China may be famous as the workshop of the world, but one Hong Kong lingerie maker has found Thailand a more alluring destination, as companies increasingly shift production to countries with lower wages.
Top Form International, which supplies companies such as Walmart from its south China factories, has been forced to face a new reality in China as workers increasingly demand higher wages.
Sitting in his Hong Kong office across the border from Guangdong province, Michael Austin, Top Form’s chief financial officer, says the company is seeing wage increases of 20 per cent every year.
“China’s policy is double wages in five years. We expect it to be shorter than that.”
After the minimum monthly wage in Shenzhen, the special economic zone just across the border from Hong Kong, was raised from Rmb1,100 to Rmb1,320 ($207) in April, the company speeded up plans to reduce its sewing workforce to 400, down from 1,000 a few years ago. The Chinese government also increased the minimum wage nationwide following a series of suicides last year at Foxconn, the electronics contract manufacturer.
Top Form’s bigger challenge, however, is the demographic change under way in China. The cohort of young workers entering the workforce is declining every year. Selective female foetus abortions because of China’s one-child policy and a societal preference for boys has created the perverse effect that there are fewer women working in China’s factories. Factory owners in southern China report that the ratio of factory workers is now 60:40 male to female, whereas it used to be predominantly female.
Last week, Jonathan Anderson, a UBS economist, released a report after crunching the numbers of the US and European Union’s import data for the first half of 2011. He found China’s light manufacturing share is starting to decline from more than 50 per cent to about 48 per cent. The beneficiaries include Bangladesh (up 19 per cent in exports to the US) and Vietnam (16 per cent). The first half of 2011 “looks a pretty convincing turning point”, says Mr Anderson of a shift in labour-intensive manufacturing to south-east Asia. India and the Philippines, by contrast, which should be “natural destinations” for labour-intensive investment, appear to be sitting out the action, he says.
For Guangdong, China’s most industrialised and wealthiest province, this migration of low-paying jobs from the province is precisely what provincial leaders have been pushing for over the past couple of years. The province lowered its growth rate target to 8 per cent annually for the current five-year plan that runs from 2011-2015.
Hang Huahua, the province’s governor, and Wang Yang, the party secretary of Guangdong, have repeatedly stressed the need for polluting industries to move out of the province in favour of more technology-intensive industries.
Michael Enright, a professor of business at the University of Hong Kong, says this may be the first time in history when a government has actively sought to turn its back on its early industrial past.
This is broadly Beijing’s goal as well, but it is harder to do at the national level because the workforce in interior provinces is not as skilled as that in Guangdong.
For an insight into how quickly manufacturing of low-end apparel and footwear is starting to move from southern China, global sourcing company Li & Fung’s half-yearly financial results also provided an indicator last month. Li & Fung sources everything from T-shirts and anoraks to furniture and beauty products for western retailers such as Wal-Mart Stores and Toys R’ Us.
Bruce Rockowitz, Li & Fung’s chief executive, unveiled a set of numbers that in effect heralded a new world order in clothing, furniture and footwear manufacturing. The $16bn behemoth’s sourcing from Bangladesh had increased by as much as 52 per cent, while Turkey and Indonesia had seen increases of 20 per cent or more.
To ensure his company Hilford stays profitable in the highly competitive business of making jeans, Roland Lee has reduced order sizes to about 2,000 pieces and moved upmarket by increasing customisation for customers such as Armani Exchange. Spiralling cotton prices of more than 100 per cent last year coupled with wage increases prompted some competitors to move production to India, he reports. The high reject rate on apparel from India makes him wary, however. Mr Lee continues to manufacture out of Shenzhen, which also boasts 24-hour customs clearance at its border with Hong Kong.
Similarly, for Top Form, expensive lingerie and bras will continue to be made in Nanhai in Guangdong because of the higher productivity of the workforce and because many suppliers are clustered nearby in the area nicknamed Bra City.
China’s increasingly first world infrastructure, the higher productivity of its workers and its gargantuan size mean it will continue to be home to a commanding share of manufacturing for apparel, jeans and toys as Li & Fung’s presentation also revealed last month.
The volume of production by the company’s suppliers in China actually grew by 30 per cent in the first half of this year, with more suppliers moving to lower-cost interior provinces. Mr Rockowitz quips that the answer to the question of ”what next?” in global manufacturing – is China.