association members told me they had no defence any more and planned to close down their factories in Guangdong.”

Mr Chan estimates that at least two-thirds of Hong Kong entrepreneurs will close their factories in the delta or move their businesses to other areas after the Lunar New Year.

“Only 30 per cent, those with liquid funds or high technology, can survive and upgrade their business in the delta,” he said. Both Mr Chan and Mr Chai say the hard reality of relocation and closure of Hong Kong enterprises is exactly what the government wants.

The presence of several tough policies and rules last year represent the government’s attitude towards Hong Kong manufacturers who once
made a great contribution to the economic development of the delta, they say.

They also do not expect the new provincial party chief and the people’s congress to solve their business problems. They say the government has already fixed its plan and there is almost nothing Hong Kong businesspeople can change.

They hope mainland governments can consult with Hong Kong, Taiwan and foreign investors next time before launching these kinds of far-reaching policies and laws.

“I hope more young elites, who are open and familiar with our businesspeople, can be brought into the provincial people’s congress,” Mr Chan said.

“The more changes we adapt to and the more we can understand the governments, the less pain our Hong Kong enterprises will suffer.”

These two Hong Kong manufacturers have struggled in the delta for dozens of years and have heard many stories from their peers about ups and downs in the industry.

Mr Chan has already set up his high-end product factory in Suzhou while Mr Chai is still deciding whether to stay in the delta or move his factory to Vietnam. Mr Chai says he will arrange for some members of his association to visit Vietnam.

“Two members have set up 2,000-worker factories there,” he said.

“The members told us the price of living and labour and preferential duties in Vietnam were just as wonderful as the Guangdong of 20 years ago.”

Copyright © 2008 South China Morning Post Publishers Ltd. All right reserved

I know there are people here who can discuss higher topics than a) how does my portfolio look and b) which graphics card works with Solidworks.

Can we have a little more strategic discussion?

While the initial loss of the above manufacturers will not have a huge effect on us, the trend by China to move up the value chain, even if they have to force Hong Kong to follow or get out will ultimately have an effect.

Will it mean that the low price phenomenon is finally decreasing? Will we finally be making the quality products we say we want to?

Will this make it more difficult for designers and inventors to start their own product lines from the ground up?

What else may happen?

I’ve always heard that china staying the cheap manufacturing mecca would eventually get overturned as their economy gets better and the workers start demanding more pay, etc… I think what it could do is to help spur some manufacturing to come back to the US but not for cheap products but for quality. We have the brains over here. Made in the USA could be the trademark for exceptional quality the way Made in Taiwan used to mean cheap junk 20 yrs ago since we still couldn’t compete with them on price unless the dollar goes completely belly up.

I have heard the same thing Skinny, but have been waiting for that to materialize or see what form it may take.

I remember reading an article about two years ago or so that was mentioning some European companies that were bringing some of their
machining work back to the US (Wisconsin I think).

Will be interesting to see how this develops.
Are we going to see orders spontaneously not being filled and tooling being lost entirely?

Similar to the Hong Kong businesses, this could have a terrible effect on small companies that use the small and medium sized manufacturers, where as larger companies may be better equipped to handle this type of set back and bounce back.

increased material and labor costs.
increased fuel/transportation costs.
tightening US economy.
fall of the dollar.
blow back concerning product safety and recalls.
carbon footprints and manufacturer’s need to be transparent.
degradation of the working class in the US (and thusly hungry for opportunities).

A lot of those factors made it less attractive to outsource, no?

How can a company like American Apparel be successful? vertical integration. In an industry that was a staple of off shoring, they re-evaluated the business of making garments and found a nice spot to operate in, while being socially progressive (regardless of the owners…um…idiosyncratic behavior).

Look at Boeing’s woes last week. They have to delay the 787 9 months because a vendor (apparently Italian) wasn’t on task. Now I can’t imagine its even possible nor ideal to try and make every part of a 787 on the south side of Chicago, but its an example of the complexities of global mfg.

If I was in a position to chose a direction for a company’s manufacturing I would defiantly question the long term viability of off shoring. It doesn’t mean you can’t make some good business decisions regarding you mfg locations, but I think the days of the easy “Just send it to China” are coming to an end.

local is the future? less crap, more quality? return of the importance of craftsman + technology? The whole industry (not to mention geopolitical world) is on the verge of some major changes.

just my $.02

I just heard that a major company is re-entering an abandoned market that went to China about 10 years ago, then went to Vietnam (because of anti-dumping duties in the US) because the suppliers there are getting their asses kicked by everything mentioned in the article.

I think the climate is beginning to shift. I think toys and electronics will still probably come out of China for a long time, but some other categories may come home.

It will be an interesting year…

People have been talking about RP in a MFG setting for a while now. How does that technology (not in its present form, but in its potential) change or facilitate change in the global Mfg landscape?

There is a market for product manufactured in the USA. I think some of the recent recalls may further open consumers to “made in the USA” as a viable sales tool.

The article is very interesting. Some of our clients have plants in Taiwan and China.

made in japan, made in taiwan, made in mexico, made in china…
made in africa?

Yea! Strategic discussions. Now this is exciting. keep it coming.

I have also heard of a major US brand that has said their next plant will not be built in China but in the US.

Europeans - have you been less affected by this. I have noticed an increase in French expats in Hong Kong. Does this mean you are in the process of moving more manufacturing to China?

china won’t go away obviously.
i’ve had it in my head that things have become way too out of balance over the last few years (trade deficit) and that we really needed to see a evening out of things. China has done some great things, in many areas they are the go-to, not b/c they are cheap (that helps) but b/c they have built an expertise. Yo or Richard might chime in on this as I look at footwear as one of those areas. There was an interesting article in the last I.D. (think that was the one) about Camper, an Spanish shoe brand. When asked why they don’t use Spanish craftsman he simply replied that they would be crazy to, the Chinese quality is too good.

There will always be low cost labor, but maybe it won’t be nation specific anymore.

Does globalization mean one world government, the fall of nations and the rise of cities?

just talking out loud.

Holy interest rate cut Greenspan
( I know it was Bernanke, but c’mon which sounds better here?)

Yeah, just saw the 3/4 point interest rate change.

Actually China was hoping for a US downturn, only because it would bring external pressure on cooling their own overheated economy. They have been less than successful on internally cooling their economy.

My main concern is companies (like mine) taking the path of least resitance to save a buck. Instead figuring out how to fix the problem, we jump ship to who can produce our product for the cheapest $. We have replaced product that was sourced in China to other countries (Vietnam, India and Brazil).

How can I fix the mentality of prioritizing saving a dollar over quality?

I think you’ll find that there is a huge population of small to med sized business who do the same thing. Some of its follow the leader, other times people looking at a spreadsheet see a huge difference on a line item like labor and get all excited.
Do you know if they have taken a hard look at the true cost (not just tooling and piece part) of what they mfg?

If there is ever a tax or tariff on carbon it very well may swing the economics of some of this stuff.

An update to the story:

Cheap labour dries up, workers get picky
Fiona Tam
Jan 24, 2008

The once cheap and seemingly inexhaustible supply of migrant labour from rural China is now a thing of the past as workers in the Pearl River Delta become more selective about the factories they work for.

The populous delta region is experiencing a shortfall of about 2 million workers, 10 per cent of its total migrant workforce. Many manufacturers now have to raise salaries and improve working conditions to keep their workers.

“Employers now have to pay about 1,600 yuan [a month] to hire an assembly worker, provide free accommodation and social insurance,” said Xu Songyuan , a manager at a Dongguan clothing factory. Two years ago, hiring a migrant worker there cost only 800 yuan a month.

About 15 per cent of orders in Mr. Xu’s factory have been affected by the labour shortage. He estimated one-fifth of his 600 workers would leave for the Yangtze River Delta region after the Lunar New Year.

Some employers even bought return train tickets for workers who went home for the holiday, in an effort to ensure they returned. They also increased leave from seven to 13 days to avoid workers quitting because of insufficient traveling time.

Billboards outside a job centre in Houjie township in Dongguan were plastered with leaflets advertising thousands of openings at local factories a month before Lunar New Year.

The town, with 300,000 assembly workers and 37 industrial parks, is a national manufacturing hub in footwear and furniture. But factories have been hiring sooner in an attempt to ensure they have more workers for the coming season.

Facing harsh competition, recruiters from Taiwanese contract electronics manufacturer Foxconn raised monthly salaries for assembly workers from 700 to 750 yuan and raised the hourly overtime wage in the holiday period 1 yuan to 13.47.

“We provide free uniforms, laundry service, dormitories with hot showers, transportation and compulsory social security. Workers can earn a maximum of 22,000 yuan a year with overtime,” said a Foxconn employee in charge of recruitment.

Local manufacturers use offers of guaranteed on-time pay, free facilities and subsidised accommodation to attract workers. But alluring offers provided by employers from inland cities can be even more attractive.

For example, a furniture factory in Shijiazhuang in Hebei province offers as much as 2,000 yuan a month for skilled carpenters. The amount is enough to hire a fresh graduate.

“The situation whereby young and eager workers poured in, desperate for work, no longer exists,” a recruiter from Dongguan Excelsior Technology said.

He said smaller factories were the hardest hit. Their factory of 3,500 workers had to raise its base pay by 40 yuan to 720 yuan.

Migrant workers now have bargaining power but many are choosing to leave the low pay and often miserable conditions in the Pearl River Delta nonetheless.

Cui Yunxia , 23, said the high cost of living in Dongguan stopped her saving money. She works six days a week, 11 hours a day and earns about 1,500 yuan a month. She lives in a factory dorm with 15 other workers.

Ms Cui expected offers in her home province of Henan would match her current wage and allow her to live closer to her family.

Wage pressures caused by the current shortfalls undermine the Pearl River Delta’s reputation as the world’s leading low-cost manufacturing centre. Mainland media reported that more than 1,000 factories moved out of Shenzhen and Dongguan last year.

Many manufacturers operate on thin profit margins and can’t raise salaries greatly.

Leung Ka-iu, 52, has decided to move his footwear factory to Vietnam next January, after operating his business in Houjie town for 18 years. He paid out millions of yuan to compensate 400 dismissed workers he had hired last year.

Mr. Leung said his business, with an 8 per cent profit margin, could not afford the soaring costs.

Copyright © 2008 South China Morning Post Publishers Ltd. All rights reserved.

I think this is will have some impact, but not too much. Honestly I am not surprised. From my time in China this was expected and a long time coming in one form or another. You see people have been telling me the Delta is just congested, expensive and a poor place to work in.

Many manufacturers that I know are actually moving out of the Delta into areas up north like Nanjing. The air is fresher and government incentives are better. China is a damn big place, and we should not let ourselves to think everything is made in the delta. So in my mind manfacturing will stay in China for a long time.

I can’t help think if this is a ploy to weed out the weak in the Delta. It is just too over crowded.

One one hand as China head to the Olympics, and being in the WTO the work conditions have to improve. China wants or needs to show the world that they are that great of a country.

But on the other end I believe the larger, well equipped and better managed factories will survive this. Not only that, western companies would or should be working with these companies anyway. Thus my thoughts is the impact will not be that great, but the cost will go up.

It will be interesting to see how the smaller satellite industries will be affected as these are the “real” factories that support the larger ones. These smaller factories often support by providing components.

The upstream effect is costs of products will go up. I do not doublt that many factories (such as garments) have planned to or already moved operations to Indochina instead. I for one never saw china as cheap, and this will change perceptions. Also as a result of the bottom line moving up, western companies will start to rely more on design, innovation, marketing and branding to make a difference. To me as a strategic designer this is damn good news!

Europeans will not be affected at all due to the eastern European countries and the tax system making it advantages to use eastern block to manufacture stuff.

You know one of the great things about this forum?

Because I posted here I am meeting another forum member, who is traveling here from the US and we are going to further discuss the above issue in person. His company sent him here to develop a strategy of dealing with the above problem.

It is great to talk in a virtual way but it is great to have a meaningful discussion in person.

Hey TimF

Let us know what strategies you and him come up with! It will be interesting to compare stories and ideas.