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Guangdong Manufacturers: “The Reports Of Our Death Have Been Greatly Exaggerated”
By Paul Midler | February 26, 2008
Ten years ago, there was plenty of talk about how growth on the coastal cities was doomed. Everyone was looking to the second- and third-tier cities, and Sichuan Province was really where it was at, brother. Taking a page from American history, the Chinese government had urged everyone: “Go West!”
The latest buzz is a push into the north, apparently. Guess what: Anhui is the new Sichuan! Oh, my god. Don’t get me wrong. I love Anhui, especially the people. But there is nothing happening there, especially not for those involved in contract manufacturing.
For whatever reason, people like to talk about the demise of Guandong Province (h/t CLB.com). We’ve been hearing it for years. The factories are moving to Shanghai, or else they are heading inland, or they are off to Vietnam. What most fail to understand is the value of manufacturing clusters. Numerous economists have described the phenomenon, and it is why industry is not going anywhere anytime soon.
Consider that in order to get a products made, factories need a critical mass of sub-suppliers and service providers. If you’re making shoes, for example, you need to be able to pick up the phone and quickly get any number of people over to your office immediately: Leather vendors, adhesives suppliers, machine repairmen, a supplier of cardboard boxes. There are dozens of behind-the-scenes players who are necessary in a production process like this one.
On one project I was involved in, there was a problem with some packaging labels. The factory called the agent who provided the labels, and he was there in no time flat. He also knew what he was talking about. There were many different types of adhesives, which went on the back of the labels. Long story short, it makes a big difference that you have a critical mass of game players there all in the same space.
Companies that do not rely upon clustering and its benefits may move inland, but there is no way that entire industries - whole clusters – are picking up and moving to another region. When the regions clusters were originally formed, it had a lot to do with a tremendous cost differential. Today, the incremental benefit – if there even is one – is marginal at best. Whatever savings there are in labor are typically eaten up by increases in logistics costs, I am afraid to say.
The title of this post is a quote from an aging Mark Twain, who was very much alive at the time he said it: “The reports of my death have been greatly exaggerated.” This one applies to Guangdong Province and its robust manufacturing sector.
Topics: China |
February 26th, 2008 at 12:58 pm
It won’t happen overnight. But it will happen over time if costs in Guangdong continue ratcheting up. Note that these clusters existed in other parts of East Asia (the “Asian Tigers”) before they decamped for Guangdong. My feeling is that Guangdong will lose a good chunk of its toy, shoe and clothing manufacturers to other provinces and foreign locations. Nonetheless, if the central government doesn’t stick it to Guangdong with onerous regulations (typically enforced by commissars in the form of central government-appointed governors and assorted provincial lackeys originally from other provinces), it should be able to rebound by expanding its share of electronics assembly and testing and other industries. Lighting manufacturers are apparently inspecting locations in India.
February 26th, 2008 at 8:15 pm
[…] Guangdong Manufacturers: “The Reports Of Our Death Have Been Greatly Exaggerated” (The China Gam… […]
February 26th, 2008 at 8:42 pm
Paul,
Great post. I have put together one of my own that will be going up later today. More than anyting, I think that a lot of these “closures” are coming from simple economic realties that many of these businesses should have died long ago. Industries are consolidating, buyers are moving away from small mom/ pop to mitigate risk, tax breaks that kept some afloat are gone, etc, etc.
As for movement. It will happen, as the comment above, but it will be slow. it will not be 14,000 , and it will not be so public.
R
allroadsleadtochina.com
February 28th, 2008 at 12:55 am
Excellent point. The infrastructure of suppliers and subcontractors in GD is extensive and would take any other region decades to get on par.
That said, Anhui cuties are sooooo much better than GD girls ;^)
February 28th, 2008 at 3:43 am
Those plant closures are nothing to get excited about. Many small players who have no business in business are closing their doors? Let’s assume it’s true. Who cares. The factories I work with are still in business, and I don’t know of anyone who is in trade who has reported their factory suddenly disappearing, or moving. Original poster is correct about GD. It’s not going anywhere.