Fears for future as factories go bust

PUBLISHED : Thursday, 21 July, 2011, 12:00am
UPDATED : Thursday, 21 July, 2011, 12:00am


The recent bankruptcies of two large factories in Dongguan - a manufacturing hub in the Pearl River Delta - has sparked fears that even major players may not be able to withstand the double whammy of rising production costs and labour shortage.

Dongguan Soyea Toys, one of the oldest toy factories in Dongguan, went bankrupt a week ago, owing its 470 workers their salaries for June and the first half of July, Xinhua reported yesterday. More than 200 of the workers gathered at the gates of the city government compound on Tuesday in protest.

Dingjia, a textile company that employed more than 2,000 workers, closed in the middle of last month.

Workers at other factories in the city have encountered similar problems, the Guangzhou Daily reported. It said reports on its Dongguan news hotline about bankruptcies or workers protesting about late payment had doubled recently. However, most companies that went bust were small or medium-sized.

Mainland media warned that the bankruptcy of large manufacturers like Soyea was a sign that factories could face a harder time than in the global financial crisis of 2008, when several manufacturers went bust.

Xinhua yesterday quoted Cai Kang, a foreign-trade official in Dongguan, as saying that manufacturers' orders had dropped 15 per cent while costs had risen by 11.4 per cent. Profit margins had dropped to 2 to 3 per cent. Still, the report said, it was too early to say if there would be a wave of bankruptcies in Dongguan.

Chen Yaohua, director of the city's textile and garment industry association, was quoted as saying that 10 per cent of textile companies in Dongguan were under pressure because of difficulties getting loans, rising labour and material costs and the appreciation of the yuan.

Soyea, owned by a South Korean businessman, had been producing stuffed toys since 1992 and at one time employed 2,000 workers.

Liu Muling, deputy director of Dongguan's Association of Women Entrepreneurs, said many small and medium-sized enterprises (SMEs) were either shutting down or moving to inland regions for cheaper labour.

'Many companies could not survive because they couldn't find enough workers,' she said. 'Those who managed to find enough workers could not bear the rising costs.'

Compared with the cheap labour of the past, now 'they have to pay five times the salaries to workers if they make them work for more than eight hours a day, and they have to buy them social insurance', she said.

A profit margin of between 8 per cent and 10 per cent would have been enough for SMEs, but this had now been eaten up by rising material and labour costs, she said. Having built its success upon cheap labour, Dongguan was now striving to changing its growth model from labour-intensive to hi-tech in response to central government calls.

Du Dade, a senior worker at a recently bankrupted furniture factory who is owed more than 20,000 yuan (HK$24,092) in back pay, told the Guangzhou Daily: 'The profit margin has shrunk by at least 10 per cent. If a boss does not manage his business well, problems are very likely to pop up.'

Chen Naixing, a researcher at the Chinese Academy of Social Sciences' Institute of Industrial Economics, said the normal bankruptcy rate due to competitive pressures should be about 5 per cent. However, SMEs in Dongguan were shutting for other reasons now, including a labour shortage and a lack of capital caused by a tightening of money supply.


The number of 'permanent migrants' from inland in Dongguan's population of 7m, according to the Dongguan Today website