This is China! BLOG

Inexorable China: Go West for Cheap Sneakers

The air was barely breathable when I left the confines of Dongguan’s city limits to vist the outlying manufacturing districts. Dongguan is a major manufacturing center in Guangdong province, near Hong Kong. The couple days I had traveled to some of these districts my eyes burned and my throat scratched for reprieve from the pollution. In one of the other districts the sand and grit from deforestation and the rubble that lined the avenues was making it difficult to see my surroundings through the tears. And yet Dongguan and all of Guangdong Province served as the first model for modernization opened by Deng Xiao Ping in the early 1980s. Dongguan, in particular, produces some seventy-percent of the furniture exports to the international market. Guangdong, in general, is famous as the center for production of shoes, toys, and electric appliances. Now, a substantial amount of that investment was moving westward, to China’s interior provinces, and to Vietnam.

The Hong Kong model for Guangdong has run its course. Since 2004 companies in the region have had a difficult time filling vacant positions on their factory floors. For twenty years Chinese from the poorer, rural south Chinese provinces had been flocking to Guangdong to work sixteen hours a day for little more than a dollar per diem. Hong Kong and Taiwanese investors reaped great profits from the lower costs of labor, preferential tax treatments for foreign investors, and no- or low-regulation of pollutants. Now, the people from the countryside and small towns in China are able to make more in their hometowns without the stressful environment the foreign investors provided. Despite the provincial government raising the minimum wage to nearly USD100 per month, factories are still struggling to hire enough workers to meet the production quotas they promised international buyers. Rampant pollution, crime and an ever-increasing cost of living are proving a deterrent to potential unskilled labor and to managers.

Other cities along China’s east coast are meeting similar challenges, albeit with variation: The Yangtze River Delta also sees a great deal of stress on a dearth of human resources. In the case of Shanghai, Suzhou, Nanjing and Hangzhou, though, the problem is one of high turnover rates because of a lack of skilled labor to meet the high level of foreign direct investment in high-value industries such as fine chemicals, automotive, electronics, R&D, and IT. Rising lease prices for land and factory space, and inflated salaries and costs of living are also forcing domestic and foreign companies from the Delta inland.

The Central Government has been encouraging the migration of industry from the east coast to the interior through a combination of tax incentives and regulatory prohibitions. The Government is targetting companies that do not add much value to products, that are energy- or labor-intensive, or too-polluting; companies that do not meet the broad strategic goals of the country. In July of 2007 the Central Government dramatically lowered the Value Added Tax rebate across dozens of product categories in such industries. It also restricted through steep duties or outright prohibited a range of products and components companies could no longer import from abroad.

However, in many second-, third- and fourth-tier cities in China (what I call x-tier cities), the restrictions do not apply. In Suzhou, for instance, it is very difficult now to open a new textile company, because of the amount of land such factories require to produce a commodity product. There is little problem opening such a factory in many parts of poorer Anhui province. The tax preferential treatments that foreign invested companies along the east coast enjoyed are disappearing at the beginning of 2008. Companies that move inland will be able to enjoy the same benefits for the forseeable future.

The inexorable trend toward investment in China’s rustbelt in the Northeast, its mountainous central region, and lush south-central already means a windfall for local municipalities and residents from hundreds of miles around. Already, cities like Kunming, in Yunan province in the south, and Shenyang, in Liaoning Province in the north, are benefitting from investment by the cities themselves in anticipation of greater investment by foreigners and Mainland Chinese alike. New highways, airports, sea ports and even entire cities are rising to meet the looming decade.

The implications for Western companies that invest in China’s interior include greater and less costly access to unskilled labor; a more affluent population that will benefit from the new industries in their area who will be able to buy more domestically-made products; a logistics infrastructure that will make moving products and compenents throughout China and into the rest of Asia more cost-effective than it is today.

Challenges loom ahead though, for foreign companies seeking immediate profitability in China’s interior. Corruption, cultural inertia, fluid investment policies and – in the interior, specifically – a non-existent judiciary will take investors back to China’s feudal history.

Bill Dodson
SUZHOU, China

1. Inexorable China
2. Inexorable China: Land Grabs
3. Inexorable China: Increasing Water Demands
4. Inexorable China: Increased Infrastructure Availability