Chinese City’s Allure Fades for Some Firms

Thousands of foreign businesspeople, primarily Taiwanese, helped turn this southern Chinese city into one of the world’s busiest export manufacturing centers.

Now, amid rising wage and pension costs, energy shortages, tighter government regulation, traffic bottlenecks and other concerns, some of them are starting to look elsewhere. Their restlessness reflects a dark side to China’s economic boom, as growth pains and other issues prompt companies to reconsider starting up or expanding in China.

Chang Han Wen is having second thoughts. He came here from Taiwan in early 1991 when the area was still largely farmland, launching a shoe assembly line with 200 workers. He has since opened five factories, including three shoe plants that employ 3,000 people and produce 1.5 million pairs of specialty boots and high-end shoes a year for export to the United States and Europe.

But his sixth plant, a garment operation, sits empty. Chang has indefinitely postponed its opening, anxious about China’s tense trade relations with the West and the threat of more quotas that would limit clothing exports. That’s only part of his worries.

This year Dongguan’s minimum wage jumped more than 27%. Even with the increase, employers are struggling with worker shortages. Government inspectors are making the rounds at factories, enforcing work-hour rules and pension contributions that officials paid little attention to in the past. Electricity is in short supply, as is fuel.

All in all, Chang says, things have gotten so much tougher that his next investment may be in Vietnam, where many Taiwanese have gone.

“For manufacturers here, the golden period has passed,” he said.

To be sure, Dongguan still enjoys major advantages over other places in China and certainly most other countries, thanks to cheap labor and access to strong infrastructure and extensive supply chains.

But Chang’s disenchantment reflects the city’s fading allure for some Taiwanese and, more broadly, significant changes that are taking place in China’s export manufacturing base as foreign investments show signs of leveling off.

After four years of booming growth, foreign direct investments into China have flattened this year. That signals the waning of massive capital inflows, particularly in the electronics sector, that followed China’s ascension to the World Trade Organization in 2001.

Yuan Gangmin, a senior economist with the Chinese Academy of Social Sciences in Beijing, says an investment slowdown was bound to hit places such as Dongguan even harder. Government policies overly emphasized the development of export industries in coastal regions -- and now that’s coming home to roost.

“Such kinds of shortsighted policy discrimination led to the high cost of immobile resources like energy, land and environment,” Yuan said. He saw a silver lining in this picture: It could spur development in the lagging western areas of China, which have more abundant resources.

Dongguan, part of Guangdong province and an area known as the Pearl River Delta, was one of the earliest to benefit from China’s policy of opening the nation to foreign investment. With money flowing from Hong Kong and Taiwan, tens of thousands of factories were established in the Pearl River area, making it the world’s factory floor for shoes, watches, clothes, electronics, toys and other consumer goods.

But with China’s economic growth spreading to other regions, and rural incomes improving, Dongguan is facing stiffer competition for workers, who are increasingly mobile.

At the same time, China is moving up the technology ladder and encouraging the buildup of environmentally cleaner industries. Local governments are being told to stop the often mad rush to put up factories and develop for the sake of generating impressive economic statistics.

The upshot is that traditional manufacturers aren’t as welcome as before. And the Taiwanese in Dongguan are feeling that as much as anyone.

Taiwanese investments in Dongguan took off in the early 1990s as restrictions were eased, despite political tensions across the Taiwan Strait. With more than 6,000 companies registered in the city, the Taiwanese are the single largest group of foreign investors in Dongguan. Many of them are in labor-intensive sectors such as footwear, furniture, handbags and toys, although the share of high-tech companies is increasing.

The Taiwanese presence in Dongguan is so large that the first Taiwan schools in mainland China were started here. Tens of thousands of Taiwanese bought homes and live in the city. Taiwanese entrepreneurs brought in machines, raw materials and manufacturing know-how from their homeland and took advantage of the land, favorable tax and other policies and abundant labor force that Dongguan offered.

But in the last couple of years, one of their biggest problems has been with labor shortages. By government estimates, about 2 million jobs went begging last year in the Pearl River Delta. Many workers who had migrated to the urban coast from farms out west didn’t return to their factory jobs after going back home for the Spring Festival holiday in February. Others have been heading north to Zhejiang province and up along the Yangtze River, where wages tend to be higher.

In response, Dongguan raised the minimum monthly wage by about $15, to $70.

Lai Wenfeng, a scholar at Jinan University in nearby Guangzhou who has studied Taiwanese investment in Dongguan, says the Taiwan entrepreneurs are partly to blame for the current labor constraints. They should have offered better pay, benefits and working conditions years earlier, he suggests.

“We shouldn’t feel sorry if some factories are leaving,” he said.

Besides lifting wages, Taiwan-run factories in Dongguan have made other changes recently. At Chang’s largest shoe operation, Four Star Shoes Co., he converted the pay system for most of his 1,100 employees from piecework to a straight monthly rate. A five-day workweek was adopted. Overall, Four Star’s labor costs shot up 40% to 50% in the last year, says Wang Bi Hui, the company’s vice general manager.

To improve recruitment and retention of workers, Four Star built dormitories for workers. A large dining hall was added, as well as a movie room and a library that’s expected to hold 1,000 books when completed.

The higher wages and better living conditions have helped employers reduce but not cure their labor shortage headaches. Dongguan Yi Chen Can Factory, which set up in the city in 1992, also spiffed up its housing facilities, lowering the number of workers in a dorm room to five or six and adding a basketball playground as well as a chess and card room.

Still, the company, which makes cans for containing gifts and other uses, relies on several agencies to help recruit workers. As labor costs have risen, the factory has supplemented its employment of 400 with about 100 temporary staff, who don’t receive government-required health and welfare benefits for regular employees, spokesman Zhang Min says.

Yi Chen Can Factory has to cut expenses where it can, Min says, because “our other costs are also increasing a lot these days.” Metal prices, for example, have soared, driven up by China’s big appetite for natural resources. And electricity bills sometimes run triple normal costs during steamy summer days, when Guangdong province and other industrial belts impose limits on use.

Power shortages aren’t just in the south, of course. It’s up and down the coast. China’s energy supply capacity hasn’t kept up with the country’s booming growth. Like many companies, Zhang’s can factory fires up generators to keep things running during rotating blackout and red-alert days. But it takes diesel fuel to power generators, and in recent months, Guangdong province in particular has seen a supply crunch.

It also slows down delivery of goods. “Many of my drivers are coming back and complaining that they cannot get enough diesel,” said Sun Ai Hua, who runs a small trucking firm in Dongguan. “These days I have to apologize and explain a lot to my customers.”

Highway traffic congestion in and out of Dongguan can be bad enough without fuel problems. The city has built more roads, but numerous construction projects and burgeoning domestic demand for consumer goods and expansions by giants such as Wal-Mart Stores Inc., which operates its distribution center in nearby Shenzhen, all add to the freight traffic on highways.

Samuel Kuo, the Taiwanese owner of Lacquer Craft, a maker of high-end furniture for exports, believes that Taiwan investment in Dongguan is still growing but definitely more slowly. Many furniture makers, he says, already have set up shop in Vietnam and Indonesia. Apart from higher labor costs in China, he says, the moves were prompted by anti-dumping duties of as much as 198% imposed by the United States.

Kuo’s company pays a relatively modest 2.6% anti-dumping tax. And he hasn’t followed others to Vietnam. But Kuo doesn’t preclude the possibility of going there. Vietnam-based furniture makers don’t face U.S. anti-dumping duties, and that country’s wages are significantly lower than China’s. Kuo’s increased labor costs in Dongguan include contributions to government-mandated retirement plans, which have risen 24% recently -- no small matter for a company with 4,000 employees. Taiwanese entrepreneurs figure it will take a few more years before Vietnam’s infrastructure and production quality can catch up to China’s. But it may be even sooner than that for some industries such as textiles.

“Vietnam has similar living habits of Chinese, similar cultural background, so it’s easier for management,” said Chen Qibin, vice general manager of Roo Hsing Garment Co., which added two more production lines in Vietnam this year.

These days it’s not easy for entrepreneurs like Chen to expand in Dongguan, even if they wanted to. For starters, land in the city is much harder to come by.

“Government officials have made it clear that Dongguan should no longer sacrifice environment to achieve speedy development,” said Chen Xihui, director of Dongguan’s Taiwan Affairs Bureau. “Instead, we should work on scientific and sustainable development.”

Chen cited the Shanhu technology industrial zone as an example of this new attitude. The 28-square-mile park stands out among a sprawl of factories and dusty roads, with its lake and flower gardens. Universities and service firms already have moved in there. Traditional manufacturers are conspicuously absent.

Said Chen, “Companies that cannot meet our environmental standard will not be able to enter the zone.”

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Researcher Cao Jun in The Times’ Shanghai Bureau contributed to this report.