HK firms struggle for survival on an uneven business field
In the second of a four-part series on China's economic slowdown, we examine the squeeze on Hong Kong-backed factories in the PRD
The dim outlines of the low-rise buildings emerge gradually from smog perennially hanging over the main road leading to Chin Wa-keung's electroplating factory in Huizhou, Guangdong.
But the dense yellow smoke is not coming from Chin's factory, which was purpose-built four years ago to satisfy the government's new environmental standards. The smog comes from the many illegal electroplating workshops that have mushroomed around Chin's plant, running on as little as one-eighth of his operating costs.
Gradually but surely, Chin's business has lost out to his more aggressive local competitors, who do not hesitate to flout the law when it is profitable to do so. Already struggling in face of the sharp economic slowdown, Hong Kong manufacturers like Chin are being driven out of the Pearl River Delta by cutthroat competition and an uneven playing field.
Fighting back tears, Chin, co-owner of Boluo Chak Wa Electroplating, says the company has been losing money "over the past one to two years". "We are considering winding it up if things don't change in the next six months," he said.
As China's economy slows, profit margins across the board are being squeezed. This is making Chin's customers much more price-sensitive than before, prompting many to switch their orders to the illegal workshops offering lower prices.
Chin and his partners - all Hong Kong investors with decades of experience of doing business in Dongguan - ploughed more than HK$4 million in 2007 into building an environmentally friendly electroplating factory in the Longxi industrial zone in Boluo county, Huizhou.
They were hoping to seize on opportunities brought by a new official policy. At the time, China was under huge international pressure to cut pollution and improve energy efficiency. Dongguan - one of the country's key manufacturing centres - launched a campaign to crack down on the biggest polluting factories.
Chin moved his plant to Huizhou when the local authorities offered incentives to attract electroplating operations using advanced air and waste water decontamination equipment.
But things did not pan out as expected. From the start, Chin and his partners faced competition from the many existing local electroplating factories operating illegally. These small workshops are often not registered with the authorities and might not even have a proper name. They easily relocate or change identities to avoid law enforcement.
The cultural difference between the rule-abiding Hong Kong factories like Chin's and the unscrupulous local workshops is becoming increasingly evident as more Hong Kong and Taiwanese professionals move out of the Pearl River Delta. Their replacements are mostly local players who know how to play the system and are more ready to flaunt the regulations when it is convenient. The business culture has changed as the result.
"The number of factories backed by Hong Kong people peaked in 2007 at 50,000, together employing one million workers," said Stanley Lau, deputy chairman of the Federation of Hong Kong Industries. "Since the economic crises in 2008 and 2011, the number of Hong Kong factories in the Pearl River Delta has decreased by at least 10 per cent from that peak."
Export orders dried up as overseas demand fell after the financial turmoil of 2008. Chin's plant, which covers 1,700 square metres, is operating at reduced capacity.
With much lower operating costs, the smaller local factories proved better able to cope with the hard times than their Hong Kong and Taiwan competitors.
The crisis also weakened local authorities' determination to strictly enforce environmental protection laws and regulations. Worried about falling tax revenue and jobs, local governments have since tended to turn a blind eye to pollution issues and allow factories without adequate decontamination equipment to keep running.
Amid this turmoil, Wilson Shea, the owner of packaging company Success Products, decided to close the canteen at his factory in the Dongguan township of Dalong, even though it is standard practice on the mainland for factories to provide meals for its workers.
He hopes that by closing the kitchen he can buy his business a bit more time. The number of workers has fallen from more than 300 before the crisis to 60.
"The current order volume is just 60 to 70 per cent of the level in 2010," Shea said.
The competitive edge of Hong Kong-funded factories on the mainland has also been blunted because many multinational retailers, such as Kmart, Carrefour and Walmart, have moved their merchandising operations there from Hong Kong, bringing modern management know-how with them. The result is Hong Kong businesses are being squeezed at both ends.
Eddy Li Sau-hang, president of the Hong Kong Economic and Trade Association and the managing director of Campell International, says Hong Kong factories cannot compete with mainland plants on pricing.
"My prediction is that half of the Hong Kong factories will be gone in five years and just a few of them can survive in 10 years' time," Li said.
It is a view shared by the Federation of Hong Kong Industries, which forecast that in the five years from 2011, about 30 per cent of the PRD factories backed by Hongkongers will cut back on production or even close down.
Li says Hong Kong factories need to change their approach and consider coming back to the city as a way out.
He says these businesses should make use of the Hong Kong government's new policy to upgrade production and focus on the more value-added end of the industry.
The Hong Kong government launched a policy in 2009 to convert and refit old industrial buildings to encourage traditional manufacturing business to move up the production chain and into sectors such as marketing, design and branding.
"Why can't Hong Kong establish wholesale markets, such as the Dongdaemun Market in Seoul?" he said. "By doing so, we could compete with the mainland factories on branding instead of pricing."