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June 23rd, 2008:

Factories Staying Put in China

Asia Sentinel – Alfred Romann – 23 June 2008

Reports of companies fleeing China for cheaper Southeast Asian locales appear to be overblown

In December 2006, the Qingdao Morning Post reported that 30 South Korean employees from Xinyi Leather Products and Xinwu Leather Products had suddenly left, leaving 300 Chinese employees unpaid and US$14 million in debts to local banks.

Quoting anonymous local officials, the Shanghai-based 21st Century Economic Report said authorities were increasingly tightening environmental regulations and enforcing workers’ rights. In the year that followed, more South Korean companies used the same exit strategy. As of January, at least 103 Korean companies had reportedly left Shandong Province., with one company in Yantai, Segang Textiles, left behind 3,000 employees and US$4.17 million in debts.

A recent survey by the American Chamber of Commerce in Shanghai and Booz Allen Hamilton found one of every five foreign companies are considering moving their China operations as a new Labor Contract Law that kicked in January 1 increased costs for producers. The yuan jumped 7 percent against the US dollar in 2007 and is continuing its upward trend this year

By early this year, the news of fleeing overseas companies deserting workers in the Pearl River Delta had spread to western newspapers as well, with the story making front-page news across Asia.

Although the story appears to have been overblown, however, that doesn’t mean there hasn’t been trouble. Speaking to the 21st Century Economic Report, a lawyer for the Yantai Korean Merchants Association said the new Labour Contract Law is affecting businesses with small margins: “If each worker is paid 100 yuan more every month, the monthly cost of the company will go up by 300,000 yuan… Besides, according to the new law, businesses have to pay 30 percent of the social insurance for their employees and this increased the pressure on Segang’s cash flow.”

The phenomenon has spread beyond Qingdao as officials put more emphasis on labour and environmental regulations. Workers at a textile factory in Chongming Island, near Shanghai, held seven South Koreans hostage last November after they moved to sell its manufacturing facilities. After a seven-day standoff, the workers were paid their wages. Nor is it is only underfunded South Korean businesses that are looking at a closing their China operations. The Federation of Hong Kong Industries says up to 7,000 Hong Kong-owned factories operating in Guangdong will close by the end of this year.

And there is little hope that things will get any easier in the coming months. Manufacturers expect salaries to go up by as much as 20% in July when new minimum wage regulation takes effect, said Eddie Wu, vice-president of the Hong Kong Electrical Appliances Manufacturers Association. “Everything is getting more expensive. The best we can do is negotiate with the customers. If we have a lot of competitors, we have no ammunition… Small companies, they’ll close down.”

But while it is impossible to ignore the number of businesses shutting down in the Pearl River Delta, rather than an exodus, it appears to the beginning of an economic realignment that could bring online the fabled domestic market of 1.3 billion consumers. Those departing are mostly smaller businesses with few employees. Big shops with thousands of employees are still better off staying in China, partly because they may not be able to find enough people in Vietnam to staff their shops.

Jonathan Anderson, head of Asia-Pacific economics at investment bank UBS, says the conditions are in place for a shift in the Chinese economy away from its hallmark low-cost manufacturing base. This is not to say that Chinese exports will become irrelevant any time soon. Growth has slowed in the last five years but exports are still growing at 20 percent per year.

“There is no sign of ‘evacuation’ from coastal provinces to date, and no market share losses in traditional labour-intensive sectors. In short, no indication at the macro level that exporters might be in trouble,” Anderson wrote in a recent note.

What’s more, Chinese exporters do not appear to be losing their edge. According to official data, which looks at bigger companies in a number of sectors, light industry reported an increase in profitability in 2007 as export manufacturers passed on costs by hiking prices. The share of exports out of Guangdong is dropping, but exports from neighboring provinces like Fujian, Zhejiang and Jiangsu are rising. The sum leaves the total share of exports from the region virtually flat at about 60 percent.

“Once we account for this fact, there’s very little support left for the idea that producers are fleeing the coastal areas in significant numbers,” Anderson wrote.

Timothy Kim is a good example. In the last decade, Kim has seen his company expand exponentially. A business that was once two people with a phone and a desk is now a multi-million dollar international enterprise with a large showroom in Hong Kong and a fully integrated factory in Dongguan, in the Pearl River Delta manufacturing hub that produces about 60 percent of China’s exports.

“Everybody says we have to go to Vietnam… Wrong. Stupid,” says Kim.

Kim’s Silver Star Kitchenware makes all kinds of metal kitchen products. His large showroom in the New Territories is jam packed with pots, pans, ladles, thermos, forks, knives, strainers and woks. The showroom is shining with metal. Kim makes every part of the product in-house.

“We make everything: The screws, handles, everything. This industry is a materials industry. Materials is 70 percent. Labor is maybe 20 percent. Vietnam cannot compete,” Kim says. “This is a materials business and you can’t get good materials anywhere else.

“You want quality, you have to do it under one roof. Upstream and downstream are important,” he says. “Labour costs in Vietnam and China are about the same in real terms.”

Vietnam’s infrastructure is weak and its labor pool is not always cheaper than China’s. It has a population of 86 million and its US$2 billion economy is a fraction of China’s but up until last year, it was growing at more than 8 percent annually.

China may no longer be the cheapest manufacturing locale but manufacturers have boosted their efficiency to compensate and passed on some of the increased costs to suppliers. China also has a relatively good infrastructure, plenty of manpower and access to quality raw materials – whether domestically produced or imported in vast quantities. Companies are moving out of traditional manufacturing hubs like the Pearl River Delta but they are often smaller companies with little value-added. “China is actually keen to develop high-end production and also get rid of low-end production plants that are contributing to pollution,” said Sherman Chan, an economist at Moody’s.

Costs and regulations have been getting more onerous across China for several years, with officials often targeting high polluting enterprises. The issue came to the foreground before 2006 when the small South Korean operators started leaving China, often under the cover of night.

Kim, of Kitchen Star Silverware, has a long list of reasons why moving to other locations makes very little sense. Finding quality materials in Vietnam or Cambodia is very difficult, he says. Stability is measured in months, not years. Quality employees are not always easy to find and there is not the plentiful supply that can still be tapped in the Pearl River Delta. And, while inflation has hit China, it is nothing compared to what it has done to Vietnam.

Still, operating in China can be tricky and old models may no longer work.

“You must restructure your company into Chinese style combined with American or European style,” says Kim. “More scientific.”

Beijing Government Takes Half Its Cars Off The Road

Associated Press in Beijing – Updated on Jun 23, 2008

The Beijing city government said on Monday it had ordered half of its cars off the road leading up to the Olympics in an early effort to clean up the air for the games and save energy.

Half of all government and Communist Party cars will not be used starting on Monday until July 19, the city said in a notice on its website.

From July 20, another regulation kicks in that will allow vehicles on the road only on odd or even days, depending on their license plate number.

“To meet the air quality standards and to realise safe and smooth traffic is our solemn promise to the international community,” the Beijing government notice said.

New sports venues and US$40 billion spent to improve China’s infrastructure have not disguised the fact that Beijing’s air quality remains a contentious issue for the games.

International Olympic Committee president Jacques Rogge had said outdoor endurance events lasting more than an hour will be postponed if air quality is poor.

Organisers announced details last week of a plan to pull half of Beijing’s 3.3 million vehicles off the roads during the Olympics to help clean the city’s noxious air for the games.

The car ban is part of an anti-pollution plan that also will halt construction and heavy industry during the Olympics, which begin in seven weeks.

Under one plan, vehicles will be allowed on the roads on alternate days â according to even or odd car registration numbers â from July 20 until September 20.

In addition, 300,000 heavy polluting vehicles â ageing industrial trucks, many of which operate only at night â will be banned from July 1.

The order also follows a meeting last week of Beijing’s State Council that urged government departments to cut their oil use, as part of authorities’ plans to create a more energy efficient society. They were urged to cut the oil consumption of public vehicles by 20 per cent, according to Xinhua.

McCain To Push To Lower Auto Emissions

Reuters in Phoenix – Updated on Jun 23, 2008 – SCMP

White House hopeful John McCain will push on Monday for car makers to build more environmentally friendly vehicles, threatening new legislation if they do not comply and proposing tax breaks to encourage consumers to buy “cleaner” cars.

According to excerpts of his speech obtained by reporters, the Republican presidential candidate will call for auto manufacturers to speed the process of making engines that can use alcohol-based fuels.

“Whether it takes a meeting with automakers during my first month in office, or my signature on an act of Congress, we will meet the goal of a swift conversion of American vehicles away from oil,” he will say.

The Arizona senator, who has wrapped up his party’s White House nomination, will also propose tax incentives to prod Americans to buy vehicles that generate less pollution.

“For every automaker who can sell a zero-emissions car, we will commit a US$5,000 (HK$39,000) tax credit for each and every customer who buys that car,” he will say.

“For other vehicles, whatever type they may be, the lower the carbon emissions, the higher the tax credit.”

Car makers have argued in the past that consumers do not always favour fuel-efficient cars and that government incentives would help encourage people to buy them.

Mr McCain will say that the existing financial penalties levied on car makers for not complying with fuel efficiency standards â known as US Corporate Average Fuel Economy (CAFE) â are too low.

“CAFE standards should serve large national goals in energy independence, not the purpose of small-time revenue collection,” he will say.

A McCain adviser said the senator supported a higher fine for noncompliance with the standards, but did not have a specific numerical proposal at this time.

McCain’s speech, set to be given in Fresno, California, is his latest outlining a series of proposals to reduce US dependence on foreign oil and fight global warming. Last week he angered environmentalists by proposing that the United States lift a ban on offshore drilling.

High gasoline prices have put energy issues in the spotlight of the presidential campaign. Democratic Illinois Sen. Barack Obama, McCain’s rival in the November election, laid out a plan on Sunday to crack down on speculation in oil markets.

McCain also calls for a hefty US$300 million prize “the development of a battery package that has the size, capacity, cost and power to leapfrog the commercially available plug-in hybrids or electric cars.”

Green Activist To Seek Legco Seat

Olga Wong – Updated on Jun 23, 2008 – SCMP

A green activist who fights against the so-called wall effect in building projects is now fighting for something more political – a seat in the Legislative Council.

If Roy Tam Hoi-pong, 28, gains enough votes, he would become the greenest lawmaker in Hong Kong – in terms of both his age and election platform.

Announcing his maiden bid for a seat in Kowloon West yesterday, the president of Green Sense said he hoped to attract middle-class and younger voters with an eco-friendly platform.

Labelling his campaign “Vote for a green Hong Kong”, Mr Tam vowed to tackle global warming, promote better town planning, regulate light pollution, explore green business opportunities, investigate cases of cruelty to animals, improve air quality, enhance green awareness in the business sector and strengthen school environmental education.

Politically, he supports universal suffrage for the election of the chief executive in 2012 and advocates the gradual abolition of functional constituencies.

A full-time secondary school teacher, Mr Tam studied environmental science at Chinese University. He is also a founder of Green Sense, which was established to promote green education in 2004. The group has been outspoken on town planning issues like the canyon effect of some high-rise developments.

Mr Tam said banners for his campaign team would be made of recycled material.

Improving Hong Kong

Little to show for more pay

Updated on Jun 23, 2008 – SCMP

I appreciate the work of legislator Albert Cheng King-hon and hope he runs again in the upcoming election as he often takes the government to task, which so few do in the Legislative Council. But his suggestion that legislators’ pay packages should be HK$380,000 a month is ludicrous.

Can Mr Cheng explain why he feels that a Hong Kong legislator should make more than the US president or British prime minister?

Could Mr Cheng explain what he and his fellow legislators have done recently to improve Hong Kong? We know what hasn’t been done: no idling-engine ban; no road pricing; no central slaughterhouse; no solution to our landfill problems; no improvement in air pollution; and no comprehensive recycling system, to name but a few.

Terry Scott, Sha Tin

Asthma Linked To Traffic Pollution

23rd June 2008 SCMP

Children who live near a busy road have about a 50 per cent greater risk of developing asthma, hayfever or eczema than those living 1km or more away, according to German researchers, who say their study shows the strongest link yet between pollution and childhood allergies. Researchers from the Helmholtz Research Centre for Environment and Health studied 3,000 healthy children in Munich for their first six years, Reuters reports. “We consistently found strong associations between the distance to the nearest main road and allergic disease,” says team leader Joachim Heinrich.