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Wednesday, October 23, 2019

Maritime Logistics Professional

China factories being pushed over the edge

Posted to Far East Maritime (by on November 8, 2011

It looks like game over for thousands of mainland manufacturers as a 20 percent hike in the minimum wage coincides with a 30 percent drop in orders.

We asked the question last week that retailers in the US and Europe must surely be ready to put in last minute orders to restock their inventories before the Christmas buying season starts in earnest. Yesterday we received the answer, from the US, at least.

The National Retail Association says even with sales in line with a 10-year average, retailers were keeping stocks lean and filling shelves with “wall-to-wall” discounts and promotions. 

“Unlike in 2008, when the financial crisis caught everyone off-guard, retailers have a strong understanding of the consumer mindset this Christmas,” the NRF said in its monthly Global Port Tracker report.

And yet those consumers are forecast to spend almost three percent more in holiday sales during November and December than they did last year, although this probably reflects the value of the goods that are moving off the shelves, because container imports through the country’s major ports have been on a downward trend since September.

So an inventory bounce is not going to happen. Not for the container shipping industry, anyway. It will be a hard Christmas season and the pain will extend well into the new year for the carriers battling with capacity, demand and fuel issues.

But it is at the start of the supply chain where the real pain will be felt. Falling orders and rising labour costs are making life tough for manufacturers. The Federation of Hong Kong Industries said a 20 percent hike in the minimum wage on January 1 would force 20,000 factories to close down.

There are an estimated 60,000 factories owned by Hong Kong businessmen operating in the Pearl River Delta, most in the dense industrial area of Dongguan. The scale of the factory hub has to be seen to be believed. It is not a neighbourhood, or even a suburb. It is a city. Mile upon mile of small, medium and gigantic factories stretching further than the eye can see (the eye can't see that far because of the chronic pollution). When the term “factory of the world” is used, it is only when you see the science fiction-like city of manufacturing plants in their toxic atmosphere that you truly begin to appreciate what it means.

This is partly the reason Beijing has been so aggressive in increasing the minimum wage. It wants to improve worker welfare while encouraging the makers of low value, high polluting goods such as toys and garments to relocate inland. Yet the inland areas still lack the container transport connections needed to move many millions of boxes a year and have to rely on inefficient road haulage or floating cargo down the choked and often shallow Yangtze River.

Repeated accusations that its export economy is built on slave labour have stung Beijing into focusing on boosting its minimum wage. This is having a devastating effect on the factories making cheap goods for western consumers with their business models based on low costs, high volume and narrow margins.

Consider this: The minimum wage has gone up by 42 percent in just 10 months. In its five-year plan, China aims to increase the minimum wage by 20 percent a year until 2015. No matter what business you run, a 42 percent increase in wages is going to change things.

Except the options for Hong Kong’s embattled factories are limited. They either relocate inland or to another country, or they focus on the China market. The domestic market is growing rapidly, but Hong Kong’s export-focused manufacturers are finding it difficult to enter the business. After decades of looking outwards, they have gained little knowledge of the domestic market that has come to be dominated by giant local suppliers.

Relocation may be attractive to the bigger companies holding contracts with big foreign retailers, but in the desperate Darwinian world of China manufacturing, it looks like 20,000 of their smaller compadres will simply cease to exist.

 

 

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