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February 5th, 2008:

Last Call For Guangdong Shoemakers

By Olivia Chung – Online Asia Times – 5th Feb 2008

HONG KONG – Guangdong’s thousands of shoemakers, many of whom saw the start of the province’s transformation into China’s engine of modernization, are packing their lasts and moving elsewhere as the Pearl Delta Region undergoes another economic metamorphosis.

The once-dynamic shoemaking industry has become a remnant of its old self, with more than 1,000 footwear and accessory producers going out of business amid an increasingly unfriendly environment for their operations.

They are part of a mass-migration of manufacturing industry from the delta, as factories shut up shop in increasingly expensive Guangdong and open up either in the country’s more backward hinterland or overseas, frequently in other Asian countries such as Vietnam.

As many as 10,000 factories, many invested from Hong Kong, are expected to close around the Lunar New Year holiday on February 7. Millions of migrant workers heading home to inland provinces with New Year bonuses in their pockets are unlikely to have work to draw them back.

Driving the closures, as factory owners face rising costs for land and wages, are government policies aimed at forcing out from the area production of low-value-added goods and at pulling in businesses that pollute less, employ higher-skilled workers and help move the region up the value scale.

Guangdong will push ahead with developing innovative and service industries while combating pollution, provincial governor Huang Huahua said when he delivered a report at the Guangdong 11th People’s Congress on January 17.

Measures such as the increased protection of intellectual property rights (IPR) will be introduced to develop a service-and-technology-oriented and environmentally friendly economy. A multi-tier capital and corporate bond market are envisaged to help catapult the capital Guangzhou and Hong Kong’s neighboring city of Shenzhen into a financial hub status to attract multinational firms.

Such changes may help white-collar workers from expat bank executives to insurance salespeople in Guangdong and across the border in Hong Kong breath easier if it helps to reduce the delta region’s notorious air pollution, which has been cited by companies as justification for moving offices to Singapore to the south.

Less happy will be blue-collar workers who lose their jobs and their families in the poorer inland provinces that depend on their remittances. Some, such as 34-year-old Xiao Hanjun, from Hubei province in central China, heading home for the new year, hoped to find work in Suzhou, Jiangsu province, after being laid off a month ago, ending 10 years of working in a factory in Guangdong’s Foshan.

Others will be less lucky, as many factories are moving sticks out of the country. Hong Kong businessman Leung Ka-yiu, boss of a shoe factory in the Guangdong city of Dongguan, broke off an interview earlier this month for a phone discussion on transferring the plant to Vietnam.

After hanging up the phone, Leung said: “No one wants to leave, but we just couldn’t go on doing business.”

Woe upon woe
His litany of woes included rising raw material and energy costs, appreciation of the Chinese currency, labor shortages and protectionism overseas. A new labor law and disincentives targeting highly polluting industries in the Pearl River Delta region helped him decide to move out.

“Since the second half of 2006, the Chinese government has started to make a number of processing trade policy changes, including heavy taxes, cancellation or reduction of tax rebates, and the new labor law. And we expect more new [unfavorable] measures to be in the pipeline this year,” he said.

The Labor Contract Law, effective from January 2008, puts greater emphasis on protection of labor rights, which manufacturers fear will hamper management flexibility in deploying workers and bring extra costs.

“The changes of policies are just like a number of knives hanging over the heads of manufacturers,” Leung said. “The labor law can be said to be the last push for me to leave. If the law is strictly followed, my factory’s labor cost will increase by 20%, which many shoe factories like mine can not afford, given our profit margin of about 8%.”

Leung also doesn’t qualify for help under the new Corporate Income Tax Law, which will phase out tax concessions for general manufacturing and export businesses of foreign investors, with exceptions for foreign-invested enterprises investing in research and development.

That will particularly hit Hong Kong businessmen such as Leung. In the past two decades, more than 90,000 export-oriented processing firms have been set up operations on the mainland, with nearly 70,000 based in Guangdong. Of those, about 57,500 owe their existence to investment from Hong Kong and employ 9.6 million workers, according to the National Bureau of Statistics.

Leung’s shoe factory, set up at Dongguan’s Houjie county 18 years ago, used to hire more than 600 people. “To avoid the new labor law, by the end of December we had to lay off two-thirds of our people, which cost us millions of yuan,” Leung said.

Pointing to a map of Vietnam on the wall behind his desk, Leung said: “My factory will move to Binh Duong province, 17 kilometers north of Ho Chi Minh City.”

Leung ‘s factory is one of more than 1,000 small and medium-sized footwear and accessory producers in Guangdong that have been forced to close down or move out of the province in the past year, according to the Asia Footwear Association.

“Up to 500 companies have closed their doors in the last three months alone, as Guangdong’s shoe industry faces competition that is 10 times stiffer than in the 1990s,” association secretary Li Peng said. The province is a footwear manufacturing hub for China, with 7,000 to 8,000 shoe factories, according to the association. In Dongguan, home to 1,000 shoemakers alone, up to 300 firms had closed, Li said.

Boom days over
The markets for leather and shoe materials started to boom in Guangdong following the establishment of numerous shoe, leather goods and handbag factories in the Pearl River Delta during the 1980s. The footwear and accessory producers in the province supply material big brand names such as Great Wall and Senda.

Li said these small and medium-sized manufacturers, which rely on cheap pricing strategies and often have weak management practices, are increasingly unable to survive in Guangdong.

About 50% of the shoemakers that have closed down in Guangdong have moved their factories to China’s hinterland, setting up in Hunan and Henan in the center of the country, in Jiangxi in the east, and in Guangxi, which lies between Guangdong and Vietnam. A quarter have moved to other Asian countries such as Vietnam, India and Myanmar, while the remaining 25% have shut up shop but are undecided about their next move.

Jin Fei, general manager of Dongguan Hong Teng Shoe Factory, said: “More than 80% of the footwear factories are processing trade activities surviving on low cost and low profit. Given their profit margin of between 5% and 8%, most of the footwear factories, plagued by increasing cost of raw materials and labor due to labor shortages, were probably in their last gasp before the New Labor Contract Law came into effect,” he said.

At a forum on the shoemaking industry in December, Liang Yaowen, director-general of the Foreign Trade and Economic Cooperation Department of Guangdong province, pointed out that technological solutions were the only way out for local shoemakers.

Shoemakers are not the only businesses feeling the pinch. Zhu Yongxin, who has had a clothing factory in Zhang Cha city in Foshan, Guangdong, for 11 years, echoed Jin’s views, saying the cost of steel for buttons had increased to more than 60,000 yuan (US$8,350) a ton recently from 20,000 yuan in 2004, while oil for sewing machines cost 75 yuan a barrel, up from 60 yuan a barrel a year ago.

The cost of unskilled labor is also surging, with a worker’s monthly pay rising to about 1,200 yuan now from 800 yuan two years ago, while a skilled worker could get between 1,500 yuan and 2,000 yuan, said Zhu, who is going to move his factory to Hunan after the holiday break.

Chen Yonghan, chairman of a trade union for factories in the Shenzhen area of Guangdong, said stricter government regulations on environment and labor rights meant that about 10,000 factories in Guangdong, mostly engaging in processing trades, might close down around the holiday period.

He expected the decreasing number of factories in Guangdong will not only cause economic loss to Guangdong province, but also in other provinces as millions of rural migrant workers will lose their jobs, hitting remittances.

According to a Guangzhou Daily report, migrant workers in Guangdong, the country’s richest province, earned more than 130 billion yuan last year. They remitted more than 70 billion yuan to other provinces last year, the paper said.

Sichuan and Hunan were among the biggest recipients for the cash, receiving more than 20 billion yuan from Guangdong last year, or about one third of the total.

Olivia Chung is a senior Asia Times Online reporter.