Economy disrupts China's plans to spiff up factory hub


DONGGUAN, China — So many industrial zones cram into this area of the Pearl River Delta region, nicknamed "factory to the world," that provincial leaders not long ago came up with a scheme to get rid of some less-desirable plants to free up space.

They figured out a way to slowly weed out unwanted factories, the big energy gluttons and heavy polluters, and liberate land for higher-end industry.

"They don't tell you, 'You must go,' " said Roberto Veneziani, the Italian general manager of four appliance factories. "But they are tightening the belt little by little until you decide, 'I can't stay.' "

The aggressive plan to push the Pearl River Delta up the economic ladder, away from its past as a region of sweatshops and belching smokestacks, seemed to be working nicely until a global financial crisis erupted last month. Within the past week, several factories have gone bankrupt, leaving queues of unpaid workers. And the future seems less certain.

Over the weekend, a business federation in Hong Kong, barely two hours away by rail and car, predicted that 2.5 million workers for Hong Kong-owned companies may be thrown out of work in the Pearl River Delta in the next three months.

China said Monday that economic growth had slowed to 9 percent in the third quarter, a sharp pullback of 2.6 percentage points from a year ago, affecting the nation's exporters.

"Export growth is slowing, and some companies are running into trouble," National Bureau of Statistics spokesman Li Xiaochao said.

The sudden crisis comes at a crucial juncture for the Pearl River Delta, China's original manufacturing hub, and for this booming city of 10 million or 11 million people, primarily migrant workers, that's a grittier counterpart to the neighboring city of Shenzhen, which has blossomed from a factory boom town into a bustling metropolis with broad boulevards and the high-rise headquarters of major banking, insurance and shipping concerns as well as industrial areas.

"The leaders of Shenzhen and Dongguan told me, 'We have no more land. It's all used up,' " said Peter P.Y. Leung, the director of Hong Kong's Economic and Trade Office in surrounding Guangdong province. "If they cannot expand, they will try to improve the value chain."

"They don't want the rate of shifting to be too fast. This would affect local taxation and the labor market. The move should continue gradually."

Experts on the region said steady transformation was now at risk, however.

"Dongguan is prosperous now, but it also faces a serious crisis," said Wu Yunjian, an expert on technological innovation at the Dongguan Institute of Technology.

For much of the 19th century, Dongguan was a global source for firecrackers and for the incense that lent its name to nearby Hong Kong, whose name in Chinese means "fragrant harbor." It wasn't until 1978 that then-leader Deng Xiaoping opened the Pearl River Delta to foreign investors eager to set up factories.

The first in Dongguan was the Taiping handbag factory. Thousands more followed. Dongguan is now home to 7,000 garment factories, 3,000 shoe factories that produce 1 billion shoes a year, 3,000 toy factories and major electronics-assembly plants for companies such as Casio, Sanyo, Hitachi, Samsung, Nokia, Phillips, Kyocera and hundreds of others.

Desperate for fast economic development, Dongguan threw its doors open to just about anyone, including dirty papermaking, battery, smelting, machinery and textile plants.

In the past year — just as Dongguan and other nearby cities began to feel constraints on land and growing environmental problems — a "perfect storm" of other conditions has slammed private factory owners, including labor shortages, rising electricity prices, stricter labor laws, a steady revaluation of the Chinese currency, the yuan, and rising raw-materials costs.

Under a Jan. 1 labor law, worker grievances against factories have soared to 30,000 through September, a threefold increase from last year, said Liu Kaiming of the Shenzhen-based Institute of Contemporary Observation, which researches labor conditions in the delta.

"This has put a lot of pressure on the factory managers," Liu said.

Now, factories also must contend with a global slowdown and a drop in orders.

Earlier this month, Dongguan announced a fund of $146 million to provide loans to small and medium-sized enterprises that are feeling the pain of the spreading global financial crisis.

Dongguan and other major cities in the delta, including Shenzhen and Guangzhou, are pressing ahead with a plan to move less desirable factories to a remote area of Guangdong province near its border with Hunan and Jiangxi provinces, said Wu, the university professor.

"Taxes collected there will be divided between participating cities," Wu said.

Just how aggressive Dongguan and other cities may be in pushing out undesirable factories is yet to be seen. Communist Party leaders appear to be gauging the public mood even as they build research parks and fund technology centers to bring in higher-end business.

In March, provincial party boss Wang Yang raised a ruckus when he said that low-tech factories should move away and migrant workers should be urged to take their savings and return to their home villages to start businesses. Days later, Dongguan Deputy Mayor Liang Guoying said the city's population could fall to 6 million, suggesting that millions of workers may be sent home if the city succeeds in drawing better industry.

Factory managers are pondering their next steps. Some are considering moving their plants out of China altogether. Others say they may go to China's inland areas. Others plan to stay put.

Veneziani, the Italian manager for Delonghi-Kenwood Appliances, which employs 6,000 workers in Guangdong province, said the policies hadn't been well thought out.

"It's not so easy to move production from one place to another," Veneziani said. "A big factory has maybe 200 or 300 subcontractors. You can't move a factory if you don't have subcontractors in place."

K.K. Chung, a Hong Kong businessman whose company, Unisen, makes point-of-sales cash registers, said he'd leave Dongguan and the Pearl River Delta for a poorer inland province.

"Some of my friends moved to Vietnam. There's plenty of labor. Labor costs are lower but logistics costs are higher," Chung said.

"We are going to move to Hunan, maybe in another nine months," he said.


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