Life of Guangzhou - Rising Costs Threaten Factories in PRD

Surging costs on the mainland could soon force thousands of factories in southern Guangdong province to close and encourage companies to relocate to Vietnam or other lower-cost centers, companies and industry officials said yesterday.

Some 60,000 to 70,000 factories in the Pearl River Delta region - which includes Guangdong - are owned by companies from neighboring Hong Kong, and the Chinese Manufacturers' Association of Hong Kong says 10,000 of them could close or merge in the next few months. "Costs at some of these factories have risen 30-50 percent in the past few years - 00 percent in some cases," Paul Yin, president of the Chinese Manufacturers' Association, said by telephone. "That pressure has intensified in the past 3-4 months as the yuan has strengthened, there's been a new labor law and raw material prices are rising."

Cheap labor has made the mainland the world's manufacturing base but rising wages and a strengthening yuan currency, on top of cuts in export tax rebates and stricter pollution control measures are all adding to the cost of manufacturing there.

"Profit margins are very slim because it is very difficult for manufacturers to raise their product prices. Customers in major markets like the United States are also facing a difficult situation," Yin said.

Some companies are considering shifting production to other provinces and regions like Hunan in Central China or Guangxi in the south, where there is less competition for workers and costs are cheaper.

However, Yin said labor costs are rising across the mainland. A new labor law introduced on Jan 1 that aims to protect workers makes it more difficult for companies to hire and fire workers, retain short-term workers, and it enforces overtime pay.

"Some companies might keep their base in Guangdong and open a branch in another province," Yin said.

A rising yuan, which has been steadily appreciating in the past few years, is also making the mainland's exports more expensive and analysts forecast it will rise another 8-9 percent this year.

Some companies on the mainland are looking at Vietnam as an alternative production location, including Taiwan Province's Compal Electronics, the world's second-largest contract laptop PC maker.

The company, whose customers include Dell and Hewlett-Packard, now makes nearly all of its PCs at a complex near Shanghai. But it is aiming to shift a large amount of that to a new mega complex it is building in Vietnam, with an aim of producing half of its total output there by 2013, said Investor Relations Manager Chang Chih-ming.

Another Taiwan electronics giant, Hon Hai, is also building a multi-billion-dollar manufacturing base in Vietnam in its drive to diversify from the mainland.

[More Guangdong News]