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Relax. South China Exports and Manufacturers are Doing Just Fine

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.

This article was written for the China business news site, China-briefing.com.

Dezan Shira & Associates specialise in foreign direct investment in China, and maintain accountants in Shanghai, Beijing and other major cities.

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