China’s manufacturing sector must reinvent itself if it’s to survive


People practice manufacturing shoes at a training center for workers in Dongguan, Guangdong Province, China, in this 2012 file photo. Guangdong, the region that drove China's rise after market barriers started coming down in 1978, is among the nation's slowest-growing as faltering demand cuts exports and workers exit. (Nelson Ching/BLOOMBERG)
November 23, 2012

— This city on China’s Pearl River Delta was once a manufacturing boomtown, a place that made so many different things, from toys to shoes to furniture, that it became known as “the world’s factory.” Migrant workers came from all corners of the country to work here, often taking jobs that used to be in the United States.

But these days, it’s Dongguan that’s losing jobs and eyeing the United States with some envy.

“I’m leaving,” said Frank Lin, a Taiwanese businessman who is shutting down his factory in Dongguan. “There’s no future for this place.”

Lin, 55, sat in a cavernous dining room at the Haiyatt Garden Hotel where only two tables had diners. This room used to be packed every night, Lin said.

Americans are more accustomed to hearing about Rust Belt manufacturing towns in decline — after the jobs left for China. But in China, too, there are places where factories are shuttering and the future is uncertain.

China’s reliance on cheap labor has powered the country’s economy to unprecedented heights. But China’s manufacturing sector is running into problems these days: squeezed from one end by places with even lower labor costs, such as Laos and Vietnam, and yet struggling to move to higher ground making more advanced products because of competition from developed nations such as Germany and the United States.

“China’s manufacturers are in an extremely hard situation and facing what we call ‘a sandwich trap,’ ” said Zhang Monan, a researcher in economics at the State Information Center, a government think tank.

For China’s new leadership, which completed its once-in-a-decade turnover this month, the coming years include a big test. Even as China is poised to become the world’s biggest economy, it is still straining to make the transition from “the world’s factory” to becoming an economy on par with the United States.

During the transition, the outgoing leader of the Communist Party, Hu Jintao, said that China’s “unbalanced, uncoordinated and unsustainable development” remains a major problem for the country, according to the official Xinhua news agency.

In a way, China’s model for its manufacturing sector has become the United States.

“China has to change its manufacturing strategy to be more innovative in technology and compete with a ‘reviving’ U.S.,” wrote Zhang, the researcher, this summer in an op-ed for the China Daily titled “Wake-Up Call for Industry.” “China is expected to face fiercer-than-ever competition from the United States in the manufacturing sector, making it all the more urgent for Beijing to expedite its industrial upgrade.”

It has been clear for a few years now that places such as Dongguan must adapt or risk getting wiped out. In March 2008, Wang Yang, the party secretary for Guangdong province, visited Dongguan, which was then a buzzing hub of activity.

“If Dongguan does not start to transform its industrial structure today,” he warned, according to the South China Morning Post, “it will be transformed [and lose out] tomorrow.”

But it could already be too late for Dongguan.

Before 2009, the city was one of the fastest growing in China. Then the U.S. recession hit, which sent demand for Chinese goods plummeting. Before the city could fully recover, Europe’s debt problems delivered another punch.

During the first three quarters of this year, Dongguan grew 3.5 percent. That would be considered strong nowadays in a developed economy such as the United States, but it is anemic by Chinese standards and much lower than the average rate of 7.9 percent in the rest of Guangdong province.

China has relied on two pillars of economic growth for the past several years: exports and construction. But many analysts say that in order for the country’s economy to mature and stabilize, it has to find other ways to grow — beyond building airports and roads or making goods cheaply.

The country has made some progress in building more advanced products such as airplanes and cars. But Dongguan’s troubles illustrate how hard it can be to re-invent an economy built on cheap labor overnight, especially as China’s overall growth has slowed to its lowest rate in years.

Dongguan is a sprawling place — more a patchwork of townships than a centralized city with a hub. In Houjie, known for its shoe factories, Chen Yunyan sat looking weary in her shop, which was filled with giant bags of zippers sold to other manufacturers.

“It’s the worst,” she said about the economy. “Most of my customers have gone bankrupt.”

The central zipper factory for Chen’s company is in Shenzhen, a major, faster-growing city to the south near Hong Kong. Chen, who manages customers in the Dongguan area, blames the government for failing to help ordinary people.

“It’s the most corrupt government,” said Chen, who is 36. “There’s no money spent on ordinary people. They only spend it on building roads.”

Houjie is, in fact, filled with bulldozers and half-built roads. Across the street from Chen’s storefront, a building was under construction.

In a job placement center around the corner, only a few young migrant workers were milling around looking for work. Lai Rongsheng, 21, moved to Dongguan three years ago from the southeast province of Jiangxi. He worked at a toy factory for six months before quitting, and now he wants to go into sales — for higher wages and work that’s less grueling. But he hasn’t found anything yet.

“More people are looking for work,” said Lai, who had already made two trips to the job placement center. Without the hope of better jobs in Dongguan, Lai and his friends said that some migrant workers were beginning to return to their hometowns.

In an office across the city, Chen Shuibin, an accountant for businesses in Dongguan, said that of about 300 clients, half were losing money this year.

“It's worse than 2009,” he said while drinking tea in his office. “We live day by day. We can’t see any hope for tomorrow.”

Liu Liu contributed to this report.

Jia Lynn Yang is a staff writer at The Washington Post who covers policy and business. Before joining the Post, she worked at Fortune magazine.
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