China’s rising wage problem prompts different responses from Shenzhen-based manufacturers
When Pauline Ngan Po-ling went to Bangladesh in 2013 she was not in the mood for sightseeing. As the deputy chairman and managing director of Mainland Headwear Holding, a Hong Kong-listed specialist milliner, Ngan was there with a much bigger mission: to coordinate the relocation of the company’s main manufacturing base from China to Bangladesh.
At the time, a number of Hong Kong enterprises had closed shop in the Pearl River Delta amid rapid wage inflation, in many instances ending a manufacturing presence which had dated back to the early days of China’s reform and opening.
In the intervening years, the manufacturing exodus has accelerated amid stagnant business growth.
“Since 2008, 70 per cent of Hong Kong firms [in the delta region] have gone out of business,” Ngan, a deputy to the National People’s Congress, said during an interview with the South China Morning Post in Beijing. “Four of the five major Hong Kong milliners in Guangdong province have all shut down their businesses.”
For many low-end apparel firms, the costs of relocating to Bangladesh were more than compensated by the low wage rate, even as the shift means longer travel time for senior managers, in addition to higher raw material and logistics costs.
Workers in Bangladesh are paid some of the lowest wage rates in the world. The Hong Kong firm pays roughly US$120 to each employee in its Bangladesh plant every month. These rates are generally higher than the national average, thanks to overtime allowances and other benefits.
“In Shenzhen, it is no longer easy to hire a worker for 6,000 yuan (US$868.40) per month these days. Coupled with other mandatory payments, including five kinds of compulsory insurance and a housing fund for employees, total expenditure per ordinary worker in Shenzhen nowadays exceeds 7,500 yuan each month on the employer side, let alone the fact we also need accommodate and feed them free of charge as per industry practice,” said Ngan.
Mainland Headwear, which set up its operations in Shenzhen’s Buji town in 1991, was one of the first Hong Kong companies to move part of its manufacturing base to Bangladesh. The company currently retains 1,400 workers at the original Shenzhen plant, down from 4,000 at the peak in 2008. Meanwhile, the company employs about 3,500 workers in Bangladesh, and the number is projected to expand to 6,000 by the end of next year.
In 2016, Mainland Headwear shipped 20 million hats to its major markets, which include the US, Britain and Japan. About 65 per cent of the consignments were made in Bangladesh, according to Ngan.
But the company retains manufacturing capacity in Shenzhen to deal with urgent orders, especially those requiring a delivery cycle of 45 days. Mainland Headwear has also set up a design and development team in Shenzhen to produce its own brand of value-added products.
In contrast, Starlite Holdings, another Hong Kong enterprise producing products ranging from printed packaging, children’s novelty books and paper products, plans stay in the Chinese mainland. To survive it will use a business strategy that relies on innovation as well as the deployment of intelligent automation.
Hong Kong-listed Starlite is also a victim of rising labour costs in the Pearl River Delta region. In Shenzhen, where the company was first established in 1987, local manufacturing wages are the highest in the region.
Starlite’s founder and chief executive Lam Kwong-yu says the company is shifting to high value-added products, and away from its traditional role of designing and manufacturing a product that is to be rebranded by another company for sale.
“We never intended to move our production base to countries where the labour costs are lower, but we know a repositioning of our business from the traditional original design manufacturer was of great urgency, that’s why we set up an innovative centre within the group five years ago to develop our self-owned brands and beef up the adoption of industrial robots,” said Lam, who is also a member of the National Committee of the Chinese People’s Political Consultative Conference.
Starlite has launched two new business lines in recent years. These include production of wooden 3D puzzles and furniture, and customised intelligent robots. Both segments are fully designed and developed by Starlite. Plans to spin off the businesses through an initial public offering within the next three years have been tabled, according to Lam.
Starlite’s group revenue has seen steady growth over the years despite a decline in its workforce to 6,000 from the previous high of 13,000. The application of intelligent robots in its key packaging and printing segments has helped to sustain productivity as the headcount fell, according to Lam.
Lam said the company is thinking about transferring manufacturing of its new businesses to the US, Britain, Germany and France in about three years, as proximity to major markets will help the company adapt quicker to consumer demand.
“We will have all the designs done in either Hong Kong or Shenzhen. As a majority of the production work will be taken care of by our intelligent robots, the costs to produce our self-owned brands in developed countries could be further lowered,” Lam said.