Korean firms leading exodus from south China’s manufacturing hub- Moving to the Philippines

Workers leave a recently closed factory in Dongguan, China. On the factory's wall is a poster that states the factory has been foreclosed by court decree and is off limits to workers. (Xinhwa Newsis)

By Park Min-hee, Beijing correspondent in Guangdong province

Falling demand from abroad and increasing operating costs pushing foreign firms to look elsewhere

An executive from a Korean electronics company operating in Dongguan, Guangdong province, China said his firm recently built a plant in the Philippines. His and other companies working in China are apparently considering an exodus from China.

The company runs one of the biggest businesses in Dongguan. As a result of the financial crisis in Europe and the U.S., export orders are falling fast. Meanwhile, labor and other production costs are soaring. These factors are combining to make doing business in China much less profitable than it once was.

"If the situation in China doesn't get any better, there's no choice but to leave," the executive said.

"Our company's situation is the least bad among companies in Dongguan. Still, our business volume is 20 to 30 percent below where it was at this time last year. Some companies are 50 percent behind where they were," said the executive. "I heard that five other electronics companies are preparing to move to the Philippines."

Labor-intensive industries such as textile, shoe and toy manufacturing have already started leaving Guangdong, facing the critical situation. Companies in high-tech areas, while their situations are quite as bad, are nevertheless suffering from the effects of a financial crisis.

"Only the smart phone-related businesses are profitable right now. Other electronics are all in danger," said a businessperson in Guangdong. The area is a major manufacturing hub and has been called the engine of China's economy. That engine is apparently cooling.

Guangdong province's GDP was $833 billion in 2011, which accounted for 11 percent of China's total output. The province's per capita GDP of $7,819 has been China's highest since 1998. The volume of foreign trade is $913 billion, 25 percent of the entire nation.

But things have changed since the start of the Eurozone fiscal crisis and downturn in the U.S. Guangdong's export volume between January and April 2012, was $169 billion, showing a 5.5 percent increase compared to the same time last year. It was only one-sixth of last year's rate of increase, 32.8 percent. For the same period, the operating profits for companies in Guangdong dropped 21.1 percent from last year.

Even before the crisis in Europe, small Chinese companies had been going bankrupt one after the other in Guangdong. The area's new struggles illustrate the limitations faced by businesses that rely on cheap labor. In Dongguan, labor is no longer very cheap. Between 2009 and now, the minimum wage more than doubled from 540 yuan to 1,150 yuan (from about US$85 to $180) per month.

"Not only has the minimum wage increased, but the Chinese government has cut incentives for foreign companies," said a financial executive. "A loss in foreign exchange due to the appreciation of the yuan also threatens the company's financial well-being."

In recent years Guangdong, has been the face of a suggested new development model for China. Under the slogans of 'From manufacturing Guangdong to creative Guangdong' and 'Empty the birdcage to attract new birds', Guangdong implemented new policies to advance value-added industries.

As an effect of the policy, 7,044 companies were expelled and 72,220 companies were broken up. Guangdong province then attracted new firms. The government emphasizes that 55 percent of those new companies are in the high-tech manufacturing and service industry.

Guangdong province has been actively expelling companies in labor-intensive areas, saying 'Leave if you are not competitive'. Experts reported, however, that the government is quite embarrassed now, as a lot of companies have fled Guangdong.

"Last summer, the central government of China dispatched investigators to Dongguan to evaluate the flight of businesses," said a businessman. "After that, there has been no wage increase in Dongguan."

"We are doing our best to open up a new market despite the difficulties of falling international demand and increasing operating costs," said Zheng Zhen-rong, a deputy director of Ministry of Foreign Economic Relations and Trade of Guangdong province. "The government officers will make 25 overseas trips this year to attract emerging markets."

Hengqindao, an island of Zhuhai, southern Guangdong, facing Macau at front, is a huge construction site as an island itself, 106 square kilometers in area. Only a few years ago, Hengqindao was a small fishing village. The island is now transforming into a financial and high-tech industrial zone.

In 2009, Beijing designated Hengqindao as the third special development zone due to its bridge connections to Hong Kong and Macao. Hengqindao follows Pudong in Shanghai and Binhai in Tianjin in being designated in this way.

The government has a hundred billion yuan-project up to merge three heartlands of the Chinese economy, Hong Kong, Macau and Guangdong by 2020.

"There is no confirmed foreign investment yet other than Hong Kong and Macau capital," answered a person in charge of a new project, when asked about the result of securing foreign investment.

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