Hangover after China's party?
Posted: Tuesday, August 19, 2008 9:13 AM
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Beijing, China
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| By Ian Williams, NBC News Correspondent |
GUANGDONG, China – Once the Olympic party is over, is China heading for an economic hangover?
Ben Schwall, for one, thinks the headache is already setting in for the country's seemingly unstoppable export machine.
"If you are a factory owner here, it’s not like you're being kicked around. Somebody has hit you over the head with a baseball bat," he said.
I met Schwall on a recent visit to the southern Chinese province of Guangdong, where he buys decorative lights for a string of U.S. retailers. "It's the perfect storm," he told me. "You've got a drop in demand. Business stinks. At the same time prices are going up."
‘Perfect storm’
The "perfect storm" is being caused by the soaring price of oil and other raw materials, spiraling labor costs, and the appreciation in the value of China's currency against the U.S. dollar, as well as a sharp down turn in demand as the U.S. faces possible recession.
Factories are closing right across the region where China's export boom began, with the most pain being felt at the low end – lighting and shoe factories, for instance. One of the few businesses still booming is scrap metal, teams clearing the remains of shuttered production lines.
Dong Tao, the Chief Asia Economist at Credit Swisse, just across the border in Hong Kong, calls it the end on an era of ultra-cheap Chinese exports.
"We expect that in the next three years, one third of Guangdong's manufacturing export factories will be closed down," he told me.
There are tens of thousands of factories here. If China is the workshop of the world, then this is its engine. A third of China's exports come from Guangdong, feeding the world's insatiable appetite for everything from shoes to lights to electronic goods.
"The entire world had the impression that the happy party of very cheap Chinese goods could last forever," Dong said. "I thought that. But I think perhaps its coming to an end."
The oil price affects the cost of production, but also the cost of shipping raw materials to China and then shipping the finished product to the U.S.
Cheap labor drying up
China's limitless supply of young cheap labor seems to be drying up too. The minimum wage in Guangdong has doubled in three years, and now stands at around $120 a month. With overtime, workers are taking home more than $200 a month.
The one-child policy is beginning to slow the supply of nimble-fingered young women, favored by the factories. And the new generation of migrant workers from the countryside are more choosy about work – and more savvy.
At one big street side labor market, young migrants work their mobile phones, comparing wage rates between factories. A new labor law has given them more muscle, especially since – to the consternation of factory owners – the government seems determined to enforce it.
Labor turnover is running as high as 75 percent annually at some factories.
‘No profit!’
Many of the factories in this region are owned by Hong Kong and Taiwan entrepreneurs. Men like Philip Cheng, whose company, Strategic Sports, is one of the biggest manufactures of crash helmets, bemoan the sharp downturn. "We don't have any profit now. No profit!" he told me, as helmets snaked along on the conveyor belt behind him, workers pasting on the visors. "The days of cheap labor have gone. No cheap labor. OK?"
Down the road, Dongguan Shan Hsing Lighting has just moved into a new factory, but is now operating at fifty percent capacity. It’s been hit by the crisis in the U.S. housing market, its biggest customer. The company's president, Tim Hsu, said profits have dried up.
"With constantly rising prices, we have to raise our quotes to survive. American consumers will have to pay higher prices," he said.
Dong at Credit Swisse agreed."Watch out," he said, "the prices in Wal-Mart, Home Depot, Motorola, they're going up."
Other factories are chasing lower labor costs elsewhere. Dong told me forty percent of factories he surveyed recently are looking to move – either to inland China, where costs are less, or out of the country.
Cheng of Strategic Sports is looking at Vietnam, where labor costs are now around half of those of China; Schwall, the lighting buyer, is planning a visit to India.
For Schwall, there's another headache. His company, Aliya Intenational, also monitors quality, making sure manufacturers aren’t cutting corners in the production process or using sub-standard or dangerous materials, a task made all the more important following last year's spate of product recalls.
He said that even before the latest surge in costs, factories were operating on wafer-thin profit margins, and now some may be more tempted to take short cuts as a way of cutting costs.
"The devil is everywhere," he told me as he examined the fittings on an elaborate chandelier he'd plucked from a busy production line. "And of course there is temptation."
He said he feels much happier when the factories he's dealing with are at least making some money, since the temptation to cut corners then is not as great.
What does it mean for China Inc?
All of which begs the question of what this means for China Inc. The pain seems most acute in the export manufacturing heartlands of the south, and doesn't appear to have yet dented China's overall growth rate, which remains above 10 percent – though many economists are skeptical about the accuracy of the official figures.
The Chinese media has carried stories pointing to a slowdown, but they have tended to follow the official line of keeping bad news off the presses during the Olympic Games. Officials in Guangdong have also played it down, describing the closures as just a normal transition away from low-end production, of the kind that took place in Taiwan, Korea or Japan. Which may well be good in the long term.
The problem is the meltdown is happening so quickly. The head of the Hong Kong Small and Medium Enterprise Association, whose members are big investors, warned in late June that 20,000 of the 70,000 Hong Kong-owned factories in Guangdong could close this year. He said the region is no longer competitive.
Economic ups and downs are not new to the rest of the world, but China has known little but boom for nearly thirty years. Breakneck double digit growth has become the norm. No other major economy has grown like China over that period.
Moreover, China's communist leaders, presiding over one of the world's most rapacious capitalist economies, have traded on their ability to deliver economic growth to dampen demands for political change.
The massive Olympic rebuilding – with its $40 billion price tag – also provided an economic stimulus, which will soon be over. The Games have given a big "feel good" lift to Chinese, about what they've achieved and where they are going.
This, and the seemingly unstoppable boom, have set expectations very high about the future, which could make a post-Olympic economic slowdown all the more difficult to manage.
