Fifteen years ago it would have been unthinkable to even consider relocating factories from the Pearl River Delta to the country's interior or abroad. Beijing was beefing up exports, using favourable policies to attract foreign investors - particularly Hong Kong entrepreneurs - to set up factories in the delta.

The sweeteners included cheap and abundant labour, export tax rebates and low rents. They transformed the erstwhile farming and fishing village in Hong Kong's backyard into a massive, thriving centre of energy that earned its reputation as the 'factory of the world'. But that heyday is over.

'I want to move most of our production capacity out of Shenzhen as soon as possible,' says Ngan, who was in the first wave of Hong Kong capitalists to pioneer the delta region's growth in 1986. 'Shenzhen has no room and no prospects for labour-intensive industries.'

Last year, the mainland emerged as the world's largest exporter. More than a decade of trade promotion led to a US$155 billion trade surplus, as well as immeasurable damage to the environment.

Deputy Commerce Minister Chen Deming has said China's exports are 'large in size, but not strong'. An upgrade of industry - moving manufacturers higher up the value chain and technology ladder - is a key part of the nation's 12th five-year plan to 2015, he noted. The plan also calls for wage increases of at least 13 per cent annually - and more than 13 per cent in certain export-based provinces - over those five years.

Mainland Headwear is labour-intensive and faces the challenges of yuan appreciation, labour shortages, swelling wages and the scrap of export tax rebates. The solution it favours: relocation.

Ngan says wages in Dhaka are a fraction of those it pays in Shenzhen. Headwear's 2,500 workers in Shenzhen take home about 3,000 yuan (HK$3,690) a month on average, almost eight times more than the typical Bangladeshi wage of US$60 (HK$466).

'Manufacturers are facing a severe challenge: the era of low-value products has gradually gone,' warned Shao Ning, vice-chairman of the State-Owned Assets Supervision and Administration Commission of the State Council, during the Boao Forum in Hainan in April.

'They must make the shift to building their own brands and upgrading technology levels, or they risk going under.'

Structural reform of the nation's manufacturing activities would continue, he said, despite weakened demand in its top two markets, the United States and European Union. The number of Hong Kong-funded factories operating in the Pearl River Delta has shrunk from about 70,000 at its peak to roughly 40,000 last year, according to the Federation of Hong Kong Industries.

Despite the increasingly hostile operating environment, some manufacturers opt to remain in Dongguan. They have to move higher up the value chain and turn to automation.

One vision of this future can be seen at a brand-new industrial park in the Houjie area of Dongguan, just off the Guangzhou-Shenzhen superhighway. It's here that Techtronic Industries is consolidating its operations under one roof in a complex costing nearly US$100 million and covering a whopping 3 million square feet - the equivalent of 640 basketball courts.

Techtronic is deliberately climbing the technology ladder by focusing on a series of lithium-ion related products - such as more compact and powerful cordless power tools. Its new products and application of new technology have helped offset higher wages and production costs, improving its competitiveness.

30%

How much the yuan has risen against the US dollar since 2005, another factor dissuading manufacturers