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By some estimates, thousands of factories in the Pearl River Delta manufacturing area between Guangzhou and Hong Kong have closed down, as China kicked in tough new tax and labor laws designed to push local industry to modernize.

“It affects our profit margins a lot,” said Winnie Ho, director of project management for Yee Kueng Industrial, which has a factory in Zhongshan, Guangdong province. “For some of our products in 2008, we have only minimal profit. It is a drag, I can say.”

Yee Kueng Industrial was among dozens of local plastics companies gathered at the AsiaMold 2008 exhibition in Guangzhou in late September, mulling strategies on how to stay competitive and attending what organizers said was a first for Asia, programs showing how software, equipment and machinery can be linked together to automate mold production.

Such steps are urgently needed in China, as the financial crisis in the United States could make next year more difficult, one local industry leader predicted.

“I think the challenging time will be the coming year,” said Alfred Au, vice chairman of the Hong Kong Mold and Die Council, which also sponsored AsiaMold. “If the situation doesn’t change, more and more companies will be hurt next year.”

Au said organizers pushed automation to local firms. The September 24 to 26 event was sponsored by Messe Frankfurt and the organizers of the EuroMold trade fair.

The display that the Hong Kong Mold and Die Council and others ran at the show illustrated, for example, how mold makers can automate and boost utilization of electric discharge machines from the 30 percent common in China to 70 percent that is common in Europe, Japan or North America, he said.

Firms are trying various strategies.

Yee Kueng Industrial is pursuing more precision molding, diversifying away from over-reliance on exports and toward domestic Chinese markets like automotive, which are more attractive with the Chinese yuan rising in value, said Jacky Ho, assistant general manager.

Hong Kong-based Ultratech Mold Design and Mfg. Co. Ltd., a 1,000-employee injection molding and mold-making shop with three factories in Dongguan, Guangdong province, and Shenzhen, has formed a team to make better use of enterprise resource planning software and adopted technology to cut mold-making setup times from 30 minutes to five minutes, said Simon Chueng, assistant general manager of sales and marketing.

The company has been able to hold its profits and annual sales of US$32 million (219 million yuan) steady, even as its wages for its injection molding operators have risen 30 percent in the last year, to about 2,000 yuan a month, he said.

With wages rising that quickly, economists and business leaders have debated whether the Pearl River Delta is losing competitiveness to places like Vietnam, India and cheaper regions in China’s interior.

Cheung said the Pearl River Delta is losing some competitiveness, but he said the company is not interested in looking for cheaper spots, preferring to focus on making itself more efficient. The firm’s customers, major multinationals like Phillips Electronics NV and General Electric Co., still maintain their business in South China, he said.

That was echoed by one American mold buyer wandering the aisles at the show, who said his costs for molds in China have doubled in the last five years. But, speaking anonymously because he did not want to identify his customers, he said efforts to find suitable mold makers in lower-cost locations outside China have not panned out.

One local molding executive said the South China firms that are in the most trouble did not prepare for the changes that have swept the industry.

“We had been laid back in that we could take advantage of labor, but that has changed rapidly,” said Jack Yeung, chief executive officer at Hong Kong-based Ace Plastics Co. “I think the factories that are closing down or going out of business were not managed very well.”

Ace is expanding at the moment, and expects to grow from 2,600 employees to about 3,400 in the next year, as a new factory in Zhuhai, Guangdong province, aimed at plastic electroplating, and a new medically oriented joint venture in Shanghai with U.S. molder Classic Industries Inc., both start up.

He said the company has been able to double the value it adds to each mold in the last two years, and has pursued other strategies like redesigning its factories to increase the number of machines monitored by one operator.

Yeung said he’s concerned about the global economic turmoil, but also sees opportunities for his firm as the Chinese industry consolidates.

Ace was in a minority of firms at the show, however, as others took a much more cautious approach.

Shenzhen Sunway Plastic Mold Co. Ltd., a 150 employee mold shop in Shenzhen, found that the rising Chinese yuan and rising labor costs “hurt us very seriously,” said marketing manager Bi Dong, but the company expects most of its customers to stay in China, rather than seek cheaper spots like India or Vietnam.

While firms focused on making themselves more competitive, you did not have to scratch too hard to find some frustration with Chinese government policies enacted in mid-2007, such as in export taxes and processing trade rules, which hit small and medium-sized firms in the industry hard.

Comments at the show echoed results from one local publicly traded plastics firm. Hong Kong injection molder and machinery maker, Cosmos Machinery Enterprises Ltd., told the Hong Kong Stock Exchange September 23 that sales at its plastic processing plant in Dongguan dropped 33 percent in the first six months of 2008, prompting layoffs and stepped-up cost controls.

“The government put us on the spot because they wanted to keep the economy stable and not rise too quickly,” said one Chinese plastics company executive, who requested anonymity for criticizing government policies. “They sacrificed us.”