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  • Oct 23, 2014
  • Updated: 8:16am
BusinessChina Business
MANUFACTURING

New hubs to cushion exodus from Pearl River Delta

Pearl River Delta eventually seen losing status as world's factory but inland provinces will ensure the mainland remains a production powerhouse

PUBLISHED : Monday, 14 January, 2013, 12:00am
UPDATED : Monday, 14 January, 2013, 3:01am

An exodus of factories from the Pearl River Delta has led some to question whether China can remain the so-called factory of the world, but even if the delta loses its pre-eminent status, the mainland will remain a manufacturing powerhouse, thanks to the rise of new manufacturing bases in interior provinces, analysts say.

Over time, China would lose its status as the world's factory, said Steve Lo, the chairman of the Chamber of Hong Kong Logistics Industry.

"The reason is that labour costs and the value of the yuan are rising, so many manufacturing companies have moved to Myanmar and other Southeast Asian countries," Lo said. "The result is China will still be the world's biggest manufacturing country, but it will be less important as the world factory."

But inland cities such as Chongqing would emerge as manufacturing hubs to replace the waning contribution of the delta because they were less expensive than coastal areas in the costs of production and land, he said. "Wuhan, Chongqing and Chengdu will be important manufacturing centres. They will ensure that China remains an important manufacturing centre."

Stephen Green, the greater China research head of Standard Chartered, echoed these sentiments. "The low value-added labour-intensive stuff like toys, textiles and shoes are leaving China. But most of the rest of China's manufacturing is staying and moving inland where they get tax breaks, cheap land and labour. That is the dominant trend."

In the first 11 months of last year, Chongqing's trade jumped 92.8 per cent to US$49 billion, according to the Chongqing government website. Exports sourced from the city reached US$35.78 billion in the period, ranking it in 10th place by value.

Exports of electronic goods including notebook computers leapt 110 per cent to US$23.55 billion in the first 11 months. Over the first nine months, Chongqing's international air cargo exports soared 123.7 per cent to more than 40,000 tonnes, of which 92 per cent were notebook computers, according to the government website.

In 2009, United States computer giant Hewlett-Packard and Taiwanese electronics manufacturer Foxconn Technology agreed to jointly invest US$3 billion in notebook computer manufacturing facilities in Chongqing, the South China Morning Post earlier reported.

It takes about 30 hours to ship goods from Chongqing to Shanghai through the Yangtze River, which makes the export of goods from Chongqing viable, and it is economical to fly large amounts of electronic goods from inland cities such as Wuhan and Chongqing to Europe, Lo said.

Stephen Cheng, the president of the Hong Kong Logistics Association, said airfreight was a practical solution for high-value products. "Time is of the essence for these products. Every three months, new products come to market," he said.

Last month, Foxconn announced plans to invest US$1.1 billion to double capacity at its factory in Zhengzhou, the capital of Henan province, which will make it the world's largest iPhone factory, according to media reports.

At the same time, Apple's chief executive Tim Cook said the company would begin manufacturing in the US next year.

Geoffrey Crothall, a spokesman for China Labour Bulletin, a Hong Kong-based workers' rights group, said Cook's announcement might possibly be due to the bad publicity over strikes and suicides at the mainland factories of its contract manufacturer Foxconn.

By 2015, some manufacturing in China would shift back to the US because China's cost advantage would have eroded, said a report by Boston Consulting. "While China will remain an important manufacturing platform for Asia and Europe, the US will become increasingly attractive for the production of many goods sold to consumers in North America," it said.

Cheng said he did not foresee factories moving from China to the US. "US labour costs are even higher than in Hong Kong. China will remain an important manufacturing base for high-value products like iPads since it can meet high-quality requirements. Other Asian countries' costs are lower but may not meet the quality requirements."

The loss of cost competitiveness in China would reduce the offshoring of US and European production to China, but the main countries that would take over the manufacturing would be developing nations such as Mexico and Vietnam, said Charles Dumas, the chairman of Lombard Street Research, a British think tank.

For the next five years, only a small part of manufacturing in China would migrate to the US, Green said. "Domestic consumption will grow very strongly for the next 20 years, so manufacturing in China to supply domestic consumption will grow."

Japanese carmaker Nissan is an example of a multinational expanding production in China to serve the mainland market.

"All our production in China is for the domestic market," said Nissan general manager Paul Miles.

"China is our largest market today, and will continue to be one of Nissan's most important engines of growth. For Nissan, China has been and will remain an important manufacturing base. In fact, we have been increasing the number of production plants and capacity in the country over the years."

In June last year, Dongfeng Motor, a joint venture between Nissan and Dongfeng Group of China, announced the building of a 5 billion yuan (HK$6.2 billion) plant in of Dalian, Liaoning province.

At present, the Japanese firm has plants in Guangzhou, the capital of Guangdong province, two in Zhengzhou, and one in Xiangyang, Hubei province.

The Xiangyang plant, which is operated by Dongfeng Motor, received a 2 billion yuan upgrade in May, which would nearly double its annual production capacity from 130,000 units to 250,000 units in 2014, when the new lines start production, Miles said.

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