Tom Mitchell in Dongguan

FACTORIES FACE SURVIVAL OF THE FITTEST

At its height, the Changdeng Shoe Company employed 7,000 workers in the eastern
district of Dongguan, a manufacturing centre in China’s southern Guangdong
province. Today the company’s factory compound is a ghost town, populated by
only a few dozen bored security guards, ground keepers and technical personnel
overseeing the dismemberment of its assembly lines.

In a communal area surrounded by Changdeng’s abandoned worker dormitories, a
beauty salon, table-tennis room and medical clinic have been stripped bare. A
notice for an auction, held last December, invites anyone interested in the
factory’s five cars to come and bid.

“The Taiwan boss was in his 70s and wanted to get out of the business,” said
Pang Wei, as he gave the Financial Times a tour of the compound. “He has gone
back to Taiwan.”

Mr Pang, an entrepreneur based in the nearby provincial capital of Guangzhou,
paid Rmb10m ($1.4m, €943,000, £711,000) for Changdeng’s capital equipment and is
re-selling it to other manufacturers. At the factory, technicians supervised the
removal of sewing tables and other machinery from upper floors to ground level,
for easier inspection by potential buyers.

Equipment is not the only thing to have been scavenged at Changdeng. “Most of
the workers here were hired by other factories in the area,” says Chen Qingwen,
who also runs a business selling shoe manufacturing equipment. “They were very
happy to take them.”

According to Zhang Huarong, chairman of both the Asia Footwear Association
and the Huajian group, one of China’s largest shoe companies, basic monthly
salaries in the industry have doubled to $200 since 2006.

However, the difficulties encountered by Changdeng and thousands of other
factories across the Pearl River Delta, where Guangdong’s manufacturing
industries are concentrated, do not suggest that China’s export engine is facing
crisis. Guangdong’s exports grew 22.3 per cent to $369.3bn last year, accounting
for 30 per cent of the national total.

What is happening is a survival-of-the-fittest struggle affecting primarily
smaller factories in relatively low-tech, labour-intensive industries. In other
cases, companies are redistributing some lower value, less time-sensitive tasks
to new production facilities in cheaper inland areas. Reflecting China’s
resilience, last month the country’s national trade surplus surged 23 per cent
year on year to $19.5bn.

Large factories that have shifted some of their operations to China’s
interior, as Huajian has done, usually retain sizeable facilities in Guangdong,
which are better at turning around higher value orders with shorter lead times.
“I never think about closing our factories in Dongguan,” Mr Zhang said. “We want
to upgrade them by focusing more on research and development, new fabrics and
new manufacturing techniques.”

Mr Pang’s buyers provide a glimpse into the industrial migration that is
occurring as higher costs take their toll on factories such as Changdeng. One of
them, Chi Shiqing, runs a small, 300-worker shoe factory in Shaoguan, a city in
northern Guangdong near the border with Hunan province.

“It’s not easy to get workers in Shaoguan either,” Mr Chi says. “Nobody wants
to move there so I have to hire the locals.”

He adds: “Wages in Shaoguan are not much lower than those in Dongguan
now.”His workers earn Rmb1,200 ($170) a month.

Mr Chi can take some comfort from the fact that he manufactures for the
domestic market only. That means he is not exposed to another key cost pressure
– the rising value of the renminbi, which has appreciated about 15 per cent
against the dollar since mid-2005.

Another factor behind recent company closures in Guangdong has been the
implementation of China’s new contract labour law, which came into effect last
month. By closing before January 1, factory owners could avoid having to pay
higher compensation costs mandated by the new law.

Changdeng at least did the right thing, folding up its operations in an
orderly manner and in compliance with Chinese law before the end of 2007.
According to local media reports, the company paid some Rmb40m in worker
compensation.

Across town, Lu Yongyuan, a 32-year-old migrant labourer from Guizhou
province, was not so lucky. The Taiwanese head of his company, Dongguan
Hongsheng Mould Factory, simply absconded. The factory’s 300 workers returned
from the traditional Chinese New Year holiday to find the factory gates locked
and their salaries unpaid.

“Most of us found out on February 14,” said Mr Lu, who had worked for
Hongsheng for 10 years. “The government will auction the assets. Costs were just
too high.”

A notice posted on Hongsheng’s gate instructs workers to contact the local
village government office to collect one month’s basic salary. Under the new
contract labour law, Mr Lu should have received the equivalent of 10 months’
wages in compensation.

About Ling

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