China: Find Me That Factory! Part II

Digital manufacturing

A few days ago, in a post entitled, “China: Find Me That Factory,” I wrote of how not a single client of my law firm has been impacted by factory closures in China and I wondered what sort of factories it is that are closing:

But, and I know this is going to sound strange, I have been asking my firm’s China clients just about every weekday for the last month how they have been impacted by the Global and China downturn and not a one of them has mentioned factory closings. Indeed, I have asked many of them if they have experienced any problems from factory closings of their own or of their suppliers and the only response I have gotten is “no.”

So yes, like All Roads, I absolutely believe factories are closing in China and with that, massive worker and community dislocation. But also like All Roads, I have very real questions as to what sort of factories those were.

China Bystander (a perennially excellent blog on China’s economy) recently did a post, entitled, Pearl River Delta’s Silver Lining, that goes a long way towards explaining why American and European companies doing business in or with China have been so little affected:

If the Pearl River Delta were an emerging sovereign economy, there would be reason to believe that it was moving up the development ladder despite the global slowdown being caused by the global financial crisis.

The delta is the heartland of southern China’s manufacturing industry and many small and medium sized labor intensive light manufacturers are suffering horribly. In the first half of the year, 15% of all firms with Hong Kong investment closed down, including half of shoe manufacturers and toy makers. Official figures show that 50,000 enterprises closed down in the first three quarters of this year, although provincial officials have said an offsetting number of new businesses have registered (those may be mostly mom-and-pop operations of the newly unemployed).

However, larger machinery and electronics companies are still showing robust growth with export orders holding up. Provincial GDP grew 10.7% in the first half of the year. Slow by recent standards but still above the national average.

The pattern emerging: low-end consolidation and a move to higher value production as the region’s price advantages are eroded. Classic emerging markets development.

This seems to confirm what I have suspected all along. Most of the factories closing are low end toy and shoe and costume jewelry operations, most of which had Hong Kong, Taiwan, or South Korean connections, not North American or European connections.

UPDATE: In a post entitled, Is the crisis really hitting China? [link no longer exists]  Chinayouren also attests to not having yet seen major economic dislocation in China and it posits the following:

So from my point of view the Crisis has still not hit China in any significant way. The international economic slowdown is definitely starting to show, but for the moment we are still riding it better than most of the Western economies.The Wall is holding strong.

4 responses to “China: Find Me That Factory! Part II”

  1. The factory I run, as well as almost all it’s vendors, operate in the industrial districts of Dongguan and Shenzhen, and none are particularly high-tech. Yet in my discussions with vendors, associates (including competitors), and district-level government officials, I never hear of anyone being directly affected by a factory closure.
    My observations are posted on blog
    My assessment not based on research, just casual observation. No doubt there are factory closures, but I would doubt it’s as significant a story as the media reports indicate.

  2. Thanks for the confirmation/evidence. I had long suspected the news stories. And David Levy’s blog is super!! I think you linked it before, and he just posted above me, but it makes for very interesting reading.

  3. This is very interesting. I am also puzzled with all these news about closing factories when all the factories I am dealing with seem to be fine.
    My feeling was that companies were the companies that were already weakened by the central government push toward higher end industry and innovation: VAT export rebate changes, new labor law . . .
    I have been looking for some data to support that impression. It seems to me that these closures are part of the transformation of Chine from “Low Cost” into “Smart Low Cost”.
    When you read books such as “Dragons at your Door” describing how some good Chinese companies have used Low Cost as a mean to create competitive advantage, I think that many remote China obverver miss part of this trend. And when we see that most of the companies closing factories have some HK or Taiwan ties, we can assume that some business people have just decided to move to new “Low Cost” countries

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