China factories face new challenge as growth slows

By KELVIN CHAN

AP Business Writer

HONG KONG (AP) _ As China’s growth inexorably slows, manufacturers such as Linan Meite Cable are discovering that being an efficient low cost producer is no longer enough to prosper.

Factories that had thrived by using cheap migrant labor to churn out inexpensive clothing, electronics and toys for export now face changing government priorities as a growth engine based on investment and trade loses its momentum after more than a decade of double-digit expansion.

At the same time, China’s labor costs are rising and global demand is still weak, putting pressure on manufacturers to move into more advanced production, consolidate into bigger entities or shift to cheaper inland regions to survive.

Growth in the world’s second-largest economy eased to 7.4 percent last quarter, the lowest since a mini-downturn in late 2012, government figures showed Wednesday.

Last year’s expansion of 7.7 percent tied 2012 for the weakest since 1999. Leaders in Beijing have indicated that slower growth is the price to pay for long term changes to the economy that reduce its dependence on trade and industrial and infrastructure investment. Instead, they want growth to be sustainable, less polluting and based on domestic spending by 1.2 billion consumers.

Caught in the middle are companies like Linan Meite, which sells shipping-container loads of electronics cable to customers in Europe and North and South America.

Owner Sabrina Dong is thinking of upgrading the company’s factory, one of more than 200 in Linan City in eastern Zhejiang province making coaxial and networking cable. Dong said she wants to buy a production line from Germany that can make the latest standard of computer networking cable, called Cat 7.

Only a handful of companies in China have it, so the investment would be a big competitive advantage. But the new machines plus an expanded factory building to house them would cost 30 million yuan ($5 million). The company doesn’t have that much cash and Dong’s father, who founded the company, is wary about borrowing to expand.

“I want to buy more machines to do high end cable,” said Dong, whose company was one of several thousand looking for buyers at the Global Sources electronics trade fair in Hong Kong this week.

“But my father said no, because he has done business so many years in China. He knows China won’t keep going like this” _ she angled her hand upwards _ “but come down like this,” she said, pointing her hand to the floor.

It’s one example of the dilemma in front of China’s countless low-end manufacturers, which feel the pressure to upgrade but are squeezed by rising wages and costs and also are dealing with the uncertainty of a fragile and uneven global recovery.

“We have to understand that the Chinese economy has entered a new phrase of structural change and upgrading, so we must look at these reforms and changes with a new perspective of thinking,” said Sheng Laiyun, a spokesman for China’s National Bureau of Statistics, at a press briefing Wednesday.

Weakness in China’s sprawling manufacturing industries was highlighted by figures last week that showed exports, long a big source of economic growth, shrank in March for the second month in a row.

“This will add to downside risks to growth and potentially weigh on job creation,” HSBC economists Qu Hongbin, Sun Junwei and John Zhu said in a report.

Slower growth has raised hopes of support from the government. Premier Li Keqiang has already ruled out sweeping stimulus like the one following the 2008-09 global financial crisis, but Beijing has rolled out some small-scale measures. The latest, announced Wednesday, lowers the level of reserves that rural banks and other financial institutions need to hold and extends some tax breaks for small businesses.

Such measures are of no consequence to China’s small entrepreneurs.

The government said it’s helpful “but we have 100 reasons to doubt that,” said Patrick Chan, marketing manager of iNotten, which is based in Shenzhen, next door to Hong Kong, and makes charging cables and battery packs for smartphones.

He complained that the policies seem mainly intended to benefit the country’s giant state owned companies.

Chan said low-end manufacturing companies like his that blanket the Pearl River Delta region in Guangdong province face pressure not just from rising wages and costs but also from the local government, which is trying to “push away” the factories and instead attract more advanced companies and service industries, part of the broader effort to reshape the economy.

“We all think it’s going to be tougher than before,” he said.

Chan said some factories have started to move to inland provinces such as Jiangxi or Hunan, but he’s staying put and trying to focus more on research and development.

David Sun, sales director for Honsunmount, which makes wall-mounting brackets for TVs and monitors in Ningbo, near Shanghai, said the yuan’s recent depreciation was “good news” because earnings from its mostly European customers would be higher after they were converted into yuan.

He said higher order volumes would boost revenue for the company by 30 percent over last year. However, the company’s mostly European customers are demanding bigger discounts, which will squeeze profit margins by 30 to 40 percent.

 Profits will be “much smaller,” he said as he waited for customers at his booth.