Asia-Pacific News

Wenzhou Factories Adapt to the Times

Simon Rabinovitch in Wenzhou

Moving from plastic lighters to gold-embossed cigarette holders, the trajectory of Zhongbang Smoking Sets Manufacturing Co mirrors the aspirations of Wenzhou, a city in eastern China that has long been a hub of low-cost factories and is now moving toward producing higher-value goods.

A man operates a shoe production machine at a leather shoe factory on March 3, 2006 in Wenzhou of Zhejiang Province, China. Wenzhou is one of the major shoe production bases of China, with more than 4,500 shoe factories and an annual output of 600,000 pairs. The European Union (EU) will impose import duties as high as 20 percent on some leather shoes from China and Vietnam starting in April. Over 70 batches of Chinese shoes have been stockpiled in Northeast China's Dalian Port since the middle o
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Five years ago, 80 per cent of the world’s lighters were produced in Wenzhou, and many of the world’s shoes and spectacles too. The city’s share of the global lighter market remains large but is losing ground, having slipped to about 70 per cent.

Rising labour costs have squeezed margins for Wenzhou’s factories and begun to drive production to cheaper markets, such as India and Vietnam, as well as less-developed inland regions of China. But many companies are still thriving in the city, thanks to a strategy of improving quality and brands.

In the showroom at the Zhongbang factory, the range of smoking accessories is vast: windproof lighters, leather cigarette packs, sleek ashtrays, slender cigarette holders and carved mahogany pipes. Liu Jianjun, a sales director, sat at a long table at the centre of all the smoking gadgets, reviewing posters for a new advertising campaign.

“Smoke clean and cool” was the slogan, paired with images of Lu Liangwei, a Chinese actor, looking 1920s-smooth with slicked-back hair and a waistcoat.

“This kind of thing costs money, but the results are evident,” Liu said. “If people just try to sell a lighter or a cigarette holder without a brand, it is very difficult these days.”

Although China’strade surplus increased sharply in June, its surplus for the first half as a whole was 18 per cent less than last year, continuing a downward trend first seen in 2008. Beijing is quick to point to the narrowing surplus as an answer to critics who say it has kept the renminbi artificially cheap to fuel exports, in effect stealing jobs from other countries in the process.

Chinese exporters are still doing better than those of most other nations, as evidenced by the continued growth of their global market share. This reached nearly 10 per cent last year, according to the World Bank. However, the reasons for this resilience are about much more than a cheap currency.

The factories in Wenzhou and elsewhere in China’s coastal regions benefit from first-rate highway infrastructure and easy access to ports. A clustering of businesses has made for condensed, complete supply chains. The labour force, though growing more slowly than in the past, remains vast and relatively skilled.

“There isn’t a substitute for China,” said Ben Simpfendorfer, managing director of Silk Road Associates, an Asia-focused consultancy. “You can’t just pick up a giant factory and move it somewhere else, not in its entirety, because it will only push up costs in places where there is much smaller access to labour and other productive inputs.”

There is no doubt that wages are rising in China, with urban per capita incomes up 82 per cent over the past five years. In Mr Simpfendorfer’s view, this heralds the end of the low-cost manufacturing model – not just in China but globally, since no other country can fully take its place.

On the factory floor in Wenzhou, the challenge is how to adapt to the rising costs.

“We’re trying to improve the conditions for our workers, not just their pay. They now get a day off every week and we’ve installed air conditioners in their dormitories and fixed up the washrooms,” said Hong Jianguang, manager of Wanshun Glasses.

He sat with a stack of spectacle frames on the table in front of him, examining each for defects. Wanshun produced 2m glasses at its peak a few years ago and was now down to annual output of 500,000, focusing on making better frames that could fetch a higher price, he said.

Down the road, the manager of Weihong Women’s Shoes said she was also trying to improve the quality of her offering. But the transition is not easy. Weihong’s manager said revenues had been increasing more slowly than costs and, for a second, said she contemplated giving up on manufacturing altogether.

“There are lots of people who can no longer make money off shoes, and so they’re taking their money out of the industry to invest in property. The money comes in so much more quickly,” she said.