Pearl River Delta losing favour as factory centre for Hong Kong firms

One-third of manufacturers plan to decrease investment in the delta as labour costs rise

PUBLISHED : Friday, 18 July, 2014, 2:57am
UPDATED : Friday, 18 July, 2014, 11:01am

Nearly 30 per cent of Hong Kong-based manufacturers with factories in the Pearl River Delta plan to scale back their investment in the area.

The Chinese Manufacturers' Association of Hong Kong says nearly 29.6 per cent of the manufacturers it interviewed as part of a survey said they would reduce investment in the Pearl River Delta in the next three years, up from 26.9 per cent last year.

With rising labour costs on the mainland continuing to spook manufacturers, the survey found that 32 per cent of the manufacturers were planning to move their factories to areas with lower costs within three years. That percentage is the highest in four years.

An increasing number of Hong Kong manufacturers with factories in the delta have been moving to Southeast Asia and remoter parts of Guangdong, as well as other provinces of the mainland.

The association interviewed 274 companies between March and May. Respondents identified labour costs as the biggest challenge, with more than 93 per cent saying these costs had increased. Although the companies said they have been reducing staff by way of modernisation, they are still facing a labour shortage.

"The labour cost has been increasing by 10 to 15 per cent every year. Many manufacturers are also puzzled by the ever-changing labour policies in Guangdong, which is an even bigger problem than the appreciation of the yuan," said Irons Sze, the association's chairman.

The survey shows Hong Kong manufacturers in the Pearl River Delta continue to shift their export markets eastwards. Close to half of those interviewed are now exporting to Asia, surpassing the percentage of those exporting to the United States and Europe put together.

OEM (original equipment manufacturer) is still the most common business model, in which a local company undertakes the manufacturing operation of a big brand. But OEMs continued to fall, from 51.6 per cent last year to 48.4 per cent this year.

Companies adopting ODM (original design manufacturer) and OBM (original brand manufacturer) models, in the meantime, have increased to 22.8 per cent and 27.4 per cent respectively, indicating more companies are moving up the value chain by manufacturing proprietary products.

Manufacturers are also becoming more cautious about the business environment. The percentage of those who are "optimistic" and "cautiously optimistic" about their business outlook has decreased from 50 per cent last year to 43 per cent this year.

In view of these difficulties, Sze said Hong Kong manufacturers should think about shifting more towards e-commerce as there is huge potential for online shopping since it still comprises a very small percentage of retail sales on the mainland.