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China’s workshop gets transplanted Add to ...

Propane is escaping from a battered green metal cylinder beside a young factory worker testing barbeque gas lines and electric starters.

It’s dangerous work, but she stays focused, insistently pushing the igniter button as gas pools around the metal elements of a grill burner. Nothing happens. The smell is growing pungent.

The worker calmly removes and replaces the defective igniter with a new one, and with a single click a whoosh of flame bursts into the air. Amazingly, no one is hurt. She moves on to the next unit.

It’s just another day on the job at Yangjiang Xinli Industrial Co. Ltd. – the largest barbecue factory in the world.

The Xinli factory epitomizes China’s dominant position in the global consumer goods manufacturing chain. About 4,000 gas barbeque grills are produced each day here. At full capacity, it can churn out as many as 6,000, the company says. Embossed with a collection of familiar North American brand names, around 800,000 barbecues roll off the line each season.

China is the world’s workshop, but it’s getting more expensive to operate. Inflation is running hot and wages are soaring as companies are forced to pay more to keep workers on the job. That’s why Xinli has joined a growing number of Chinese companies moving their businesses to lower-cost areas inland, and built a new, massive factory here in Yangjiang, nearly double the size of its original 150,000-square-metre facility.

Steamy and persistently overcast, Yangjiang sits about 250 kilometres or a 3½-hour drive west from Southern China’s traditional manufacturing hub of Guangzhou and its frenzied factory cities of Shenzhen and Dongguan that are known as the Pearl River Delta.

Workers are drawn primarily from the local region and paid about 20 per cent less in than in Guangzhou, where labour inflation, unrest and a severe shortage of migrant workers have created a crisis for many Chinese manufacturers.

“Manpower is the problem in Guangzhou. It does not have many permanent residents. They come from outside which makes the cost of labour much higher,” says Liang Yuanmin, Xinli’s chairman and president.

Xinli used to have manufacturing operations in Guangzhou. But the new factory in Yangjiang, a so-called third-tier city with a population of about 2.5 million, will now serve as the company’s flagship factory. Xinli produces barbecues at a cost that would be almost impossible to match anywhere else in the world. It also makes turkey and fish fryers, small motorized pumps, and the new facility will also produce solar panels. With the solar business, the company hopes to cash in on the rush to green energy that has taken hold across China.

“Moving to third-tier cities will provide more resources,” Mr. Liang explains between drags on a Double Happiness cigarette.

“For research and sales Guangzhou will be the right place. But not for manufacturing,” he says.

A dying competitive edge

Manufacturing and export are the lifeblood of China’s economy, which overtook Japan last year to become the world’s second largest behind the United States. In 2010, China also surpassed Germany to become the world’s largest exporter.

The developed world has come to depend on cheaply produced consumer goods from China whose strong economic growth during the global financial crisis propped up a flailing West and helped pace the rebound.

Now, changing demographics, labour unrest and shortages, along with ever-growing pressure on wages are threatening the low-cost manufacturing machine that has given the North American consumer the $29 DVD player and $300 laptop at the local Wal-Mart.

Much of China’s manufacturing sector is facing a crisis that is blunting its competitive edge. Surging commodity prices, a rising Chinese currency and a sudden spike in wages is forcing factory owners to take drastic measures to reduce costs.

Last year, 30 provinces and municipalities in China raised local minimum wage levels by an average of about 23 per cent. Chinese finance officials are vowing to curtail inflation, running well above 5 per cent.

Cost pressures in China’s manufacturing sector have significant ramifications, not only for China, but the rest of the world that consumes its goods. Higher costs currently absorbed by manufacturers are starting to be passed on to the consumer. If this persists, it could stoke inflation in Europe and North America, a problem such industrialized economies can ill afford as they are already grappling with meagre growth despite ultra-loose monetary policies.

China’s response represents the beginning of the end of the biggest labour migration in modern history. For nearly three decades, millions of migrant workers from China’s interior provinces such as Sichuan, Anhui and Hubei were forced to move east to find work at coastal factories.

Now, places inland like the booming municipality of Chongqing with a population of 32 million and nearby Chengdu in Sichuan, China’s most populous province, are becoming manufacturing hubs in their own right.

“The manufacturing industry is moving from around Guangzhou and around Shanghai to the Chongqing/Sichuan economic circle. Manufacturers need a lot of human resources and we have such a big population in this region we can meet that demand,” says Liu Xiaoning, a manager with shipping giant Cosco Logistics in Chongqing.

The annual salary for a skilled worker in Chengdu is about 20,000 yuan (China’s currency) or about $3,090 (U.S.), according to human resources consulting firm Aon Hewitt. In coastal cities such as Guangzhou, it is more than 24,000 yuan or about $3,700.

Part of the government-backed push westward is to produce goods destined not for export, but for a growing domestic market. A key pillar of China’s economic strategy is to shift demand for its goods from export to the domestic consumer market. It will take years if not decades, however, to refashion the Chinese economy where GDP per capita is just $4,000, or less than a 10th of what it is in North America.

Indeed, the 800,000 barbecues produced each year at Mr. Liang’s factory in Yangjiang are all destined for foreign markets such as Australia and the United States.

“The Chinese people do not have a lifestyle like in the West where people get together for a barbecue,” he explains, glancing at an iPad in front of him on a huge boardroom table.

Even though Yangjiang is located on the South China Sea Coast, Xinli must transport the barbecues it makes by truck east to the major coastal port. The small port in Xinli is not equipped to handle container shipping.

Still, government investment in infrastructure projects has greatly improved the region’s competitiveness as a location for manufacturing. Ten years ago, it took eight hours to drive from Guangzhou to Yangjiang. Today it takes 3.5 hours.

Wage pressures in the factories of Guangzhou, Shenzhen and Dongguan have sent business owners looking for lower-cost alternatives. Mr. Liang says his factory-owner friends on the east coast are having trouble finding workers and are thinking of moving their operations west.

“In Dongguan, a lot of factories are empty now. They have “For Rent” signs,” he says.

As Chinese factory production moves west and away from the traditional manufacturing port regions of the Pearl River Delta, Yangtze River Delta and Bohai Rim surrounding Beijing and Tianjin, inland provinces that had previously depended on agriculture are enjoying unprecedented economic growth from increased industrial output.

GDP in Chongqing jumped 17 per cent last year. Next door, Sichuan province’s GDP surged 15 per cent in 2010 and, for the first time, overtook Shanghai’s in total economic activity.

A number of high-profile manufacturers have moved from Guangzhou to the interior province of Anhui, including television maker Konka and electronics firm Midea. Consumer products giant Unilever moved to Anhui in 2002 and said last year it would boost its investment in the province by $103-million. Anhui’s GDP climbed 14.5 per cent in 2010 compared with 12.2 per cent in Guangzhou.

This month, as inflation in China reached an almost three-year high, tensions in two factory cities close to Guangzhou boiled over. In the jeans manufacturing hub of Zengcheng, migrant workers rioted for three nights straight in response to a police crackdown on street vendors. Further away in Chaozhou, a mob trashed cars and attacked government buildings after a fellow worker was stabbed after demanding unpaid wages from his bosses at a ceramics factory.

Last year, Taiwanese electronics assembly giant Foxconn was hit by a raft of worker suicides at its factory in Shenzhen while three Guangzhou plants that produced cars for Japan’s Honda staged strikes. Both Foxconn and Honda raised wages to appease workers.

Foxconn, which assembles Apple products including the iPad and iPhone, recently built a massive factory in Sichuan’s capital Chengdu to produce more smart phones and tablet computers. The company believes workers will accept 15 per cent lower wages in Chengdu than at its factory in Shenzhen in exchange for working closer to home.

An adaptive culture

China’s “Go West” strategy offers tax breaks and other incentives to business that set up operations away from manufacturing hubs on the coast. It’s been in place for more than a decade, but only recently has it begun to take root and help attract major manufacturers to places like Sichuan and Anhui.

In addition to cost pressures on the coast, desperately needed infrastructure improvements in the interior have made the hinterland more economically viable. Much of the massive $586-billion (U.S.) stimulus package initiated by China’s central government in response to the global financial crisis in 2008 has been spent on upgrading infrastructure in less developed regions.

Building new roads, railways and airports has not only created jobs and economic growth in the interior, it has also left a legacy of a more competitive manufacturing sector.

Although the shift away from Guangzhou and other coastal cities is a relatively new phenomenon, China’s manufacturing sector has a history of clustering in the most cost-efficient areas.

Now a financial centre as well as the world’s busiest container port, Shanghai was once the global hub of cotton spinning and textile manufacturing. Most of those factories left the city and headed south more than a decade ago.

Hong Kong too, was once home to thousands of factories, but is now a city centred on financial services that also serves as the executive headquarters for many companies whose production requires cheap labour from mainland China.

When it comes to maintaining low-cost production, China’s manufacturing sector adapts to shifting conditions faster than any one else, says David Fung, a Vancouver-based businessman and the former chairman of the Canadian Manufacturers and Exporters group.

“In North America we are so protective of our communities we try to preserve the old regime,” he says, referring to emotional efforts to resuscitate manufacturing towns in Canada and the United States. Yet when cost pressures become too much for private Chinese manufacturers, it’s often a simple decision “to move their factories away from the hot zones,” he says.

The scores of cranes and construction sites in Chongqing is a testament to this philosophy. While steeped in ancient tradition and thousands of years of history, China’s approach to economic development has long favoured progress over sentimentality.

Central and local government planning allows for rapid development. If the government decides that a road, railway or factory should be built somewhere, local residents have little choice but to accept compensation and, literally, move out of the way of progress.

In China, it is not uncommon for whole villages to be displaced and levelled to make way for new development. Despite protests to preserve them, Beijing’s Hutongs (traditional one-storey city dwellings) continue to be torn down to make room for new roads, metro lines and skyscrapers.

The destruction of historical buildings and in some cases traditional ways of life, is an unfortunate side effect of the government’s core objective of continued economic development that will improve living conditions of China’s almost 1.4 billion population.

China’s planned economy and the central tenet of bettering the fortunes of its citizens at the expense of almost all other goals will continue to give its manufacturers and exporters an advantage over Western competitors.

Local government officials in China are compensated, in part, based on their region’s economic growth. This gives them a vested interest in creating conditions and adapting to economic shifts in a way that will help manufacturers succeed.

Factories in Chongqing were once focused primarily on military and automobile manufacturing. Now the municipality is refashioning itself as a high-tech production centre providing incentives for laptop manufacturers to set up shop.

Zhou Shulin, the vice-director for the Chongqing Logistics Co-ordination Office, explained in stark terms what is driving the government’s fervent push for economic development in the region.

“Chongqing is not going to be Detroit,” he said.

Tensions rising

To be certain, no one is predicting a full-blown mass exodus from the manufacturing hubs centred around Guangzhou and Shanghai any time soon. The ports and exporting infrastructure around these areas remains the best and fastest way to ship Chinese-produced goods overseas.

But tensions are rising. An aging and undersupplied work force has driven wages higher, and those that aren’t getting a raise are fighting back. In May, rising inflation spurred an unprecedented strike by thousands of Shanghai truck drivers that disrupted shipping from the world’s largest container port. After a few days of violent clashes between the police and drivers, Shanghai’s local government cut tariff fees to convince the truckers to end the strike.

Some Chinese companies are even moving right out of the country in a bid to keep costs down. Some sectors, textile manufacturing in particular, are shifting production to countries where wages are even lower than in China. Nations like Vietnam, Bangladesh and Thailand have seen an increase in manufacturing activity as Chinese labour costs rise.

But as manufacturing operations shift to low-cost countries or areas inland, the question is how long can China continue to find ways to keep a lid on costs before they erupt and send prices of its goods surging.

At the Xinli barbeque factory, cost pressures are already brewing. In the past year, Mr. Liang has had to raise wages by about 10 per cent to match inflation.

As he explains: “If we don’t pay people at a certain level, they will not put all their might into the work.”

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