Sharply rising costs in China and weakness in major markets in North America and Europe are making it probably the most difficult time in at least 20 years for many export-oriented small and medium-sized manufacturers and plastics firms in China.
In recent interviews, executives said more factory closings are likely as less-efficient firms struggle with wage increases of 15 percent a year and a stronger Chinese currency. Further compli- cating the outlook in the past few months is sudden slackness in orders from traditional Western export markets, they said.
“In the last 30 years, since the Chinese opening-up policy, this is the toughest time for Hong Kong companies,” said Raymond Chan, chairman of the Hong Kong Plastics Manufacturers Association Ltd. and president and CEO of automotive and electronics molder Jing Mei Industrial Co. Ltd.
The challenges are hitting some foreign-owned firms as well. Gideon Milstein, the head of the Guangzhou, China-based Foreign Manufacturers Association, called the current environment “one of the hardest times for manufacturing businesses in China … in an atmosphere of looming global recession.”
Strategies such as adopting better technology or lean manufacturing are popular topics at industry meetings in China these days, including a Sept. 30 technology forum sponsored by the Hong Kong plastics group and a Sept. 26 FMA meeting in Shenzhen that drew more than 50 attendees.
Bernard Ting, chairman of the Hong Kong Toys Council and general manager of large injection molding firm Qualidux Industries Co. Ltd., said some toy factories have gone bankrupt this summer, a troubling sign because it's rare for them to close now, the prime time for filling holiday orders in Western markets.
“Usually they don't go belly up in the peak season, in July and August. That is unusual,” he said.
The toy retailers and corporate buyers cannot accept price increases, so factories must become more efficient, he said. But the troubles in the supply chain also have buyers looking much more closely at the financial condition of factories they order from, he said.
“Usually the customers would go right for the cheapest factory without thinking but nowadays it has changed,” said Ting, who spoke at in an interview at the HKPMA forum.
The comments echo an estimate last month from Jack Yeung, the head of the Hong Kong Mould and Die Council, that 20 percent of the mold-making and molding factories in South China could close by early next year because of the tough business environment.
Some companies, paradoxically, are doing well.
Yeung and others said companies with stronger technology or market niches are picking up business as factories consolidate or customers reduce their supply chains. Some sectors such as medical product manufacturing and automotive are attracting more investment as China's manufacturers upgrade.
But for many exporters, the situation is getting tougher.
Milstein, who is also chairman of Guangzhou-based metals and plastics fabricator CBL Group in addition to his FMA role, said labor costs have risen 50 percent in the last three years for his firm, which has a factory in the Guangzhou suburb of Panyu and is building another in Wuhan.
As well, he said prices for some raw materials went up 65 percent this year, and China's currency has risen 7 percent this year alone, further cutting into profits.
“Margins now are virtually nonexistent, so where do you go from there?” Milstein said. “We as a lean manufacturer have been focused on absorbing cost increases coming through and mitigating them to our customers … but it's got to a pace now where even we can't keep pace with those price increases.”
The FMA is affiliated with the British Chamber of Commerce in Guangdong.
Smaller companies in China are also finding it harder to get access to bank loans, potentially causing more problems as China tightens its lending, executives said.
For some of the companies, it requires rethinking their approach. China still has many advantages, they say, especially a well-developed supply chain that is hard for other emerging economies to match.
But the days of relying on low costs to turn a profit are over, they said.
“We have to change the mindset from cheap labor and cheap land to higher tech,” said Eric Sun, director of business development for Hong Kong-based Kin Hip Metal & Plastic Factory Ltd. and a vice chairman of HKPMA.
At the HKPMA forum, for example, European machinery manufacturers Arburg GmbH + Co. KG and Engel Holding GmbH discussed new technologies such as a linear motor injection press Arburg is making with Siemens AG for thin-wall projects like circuit boards, and Engel's organomelt technology to mold lightweight thermoplastic composite materials.
Hong Kong manufacturers are increasingly investing in automation to lower costs, said Samson Kwok Wai Suen, a senior consultant with the Hong Kong Productivity Council.
Suen, who spoke at the HKPMA forum, said automation can help overcome the changing labor market, with development in interior Chinese cities making it harder to recruit line workers and skilled engineers to the coastal regions where Hong Kong factories are centered. Upgrading is crucial, he said.
“If they go to the high end, they can still survive,” Suen said. “If they are in the middle, they have to fight with the [mainland Chinese] manufacturer and the low-cost countries.”
Milstein said the rapidly rising costs in China are prompting questions about the future of contract manufacturing in the country.
But he said that manufacturers — and their customers among the brand owners — for the most part don't have a lot of other viable alternatives right now, when all the pros and cons are considered.
“When you look at what options there are, not many countries have the infrastructure that China has to be able to support sophisticated contract manufacturing,” Milstein said. “At the moment I would question if there are opportunities there to move it.”