Minimum wages in Guangdong jumped nearly 19 per cent from March 1 and are expected to rise by an annual average of 20 per cent for the next five years, affecting tens of thousands of factories making everything from toys to furniture to computer components. Meantime, labour shortages are worsening as migrant workers, many of them from inland areas, find work closer to home, or opt for jobs in service industries such as hotels or in air-conditioned shops as sales assistants.

Besides ballooning labour costs, factory owners, who mostly make goods for export, face other price pressures, said Shen Jianguang, chief economist of Mizuho Securities Asia in Hong Kong. Among them, he said, are tighter controls on pollution, rising raw materials costs and the gradual elimination of Chinese tax rebates on exports. Manufacturers are also contending with power shortages as well as a strengthening yuan, which reduces their profits when converted into other currencies such as the Hong Kong dollar.

The rising wages are part of the mainland's efforts to shift its export-reliant economy towards one more dependent on domestic consumption. At the same time, Beijing is trying to encourage higher-value-added products and innovation through more research and development.

'Very strong wage increase will be a key feature for the Chinese economy in the next five years,' said Vincent Chan, head of China research at Credit Suisse.

'We expect total wage income of the country to increase by 139 per cent, or 19 per cent per annum between 2010 and 2015, much faster than the expected' 9.5 per cent economic expansion, unadjusted for inflation.

As low-end, labour intensive industries move from the coastal areas to the interior, he said, Guangdong and the Yangtze River Delta, which together account for about 70 per cent of the mainland's exports and 30 per cent of its economic output, face big challenges.

'The ideal scenario is that productivity gain, and thus economic growth, of these two major regions can be maintained' through such things as industry automation, product upgrading and development of the domestic consumer market,' the economist added.

Just off the Guangzhou-Shenzhen superhighway is a brand-new industrial park in the area of Houjie in the city of Dongguan. It's here that Techtronic Industries is consolidating its operations in a complex built at a cost of nearly US$100 million that covers a whopping 3 million square feet (about 280,000 square metres), the equivalent of 640 basketball courts.

Techtronic Industries is known for its Hoover and Dirt Devil brand floor-care appliances and Milwaukee and Ryobi brand power tools. Before the company moved into its new complex last summer, it had seven separate factories spread around Dongguan. Techtronic Industries also had some some relatively high-cost power-tool-making operations based in Germany, which it has now transferred to southern China. The aim is to house much of its research and development, engineering and manufacturing under one roof.

The company still makes some heavy-duty power tools such as those used in road construction in Germany, and maintains a research and development operation there.

Inside the new Dongguan complex, thousands of workers, mostly migrants, are developing new products, assembling components and testing finished goods. Instead of having production lines with 200 workers sitting neatly along a lengthy revolving production belt as there would have been in the past, the workers are now divided into production cells. Each cell is manned by 20 workers who stand shoulder-to-shoulder assembling, testing and packaging power tools and products. The goal is to be more nimble and produce smaller orders faster - as few as 20 finished products - as well as large orders of up to 20,000.

Frank Chan Chi-chung, the company's chief financial officer, said creating the production cells has helped to improve efficiency. For a start, the company now needs about 15 per cent less space to produce its products, and a lot fewer workers. Previously it employed 15,000 workers across the mainland. Today the figure is 11,000, down 27 per cent.

And because the factory is turning out products faster, it needs to keep 35 per cent less inventory, freeing up cash. The time needed to switch the production line to produce a different product has been cut by 10 per cent, and the likelihood of producing defective products has been shaved by 25 per cent.

The company is paying its workers in Dongguan 2,000 yuan (HK$2,400) a month on average, nearly double Guangdong's minimum salary of 1,050 yuan.

And while wages may be rising substantially in southern China, Chan said a Dongguan labourer's pay currently is one-tenth of the cost of a blue collar worker in Germany.

As a result, Techtronic Industries estimates it has slashed its overall operating costs by about a third after consolidating its scattered Guangdong operations as well as its German ones at the new Dongguan complex.

Chan said roughly 2 per cent of the group's annual sales, or about US$65 million in last year's case, is earmarked as funding for research and development.

'Together with our research and development centres in the US and Germany, we are working around the clock,' said Chan, noting that the company's innovation centre at the new Dongguan complex has been up and running since April. International time differences mean that product ideas can flow from the United States and German operations straight 'into our Dongguan production base, which, in turn, produces prototypes right away,' he added.

It's the kind of value-added that Beijing has in mind to drive the country's economy forward. For instance, the company has a proprietary lithium-ion battery technology that it has developed to power several of its products from cordless vacuum cleaners to a thermal jacket that can withstand a temperature of as low as minus 30 degrees Celsius for as long as eight hours.

Techtronic Industries isn't the only company retooling itself for challenging times in the Pearl River Delta. Eddie Leung Wai-ho, managing director of timepiece maker Dailywin Watch Products and honorary president of the 1,800-member Dongguan City Association of Enterprises with Foreign Investment, said his company also has taken various measures to become more efficient.

At Dailywin's production base in Dongguan, about 600 workers are required to identify ways of improving production processes and product quality. 'It is a monthly exercise keeping them constantly in a mode of making improvements,' he said.

On the workers' suggestion, the company has covered the hard-top work benches with leather to avoid scratching the watches. Workers also suggested switching off the lights in their dormitory at midnight to save energy. Some assembling processes have also been automated to reduce labour input.

About 4,000 fluorescent lamps were recently replaced with environmentally-friendly light-emitting diode, or LED, lamps. It cost 1.5 million yuan, but will cut the company's annual electricity bill of 3.6 million yuan by about 500,000 yuan, a 14 per cent saving. The cost of installing the new lamps 'will be recouped in three years,' Leung said.

Danny Lau Tat-pong, chairman of the Hong Kong Small and Medium Enterprises Association, said the mainland's economic priorities leave companies with no choice but to boost efficiency.

'It's driven by state policy,' said Lau. 'There are some ways of raising productivity such as automation and branching into new products, but many smaller enterprises may not be able to afford it.'

18.6%

The increase in the mandatory minimum wage imposed in Guangdong on March 1

- It was the second rise in 10 months