Friday, February 29, 2008

DONGGUAN, China — Outsourcing has hit the hub of China’s Pearl River Delta, with soaring costs pushing the world’s longtime workshop for low-cost goods to move its factories overseas.

Rising raw material and energy prices, the strengthening of the yuan against the dollar and new business regulations are forcing labor-intensive factories — particularly those in the footwear, toy and clothing industries — to hunt for rock-bottom production costs elsewhere.

Many are choosing to move abroad to low-cost countries such as Vietnam and Indonesia, while others are seeking cheaper places to do business in China.

Chinese exporters are also raising prices, threatening the supply of cheap products to the U.S., from laptops to teddy bears.

“Higher raw material prices and a stronger currency are pushing up prices for the U.S. consumer,” said Ben Simpfendorfer, an economist with the Royal Bank of Scotland in Hong Kong.

“Factories are passing on the higher costs. Export prices started rising in 2005, especially for individual traders from the developing world. However, large multinationals are now also accepting higher prices [from Chinese suppliers],” he said.

A year ago, Guangdong province just north of Hong Kong was home to around 6,000 shoe factories.

Since then, 1,000 mostly small- and medium-sized companies, which accounted for 10 percent to 15 percent of the province’s total production capability, closed down, according to the Asia Footwear Association.

About half moved to inland areas in China, where wages are lower and local governments have more tolerance for heavy polluters. Another 25 percent relocated to other countries in Asia, most notably Vietnam and Indonesia. While the remainder went out of business.

Hong Kong business associations are predicting more than 10,000 factories will disappear from the region over the next few months.

The trend follows a concerted effort by the provincial government to develop more advanced technologies in line with Guangdong Party Secretary Wang Yang’s call for “thought liberalization,” official lingo for the need to tear off the province’s unwelcome “factory of the world” label and export higher-value, low-polluting products.

Last year, the central government removed tax rebates on hundreds of low-cost products to address the yawning trade surplus that irritates China’s chief importers and encourages companies to adopt more innovative approaches to business.

China’s decision to abolish the yuan-dollar peg in July 2005, and instead tie it to a basket of currencies has also driven up costs to American customers as the dollar declines in value globally.

When it was pegged to the dollar, the exchange rate was 8.28 yuan to the greenback. Over the past 2½ years, the yuan has gained value, with a dollar now worth about 7.1 yuan.

Small- to medium-sized enterprises operating on slim profit margins in Guangdong have been the first to fall, the final blow coming in the form of a new labor law that came into effect on Jan. 1. The tougher rules designed to protect workers’ rights have increased labor costs by as much as 20 percent, industry officials say.

As many as 15 percent of Taiwan-owned factories have moved out of Dongguan, a major production base for footwear and furniture, in recent months, said Zhang Xifan, vice president of the Taiwan Merchant Association in Dongguan, a region of Guangdong province.

“The business environment has been very bad in the [Pearl River Delta] because of the rising prices of raw materials and tense competition, and the labor law has made it worse,” he said.

The manufacturers sticking it out in Guangdong are raising workers’ salaries to comply with local regulations and to tackle a labor shortage that has hampered production for the last two years.

“Labor costs are getting high and this is related to the new labor contract law. We have increased wages by 20 percent since the end of last year up from 1,200 to 1,500 yuan [$170 to $210] a month,” said Taiwanese businessman Robert Luo, who owns a shoe material manufacturing company in Dongguan.

Minggao Shen, a Citigroup economist based in Beijing, believes the trend of labor-intensive factories closing in Guangdong is necessary for China’s economic maturation.

“China can not keep all its firms, particularly those high-polluting ones. These factory closures are expected. Otherwise how can China improve the quality of its growth?” the economist asked.

“Even with the increases, China’s labor costs are still only 5 percent of those of the U.S. South Korea’s labor cost compared with that of the U.S. was at 5 percent in 1975, but 30 years later it was 50 percent. The question is how long will China take to reach the 50 percent mark? Because of the country’s size, I think it could take 60 years.”

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