Using swift, nimble fingers and labouring in near-silence, workers at a Shenzhen factory can put together an electronic bark-prevention collar for dogs from basic components in only 10 minutes. The collar will eventually wind up on a pet store shelf in the United States, where it will retail for US$70. The workers, mainly young girls, need only 20 to 30 minutes to assemble a telephone. A miniature LCD television takes 40 to 50 minutes. The workers toil this way six days a week, from 8am to 5pm with a one-hour lunch break, earning the equivalent of US$100 a month. There are 1,400 of them, all working on low-cost consumer electronic devices for their employer, Hong Kong-based Suga International. In a typical day, they will churn out between 1,000 and 2,000 telephones for companies such as NEC and Philips. The factory, run by Mark Fung Chi-leung, also produces 5,000 to 6,000 pet-training kits daily. The numbers sound impressive, but there is nothing particularly special about Suga, a mid-sized electronics maker that earned $39 million in profit on sales of $453 million in the year to March. In fact, such scenes are repeated every day at thousands of other plants across the Pearl River Delta, where workers churn out everything from golf clubs to DVD players, toys and even Christmas trees. The delta is being hailed by many as the workshop of the world for its ability to manufacture cheaply almost anything, thanks to a skilled, low-cost labour force and the business-friendly environment of southern Guangdong province - features blamed for killing off the manufacturing industries of other countries in the region. As the business and economic links between Hong Kong and the delta grow, some fear Hong Kong's relevance will fade as investment bypasses the city. Some have also wondered if Hong Kong is getting a free ride from the special concessions handed out by the central government in Beijing, including the Closer Economic Partnership Arrangement, relaxed restrictions on tourism and, more recently, expanded renminbi business. But if a visit to Suga's factory is typical, it seems the real challenge to Hong Kong companies operating on the mainland is how to compete when their main advantage is low costs, not technological innovation. 'Our company is a very typical Hong Kong manufacturer,' said Mr Fung, an executive director at Suga, during a ride to the company's plant through the traffic-clogged streets of Shenzhen. Suga assembles everyday consumer electronics for sale both in China and overseas, using locally made and imported parts. Finance, marketing and customer negotiations are run through the Hong Kong head office. There are tens of thousands of firms just like Suga. According to a 2002 study commissioned by the Federation of Hong Kong Industries, Hong Kong-based companies operate 59,000 factories on the mainland, 53,300 of which are in Guangdong province. Hong Kong companies are estimated to employ 11 million people on the mainland, 10 million of whom are in Guangdong. Foreign investors are also flooding in to take advantage of the country's opening markets. In 2002, China attracted US$52.7 billion in foreign direct investment (FDI), the second-highest amount in the world. Luxembourg topped the table because of a few large cross-border mergers and acquisitions. In the first 10 months of this year, Guangdong attracted US$12.31 billion worth of FDI, 19 per cent more than in the same period last year, while exports grew 26 per cent to US$121.73 billion. Analysts and business owners say that the Pearl River Delta's future lies in innovation. 'The key challenge will still be the same: how to transit from export-processing industries towards more technology-driven industries so you can survive longer,' said Yiping Huang, a China economist at investment bank Citigroup/Citibank. Foreign direct investment is flooding into Guangdong province, but production costs in the form of labour, utilities and transportation are rising as well. Companies that compete only on cost will have to either move somewhere cheaper or improve their productivity, Mr Huang said. Hong Kong-based manufacturers are already seeking out lower-cost regions, said Paul Yin Tek-shin, vice-president of the Chinese Manufacturers' Association of Hong Kong, who also runs a precision metalworking business in Shenzhen. In the past, business was largely left in the hands of state-owned enterprises. Now more private manufacturers are sprouting up, creating more competition for Hong Kong companies, he said. 'Manufacturing in the Pearl River Delta is gradually becoming more expensive, so people are thinking of moving northwards,' he said. 'We have some worries,' Mr Yin said. 'We have to face competition. It's getting keener. We will have to be more flexible in doing things to improve ourselves.' His company has already set up operations in more northern areas, such as Zhejiang and Jiangsu. At Suga, there seems to be no pressure to move just yet. When asked if there are any plans to invest in Shanghai, Hangzhou or other areas of the Yangtze River Delta, Mr Fung said: 'We do not have a fixed schedule but ... we can see that it is a possibility for people to further invest [there].' Still, the company faces growing pressure from customers to be more agile and quick-footed. In the past, Suga had three months' lead time to fill an order for 100,000 items. Now it's more like a month to deliver 1,000 items. The company's profit margins are razor-thin. Material costs account for 70 to 90 per cent of its products' selling prices. The rest is overheads, manufacturing costs and profit, Mr Fung said. In order to gain a bigger share of profit, Mr Fung said the company tries to be involved more in the design of the product instead of just taking an order. In industry jargon, it's called original design manufacturing (ODM), instead of original equipment manufacturing. However, Hong Kong companies are just not known for innovation or for investing in research and development, according to Thomas Chan Man-hung, head of Hong Kong Polytechnic University's China Business Centre. That's because most Hong Kong companies were originally trading companies, making money from buying and selling goods and not from the production process itself, so they had no commitment to products and or industries. 'I'm afraid most Hong Kong companies cannot do ODM,' Mr Chan said. 'What they call ODM is not really ODM.' 'I think they're just assembling. If they have orders, if they can source components, they can do the job,' he said. Still, Mr Chan compares the state of China's economy now to Japan's period of nascent industrialism in the 1960s and 70s, although he thinks China will develop much faster. But the influence Hong Kong companies have in China is shrinking, overshadowed by companies from Taiwan, Japan, the US and Europe, he said. For the moment, Suga's Mr Fung is preoccupied with just running the business day by day. In an interview after a tour of the factory, he talked about obstacles to doing business, such as high taxes and bureaucratic hassles encountered when shipping goods out of Shenzhen's Yantian port. 'Frankly speaking, in China the overheads, the operating costs are cheaper. But for efficiency and lead time, Hong Kong is still better than China. Hong Kong logistics still have a good advantage,' Mr Fung said.