Relax. South China Exports and Manufacturers are Doing Just Fine

February 1, 2012 Posted by China Briefing Reading Time: 6 minutes

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 info@dezshira.com, or download their brochure.

Related Reading

The Greater Pearl River Delta: Business Guide to South China (Fourth Edition)
In this newly-released edition of our regional business guide to South China, we offer business-minded individuals an up-to-date reference source for all of the key issues concerning setting up and successfully operating a business in South China.

Vietnam and China – A Comparative Look for Foreign Investors
In this issue of Vietnam Briefing Magazine, we take a look at Vietnam’s increasing attractiveness as an alternative to China as a major manufacturing destination in Asia. Vietnam is increasingly hitting the news for its low labor costs, similar to China many years ago, but the country in fact holds several additional, generally unexplored advantages for foreign investors.

Hong Kong City Guide
Asia Briefing’s complimentary Hong Kong City Guide is designed for the investor seeking a general overview of one of the world’s most dynamic regions and a key pillar in today’s global economy. Hong Kong has been a major beneficiary of China’s changing economic policy over the past few decades and local authorities have big plans for infrastructure investments and development zones to make the city’s economy even stronger. Positioned at the center of East Asia, Hong Kong has long been important as a gateway to Guangzhou due to its location on the Pearl River Estuary.

Guangzhou City Guide
Asia Briefing’s complimentary Guangzhou City Guide is designed for the investor seeking a general overview on one of China’s largest cities. As capital of Guangdong, one of China’s most developed and prosperous provinces, Guangzhou is also the center of manufacturing in the region and hosts several important annual trade fairs.

Shenzhen City Guide
Asia Briefing’s complimentary Shenzhen City Guide is designed for the investor seeking a general overview on China’s steadily growing tech city and important gateway to Hong Kong. Starting as China’s first – and eventually most successful – special economic zone, Shenzhen has seen vast sums of investment pour into China since the late 1970s.

Zhongshan City Guide
Asia Briefing’s complimentary Zhongshan City Guide is designed for the investor seeking a general overview of one of China’s most prosperous cities. Originally known as Xiangshan, the name of today’s Zhongshan town and country was changed in 1925 to honor the area as the birthplace of China’s famous revolutionary and political leader, Dr. Sun Yat-sen. Zhongshan has since blossomed into a mid-size modern industrial county with a national level development zone.