Costs of manuafacturing in China are going up, and that’s taking a big toll on some Chinese companies. The days of cheap labor and little regulation are going away.
Now many of China’s manufacturers—including Shan Hsing—are undergoing the kind of restructuring that tore through America’s heartland a generation ago. The U.S. housing market, which generated demand for everything from Chinese-made bedroom sets to bathroom fixtures, has plummeted. A new Chinese labor law that took effect on Jan. 1 has significantly raised costs in an already tight labor market. Soaring commodity and energy prices, as well as Beijing’s cancellation of preferential policies for exporters, have hammered manufacturers. The appreciation of the Chinese currency has shrunk already razor-thin margins, pushed thousands of manufacturers to the edge of bankruptcy, and threatened China’s role as the preeminent exporter of low-priced goods.
Hsu’s new factory, it turns out, is running at just 60% of capacity, and he predicts that half of China’s lighting factories—almost all based in Guangdong—will have to close their doors this year. “Shoe factories, clothing, toys, furniture, everyone is shutting down,” he says. Hsu’s not alone in his alarm. “We spent 20 years building up our industry from nothing to one of the biggest in the world,” says Philip Cheng, chairman of Strategic Sports, which produces half the global supply of motorcycle, bicycle, and snowboarding helmets out of 17 plants in the Pearl River Delta. “Now we are dying.” Cheng says he once earned 8% margins. His margins now? Almost zero.
Comprehensive statistics on shutdowns are hard to come by. But the Federation of Hong Kong Industries predicts that 10% of an estimated 60,000 to 70,000 Hong Kong-run factories in the Pearl River Delta will close this year. In the past 12 months, 150 factories making shoes or supplying shoemakers have closed in Dongguan, says the Asia Footwear Assn. More plants will disappear as demand slows: UBS (UBS) analyst Jonathan Anderson expects overall export growth of just 5% or less for China this year.
