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by Wai-duen Lee & Jonathan Beard
Guangdong Province has long been regarded as the "factory of the world". Nearly US$370 billion of export, equivalent to 30% of the national total, was shipped from the province in 2007. In the same year, Guangdong accounted for 11.2% of China's GDP and about 12% of the country's manufacturing plants.1
However, over the last year-and-a-half, increasingly shrill headlines have announced a collapse in this once booming economy. Reports have noted thousands of workers losing their jobs as manufacturing plants closed-from small/medium garment and shoe and electronic plants, to one of the world's largest toy suppliers. Surveys have indicated high levels of plant closures, although the data is far from complete. Even in a booming economy there will be considerable churning as many companies close, but many more will open or expand--the absence of adequate Guangdong time series data on this issue only serves to cloud the picture.
Nonetheless, other indicators highlight the slowdown befalling the Guangdong economy. In the first 11 months of 2008, the province's external trade value grew by only 10%, lagging well behind the national average of 19.3%, and its share of the country's total exports has shrunk from around 30% in 2007 to 26.5% (January-November 2008) (see Chart 1).
For the first 11 months in 2008, container throughput at Shenzhen ports was only 4.9% higher than the same period last year-significantly lower than the double-digit growth rates of the past decade and of the other, less mature, PRC port regions. More worryingly, throughput at the previously thriving Yantian terminals went into decline as demand in their key market, North America, collapsed-throughput declined by 5% over the first half of 2008.
In truth, a Guangdong slowdown has always been on the cards: 15-20% trade growth cannot continue forever. However, during the last 18 months, structural and cyclical trends have combined to produce a "perfect storm" of adverse conditions. In 2007/08, Beijing introduced a number of regulatory changes targeting labour-intensive and highly polluting export-processing industries, in addition to a new Labour Contract Law. These were all of particular significance to the Guangdong economy, but unfortunately hit just as demand was vanishing in the key markets of North America, Europe and Japan. Not surprisingly, in recent months, Beijing has desperately reversed or eased up on some of the reforms.
When the not inconsiderable impact of the global meltdown is stripped out, the more salient point, for medium and long-term forecasts is the continued evolution of Guangdong from a labour intensive, relatively low-skill export-oriented economy to one focusing on products that require higher skill levels and an expanding service sector. Economic indicators suggest that the province is already moving towards higher end production and the tertiary sector. "Electronic information" and "electric equipment and special purposes equipment" (such as computers, communication equipments, other electronic equipments, and electrical machineries) are now the largest manufactured products by value, accounting for 39.6% of all industrial output value in 2007 as compared with 32.4% in 2000. Meanwhile, textile and garments accounted for less than 5.5% of the province's industrial output value in 2007, falling from 9.8% in 2000. Guangdong's tertiary sector accounted for 42% of provincial GDP in the same year, one of the highest among all provinces. As some of the province's production shifts from bulky garments and footwear to less bulky electronic products, growth in container volumes may slow, even as the growth in value of trade accelerates.
Other factors are also shaping the province's development, although the impact of several has probably been over-played. Take for example, the "China-plus-one" strategy - establishing production capacity in China and another country in order to minimise risk. Under this scenario, Vietnam, in particular, has supposedly attracted a large number of manufacturers away from Guangdong. Key attractions include: cheap land and labour, the introduction of Doi Moi reforms in the 1980s, the granting of Most Favoured Nation status in the late 1990s by the US, accession to the World Trade Organization (WTO) in 2007 and a number of tax incentives.
However, the instances cited, whilst making for interesting business school case studies, hardly constitute a hallowing out, rather they should be seen as part of an economic maturation as the Chinese economy and its Asian neighbours develop. Vietnam has considerable potential, but its does not yet have China's critical mass of reliable and reasonably skilled labour, an efficient government, and a working transportation infrastructure network that connects to the rest of the world without significant hiccups. Even when it eventually does, the scale simply will not match the PRC.
The impact of sky-rocketing oil prices has also generated a healthy interest in restructuring supply chains and the potential for moving manufacturing capacity "closer to home". Again, these rising transportation costs clearly impact supply chain management and where there is flexibility to move production, changes will be made. However in terms of driving manufacturing investment it seems unlikely that such a fluctuating factor could be a key driver for medium to long-term decisions, when set against other considerations. From 2004 to end of 2007, Guangdong's growth in export value has exceeded 20% each year. Over the same period, oil prices have been on a roller-coaster ride (Chart 2), not least over recent months, approaching USD 150 per barrel in the summer 2008 before falling down towards USD 50 per barrel. Moving forward, it is more likely that increases in labour and property costs will weigh more heavily on decisions about factory locations.
Over the medium to long-term the prospects for Guangdong remain promising, but the growth trajectory of the last 20 years is unlikely to be repeated. Although infrastructure challenges will remain, "soft-infrastructure" will likely be a more critical issue, including regulatory reform and ensuring a supply of talented but competitively priced labour. Rising labour costs pose a threat to some sectors, but on the other hand improved compensation, improved working conditions, higher disposable income, a move up the value chain and environmental improvement are also positive developments.
Predicting the timing and extent of the global economic meltdown was always going to be difficult - less so, the structural evolution and maturing of the Guangdong economy. For the "Hong Kong Port Cargo Forecasts 2005-06", GHK assumed that Guangdong's export / import growth would fall from 19-21% CAGR 2000-05, to 10.5% 2006-10 and 8.7% CAGR 2011-15. At the time, many felt this was overly pessimistic. Given recent events, the reverse may prove to be true, however the important point is the underlying assumption of a maturing economy. Those who built their dreams around continued high double digit growth were bound to be disappointed, global meltdown or not. Similarly, the doom-mongers are tilting too far the other way. Even at the more modest growth rates, the absolute increase in cargo volumes will still be substantial.
1 Defined as annual revenue above RMB 5 million.
The authors:
Wai-duen Lee is a Senior Consultant at GHK Hong Kong Ltd. She will be speaking at TOC Asia, March 3-5, 2009, in Shenzhen, China.
Dr Jonathan Beard is Managing Director of GHK Hong Kong Ltd.
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