Submitted By: Simone Michel

South China was once known as the world’s factory floor. Plants used to spring up like mushrooms and seas of workers would wait in front of the gates in hope of being the lucky one to get a job. Lately, this picture has started to change. Many of the big gates remain closed due to rising costs and shifts in Chinese government policy, knocking hundreds of smaller factories out of business. Some of the factories that are still in Guangdong province, watching how their profit margins disappear, are considering moving to lower-cost countries such as Vietnam. According to this 1,000 shoe factories closed in 2007.

Many reasons come together: Companies are losing money because of the rising value of China’s currency, making it more expensive compared to the US Dollar. Furthermore, raw material prices ballooned and not the full percentage of this price increase could be passed on to customers. Tax shields for foreign companies were abolished. Inflation returned to China last year as well, letting cost of labor rise faster than productivity. As a rule of thumb, foreign managers in Shanghai have to raise wages by 10 percent every year, otherwise their employees give notice.

But rising cost is not the only reason factories have gone bankrupt. On one hand, workers can now find more jobs elsewhere than ever before and South China is experiencing a labor shortage. Furthermore, the workers that can be found are unskilled. On the other hand, China’s government is making it harder on these factories. After encouraging cheap manufacturing for more than a decade, the regime wants to push investment toward high-tech. The goal is to have more sophisticated factories with higher-wage jobs. China is following Japan and Taiwan, countries who have both started out at the low-end and climbed up the manufacturing ladder to the high-tech end.

Furthermore, the government changed labor policies at the beginning of this year. Chinese workers are starting to get aware of the working conditions and are now demanding higher wages, overtime pay and improved safety. The second broadcast of NPR’s China series highlights nicely how the new law is requiring businesses to give workers written contracts and pay compensation if they’re fired.

With more and more workers pressing their rights against their employers, a supplier’s market of labor and rising costs, the factories are forced to come up with new ideas. Do you think the factories in Guangdong province have to shut down because of all these external influences or do you think it’s their own responsibility because the concept of lean production has never played a role in China’s past?