Op/Ed Commentary: Chris Devonshire-Ellis
Feb. 1 – With some media spotlighting potential problems in South China – and one blog even going so far as to suggest smart Chinese businessmen are queuing up to attract orders, only to deliberately declare bankruptcy – it’s time to look again at the realities of the situation. The actual business environment in South China is something we are qualified to discuss with some knowledge – our firm, Dezan Shira & Associates, has four regional offices there (Hong Kong, Shenzhen, Guangzhou and Zhongshan) and has conducted business in the region for 20 years, while our Regional Partner Alberto Vettoretti is an adviser to the Shenzhen Government.
That South China has gone through changes is a given, but they have not arisen due to the Global Financial Crisis, and neither are they particularly new. Having ridden the export manufacturing boom since China began its reforms in the 1980s, South China (and Guangdong Province in particular) became a fertile ground for businessmen from Hong Kong and Taiwan looking to take advantage of the mainland’s relatively low wages and the proximity to their own homes. With Hong Kong as a major port, South China rapidly developed as an export-driven hub, right up until the early part of this century. However, China’s central planners saw demographic problems with this-low end, low-margin, labor-intensive manufacturing base and wanted to encourage such businesses to move elsewhere.
This was done by removing tax incentives for manufacturing WFOEs, decreasing the amounts of VAT claimed back upon export of certain items, and by raising the minimum wage. This trend effectively began back in 2007. While there was plenty of moaning and groaning about the situation, most Guangdong-based export manufacturers quickly got the message, and decamped their manufacturing operations further afield, mainly to Vietnam, Bangladesh and other parts of Southeast Asia. The part left in South China was the liaison office – after all, who wants to completely uproot a successful business with plenty of international buyers?
This means that while on the face of it, many companies remain in South China, those that have business models incompatible with the new business environment shaping the region only actually retain a sales office – the manufacturing is sourced from or produced elsewhere. This migration of businesses from South China is one of the reasons we set up offices in Vietnam several years ago – many of our clients there are in fact originally clients from South China. Accordingly, while it always pays to be prudent, we do not expect to see any major problems with sensible businesses in South China. Thousands have already adjusted.
This means of course that South China’s industry has been going through an evolution away from low-end manufacturing and towards value-added production. The high tech industry is developing as a core component of Shenzhen’s commercial make-up, and bio-tech and other new industries are now taking the place of the old Nike factories and others of that ilk. They are succeeding. The fact that Hong Kong has plenty of world class academic resources to bring to the table is of course a major boost to underpin serious R&D and investment in high-tech industries across the Pearl River Delta. That talent is far better utilized in the new technologies of IT and biotech than in manufacturing toys and Christmas trees, and the entire region has been shifting away from low-end production now for several years.
Far from being in the doldrums, South China exports have been booming. According to Marine Insight, Guangzhou ranked the seventh busiest port in the world last year, and Hong Kong was ninth. (First was Shanghai, then Ningbo followed by Singapore). Shenzhen is also usually around the top 10 mark. So South China-based manufacturers, their exports, and the products manufactured there are not in as bad a position as some would suggest.
The sustainability question over buying product from South China really needs to be divided into two: firstly, what type of product? Because hi-tech industries are booming in South China and are encouraged to do so through a variety of incentives. If the product is traditionally low-end, then is the company acting as an intermediary for manufacturing operations elsewhere? Most low-end manufacturing in South China has already left. The only caveat here is if an overseas buyer is acquiring low-end, low-value, high-labor product from a South China-based factory, its probably time to look elsewhere (Vietnam) and impose the usual trade terms to protect a buyer from any default. Unless someone’s been really cheap shopping around the manufacturing bargain bin ends with dodgy suppliers, the risk of default has lessened significantly. What remains in South China is an economy that is vibrant, high-end, and supporting at least 3 of the top 10 busiest container ports globally. Buyers looking at cheap products should be looking to their contacts for advice, and companies wanting to engage in high-tech businesses should be getting into South China as it reinvigorates and reinvents itself as a dynamic trading hub, once again.
Dezan Shira & Associates maintain several offices in South China as well as in Vietnam. To enquire about business, legal, tax and related issues throughout the region please contact the firm at email@example.com, or download their brochure.
The Greater Pearl River Delta: Business Guide to South China (Fourth Edition)
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Vietnam and China – A Comparative Look for Foreign Investors
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HEAR HEAR!!! Its about time someone stepped up and told it how it really is. The negativity of people commenting on South China who never come near the place has been getting stupid. We’re booming in fact, Shenzhen just opened a St. Regis Hotel with 102 floors while the city is starting to resemble Singapore the same city we are modelled on.
PS: Give Alberto my regards!
Hi Bryce; I was in Shenzhen last month, a lot of changes. A great Sheraton Daimeisha Resort complex too nowadays. Our billing for South China FDI was up 26% YOY in January so I concur, re-investment into South China from overseas is picking up. Cheers – Chris
Yes, indeed, buyers for low end products should have started to at least explore elsewhere at least three years ago.
2011 is so last year. The BDI has PLUNGED in the past month.
P.S. as far as I know AAPA still hasn’t published the 2011 numbers and that link leads to an article from August 2011.
Question: how much of the goods which are sent via the southern port were actually produced in the south compared to goods produced more inland or to the west. These last two obviously have no port to use.
@Joel – a good point, although the data we have is the most current available, and youlre right, not all 2011 stats are out yet.
However exports from China’s Far West to Europe and the US exit via Tianjin, and those from Yunnan either from Haiphong (to S/E Asia) or via Beihai (S/E Asia & HongKong).
Inland regions such as Chongqing and so on export via the Yangtze through Nanjing, Shanghai or Ningbo, suggesting that the majority of shipments from Guangdong are probably locally sourced. But then again I’m not a logistics guy. Can anyone else shed light on the China sources of products exported from South China?
Thanks – Chris
I have not looked at the port stats in a few years, but in general, what I can tell you is that there are significant volumes coming out of the major east coast ports (Ningbo, xiamen/ Fuzhou, Guangzhou, and Shenzhen) from inner (south of Yangtze) provinces. If the products are north of Yangtze, and within proximity of Yangtze, then they are more likely (historically) to travel via boat to Shanghai.
However, and where having access to real time port traffic is important, the drought (and impact to Poyang lake) has significantly reduced river traffic down the Yangtze. Which is resulting in higher levels of truck traffic, and therefore a wider diversity of ports (away from Nanjing/ Shanghai) will occur.
As for breaking it down a specific port’s volume by province, that can be done, but the vast majority of export traffic will come from nearby provinces. Unlike the east coast market, which was build off export economy, the inner provinces are (largely) built off the subassembly or regional markets. So, a lot of the output will either be used up locally, or sent to another site (usually on East coast) to be put into another step of production before being sent out.
I’ll see if I have any old data (we actually interviewed all the ports in 2008 to get a feeling on how much traffic was bound for export vs domestic consumption… not sure if I still have it though.
“Most low-end manufacturing in South China has already left.”
I am not sure about that. You might be in contact with particularly sophisticated operators, who have taken actions before the rest of the crowd.
If we look at QC inspections of garments and other low-tech products, Guangdong still represents a bigger volume than any other province (Zhejiang, Fujian…).
I know many importers of low-tech products who would like to purchase outside China, but who are not organized to source efficiently from several countries. An importer of promotional goods might find the cheapest caps in Karachi, the cheapest T-shirts in Tirupur, the cheapest USB keys in Shenzhen, and the cheapest lighters in Wenzhou. But it is extremely convenient for him to keep buying everything in China.
@All Roads – Rich thanks for that. Fascinating observations as always.
@Renaud – I’d agree, China does offer convenience in terms of bundling products into one container more than anywhere else at present. Vietnam I think is catching up and so is Mumbai though. But I also agree with Joel’s comments that for low end, low value items the buying should had left South China 3 years ago, there’s no need to source that type of product there now.
Appreciate your feedback!
Thanks – Chris
From our perspective:
1. An increasingly large % of our business is going to SEA and provinces other than GD–but the majority of what we do is still is still done in GD. We do not do any electronics or “high-end” manufacturing. The fully developed supply chain, the maturity of suppliers and labor and the logistical convenience cannot be matched anywhere else. Unless we’re ordering an entire product from a single supplier, we almost never find complete supply chains outside of GD that are significantly cheaper than what we can find in GD.
2. I don’t have stats, but I’ll bet that it’s safe to assume that this (the movement of production) is the norm for most industries so the % of product shipped via the three PRD ports that is actually from other provinces must be increasing as well.
3. Further, like many of the electronics made in SZ, the % of any product that is made in various other locals (and countries) and then finished/packaged in SZ or GZ prior to shipping will make final numbers very hard to interpret.
4. We work with suppliers that have generally been in business 10 years or more in GD and still have major QC, management and other contractual issues when customizing production on a regular basis. The frequency of issues is MUCH lower in GD than in ZJ or SC or Vietnam (QC stats would confirm this across industries). This is the MAJOR reason that even though prices (usually labor and incentives to factories) are often better elsewhere, we’re still working mostly in GD. I see ZJ and VN as being similar to what it was like in GD 10 years ago.
@David – Astute observations. So it appears that buying from established manufacturers with a track record (David mentioned ten years) is still very much a feasible purchasing model in Guangdong.
Readers please note: David runs a well known sourcing business in South China and its worth contacting him if you need sourcing/buying assistance. Click on his name on the post above to visit his blog and get details.
Thanks – Chris
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