Early signs of recovery in heartland

Less than a year after being in the eye of an economic storm, China's manufacturing heartland might at last be showing some signs of recovery.

Guangdong province - labeled one of the key "workshops of the world" - was on the firing line at the end of 2008 when North American and European consumers stopped buying their goods.

Exports collapsed by 18.6 percent in the first half of this year, according to Customs statistics, as vital markets for the province's electronics, clothing and household goods manufacturers dried up.

Only six months ago it was reported that 600,000 migrant workers, who make up a substantial proportion of the labor force, had decided to go home.

Many businesses, which had until recently been thriving, were left questioning their survival.

Yet after months of the sustained impact of the government's 4 trillion yuan economic stimulus package, as well as indications of a steady recovery in some export markets, there seems to be evidence that at last things might be turning around.

The fall in the province's exports has certainly slowed, down 15.1 percent year-on-year in July, compared to 18 percent in June, according to the National Bureau of Statistics.

Frankie Yi, marketing director of Huizhou Unihero LED Lighting Technology in Huizhou, one of the province's major cities, said the stimulus package is having a positive effect on his business.

It is part of the Shenzhen-based consumer electronics group Unihero, whose exports of appliances slumped by 30 percent in the first half, compared to last year.

The focus is now on the low-energy LED lighting subsidiary, which is based at a business incubator in the HZZK National Hi-Tech Industry Development Zone, a Chinese national industry park.

The subsidiary's work has been boosted by the government's huge building and infrastructure spending program, in which low-energy LED lighting is often specified.

"Because the government is specifying the use of LED lighting in a lot of new infrastructure projects, it has benefited the company," Yi said.

The growth of the LED business, whose sales largely go to the domestic market, is gradually moving the group away from a dependency on exports.

"Before the economic crisis, one of our main strategies was to concentrate more on the domestic market, and this we are continuing to do," he said.

High technology

The LED company is one of a large number of hi-tech businesses that make up the Guangdong economy.

Often set in green landscaped parks, they contrast with the province's image of factories belching out smoke.

Despite the crisis, the province still looks relatively prosperous with few obvious signs of unemployment or poverty.

It has been hit hard, however, after suffering its biggest economic trauma since it set out on the road to becoming one of the industrial powerhouses of modern China more than two decades ago.

There have been a number of initiatives at both provincial and municipal levels to get the province back on its feet.

These include subsidies for employing people, tax reductions and other stimulus measures.

One of the main strategies of government authorities has been to lessen its dependence on foreign-owned companies - some 2,542 of which deserted the province last year as a result of the financial crisis.

Xie Zhongfan, executive vice mayor of Zhongshan, said it is important that the economy not be dependent on one or two companies that might suddenly leave, and focus instead on developing homegrown small businesses.

"If you develop a solid base of SME (small and medium-size enterprise) businesses, the money is in the pockets of the business owners who then reinvest it in the local economy," Xie said.

One of the big debates among economic planners is whether Guangdong should give up its dependence on low-technology, but labor-intensive industry - making such items as simple household goods and toys - and move up the industrial chain to make more value-added technology products.

This is one of the goals of the Torch Industrial Development Zone in eastern Zhongshan, stretching across 70 sq km and one of 57 hi-tech zones in China.

About three quarters of the 500 businesses on the site are in hi-tech sectors, and the combined annual turnover of all the businesses is about 90 billion yuan.

Feng Shusheng, director of the administrative committee for the zone, said there is no reason why the development of a high-tech business sector should lead to fewer people being employed.

"State-of-the-art electronics businesses can be labor-intensive, as well. We want to develop businesses that are both technologically-intensive and labor-intensive," Feng said.

"It is not good to move all the lower-tech, labor-intensive businesses to less developed areas of China, since it doesn't help those areas with their development," he added.

Lian Hoon Him is a partner and head of the operations practice that covers manufacturing at the management consulting firm AT Kearney in Hong Kong.

Lim said the challenge for Guangdong's manufacturers is not necessarily to move into more advanced sectors, but to develop more efficient manufacturing processes.

"They need to redesign their end-to-end supply chain and manufacturing processes so they can produce items more cheaply and efficiently. This improves their manufacturing position, and could go some way to help in weathering a fall in export sales," Lim said.

LCD televisions

The production lines at the manufacturing plant in Huizhou of TCL Corp, China's third-largest TV maker, are still going at full tilt.

The plant is producing 5,000 46-inch and 8,000 32-inch LCD TV modules a day.

Although exports are down 20 percent year-on-year, the company has been helped by a massive 248.9 percent increase in domestic sales of LCD televisions.

The company has been given a major boost by the government's "new for old" policy, which subsidizes consumers buying new TVs, cars and other products.

Bo Lianming, the company's chief operating officer, said this proved a major lifeline in avoiding any layoffs of its 50,000-strong work force.

"The domestic market is now very good, especially in the second quarter of this year. We have benefited from the stimulus package," he said.

Lim at AT Kearney, however, said it is not always easy for companies to make up for a sudden shortfall in exports and sell to domestic consumers.

"Companies which focus on exports often have higher cost bases because they have systems in place to manage the needs of overseas customers who in turn are prepared to pay higher prices for reliability. The domestic market might not wear those higher prices," Lim said.

Huang Jingbo, a professor of international trade at Sun Yat-sen University in Guangzhou, said there is evidence that lower technology industries are moving to more remote areas of Guangdong and other provinces.

"Guangdong is now moving low-tech industries from the Pearl River Delta to the eastern and western parts of Guangdong and even other inland provinces," Huang said.

"This increases job opportunities in regions and provinces not as developed as the Pearl River Delta and also makes the industries there more profitable because the labor there is relatively cheap," he said.

He believes the effect of this will be to attract more hi-tech industries to Guangdong's key manufacturing centers.

"There is a phrase, 'Empty the bird's nest and attract new birds.' When the bird's nest is empty, hopefully, we can attract hi-tech birds," Huang said.

Hybrid cars

One of Guangdong's exciting new industries is hybrid car maker BYD, in which billionaire investor Warren Buffett recently purchased a $232 million stake.

BYD employs more than half of its 130,000 employees in the province, also making other lines such as batteries for mobile phones.

It introduced the world's first mass produced plug-in hybrid vehicle, the F3, in December 2008 in the first months of the economic crisis.

While car sales slumped across the world, the company's sales in the first half of this year were up 176 percent, exceeding total sales for the whole of 2008.

Huang Juan, a spokesperson for BYD's auto export division, said the company has benefited from the stimulus package and the government's focus on developing a new energy car industry.

"The State Council approved the revitalization plan of 10 industries, and the car industry was one of them. As a result, the car industry in China was prosperous," he said.

Huang Juan said companies like BYD will now drive the future of the Guangdong economy.

"The province is now at a stage of economic transition. Its inefficient traditional industries are now moving to innovative, energy-saving and environmentally friendly ones," he said.

"The upgrading of enterprises is a driving force for the industrial transition of the province," he said.

Another new energy company blazing a trail in Guangdong is Mingyang Electric Co, based at the Torch Hi-Tech Industrial Development Zone in Zhongshan.

Alternative energy

Once just a small iron plate factory, Mingyang Electric makes wind turbines and is at the forefront of China's new energy sector.

Four years ago, it had just three people working on turbines. Now it employs 1,700, and its turnover is set to double this year to 5 billion yuan from 2.1 billion yuan last year. A flotation on NASDAQ has been postponed from late this year to next year.

Mingyang Electric has had to switch some of the production of its turbines nearer to its main markets in the north of China. It costs 300,000 yuan to transport just one unit by road from Zhongshan.

Zhang Zhonghai, vice director of the company, is confident the company can play a major role in developing the wind power industry in China.

Wind is set to make up 1.5 percent of China's energy next year and 15 percent in 2020.

"We aim to concentrate on innovation and technological research. We can be the wind power and technological base of China," Zhang said.

Huang at Sun Yat-sen University cautioned that moving into higher technology sectors does not make an economy immune from the chill winds of recession.

He said that during this latest economic crisis, some of the lowest technology manufacturers have proved the most resilient since what they produce are daily essentials for both the Chinese and export markets.

"Household goods such as sink bowls, bags and suitcases are daily necessities and the downturn in exports hasn't really affected these, even though they are labor-intensive goods. It is areas such as consumer electronics that have fared worse," he said.

It is clear, however, that the stimulus package has saved Guangdong from what might have proved a severe crisis.

"It would be difficult to envisage how an economic stimulus package of this scale could not have a significant impact, " Lim at AT Kearney said.

Industrialists and small business owners throughout Guangdong will be looking for a stronger recovery than the one yet seen, but will be happy there are at least some green shoots already showing.

Li Ruqui, the mayor of Huizhou, believes that continuing to modernize the province's industrial base is the right way forward.

"It is important that Guangdong enterprises upgrade their equipment and their technologies. Without the stimulus package the economy would have fared much worse, and we can now see that the economy is recovering," the mayor said.

(China Daily 08/31/2009 page1)