To walk through TAL Apparel's new $70 million factory in the blue-collar city of Dongguan is to witness evidence of a sea change in industrial China. Nowhere to be found are the stereotypes of Chinese industry: the buzzing hive of menial laborers, medieval working conditions and outmoded equipment. The factory's pristine white floors and brightly lit aisles look more like a modern office suite than a clothing factory. In one corner, automated cutting machines slice out fabric for men's pants, a process that wastes less material and requires only about half the staff needed to cut patterns by hand. In another section of the plant, a computerized system of ceiling tracks ferries the pants on hangers between sewing stations instead of having workers pass the pieces along. At the end of the assembly line, the high-quality garments emerge sporting brand names like L.L. Bean and Dockers. S.N. Yip, a director at TAL, says that only the most modern, efficient factories can thrive in today's China. "If you want to run a sweatshop," he says, "this isn't the place."
Yip, like thousands of other Chinese factory owners, knows there's no real future in Chinese sweatshops. Sure, China for many years has been the country of choice for multinational companies looking to set up factories, taking advantage of the country's vast pool of dirt-cheap labor and lax environmental and labor laws to produce the toys, clothes, electronics and other consumer goods that flooded retailers shelves worldwide. It's an industrial model that has served China well, providing double-digit economic-growth rates and lifting millions out of poverty. But it is also a model that, inexorably, is starting to break down. Soaring costs for labor and raw materials, along with tougher government oversight and an appreciating national currency, are playing havoc with the profit margins of China's low-cost producers and the country's seemingly unstoppable export machine. Over the past year or so, factories started shutting down in China's Guangdong province, the country's industrial heartland that produces more than 30% of its exports. As many as 20,000 may have already closed. Credit Suisse estimates some 60,000 export-oriented factories or a full third of those operating in Guangdong will cease to exist within three years. During the first half of 2008, the city of Shenzhen (which like Dongguan is in Guangdong province) experienced the slowest growth since it was designated one of China's first special economic zones in 1979.
Which raises a question, one that is likely to be brought up when the World Economic Forum meets in Tianjin, China, later this month: In a global economy where factory sites are increasingly stateless and fungible, can China compete? This is not as absurd a question as it may seem. Late last year, the consulting firm Booz & Co. conducted a survey of 66 multinational companies with operations in Shanghai and found that 54% believed China is becoming less competitive with other low-cost countries due to rising labor costs and other unhelpful trends. Almost 20% of survey respondents said they had plans to move operations elsewhere, with their first choices Vietnam and India. "From the cost perspective, China has marginally lost its competitiveness compared to its neighbors," says Edward Leung, chief economist at the Hong Kong Trade Development Council.
Viewed from a long-term perspective, it was inevitable that China eventually would lose its edge. The economies of Asia's other tigers South Korea, Taiwan and Hong Kong have all undergone a similar transition. After several decades of rapid growth, business costs rose along with living standards, provoking an exodus of low-cost manufacturers (most of them decamped to China). Now the wheel has turned, and China finds itself at the beginning of a new stage in its economic evolution. And while some of the factors that have reduced its advantages, such as spiking commodities prices, may be transient, a critical mass is likely permanent. For one thing, China's interior provinces have experienced their own economic boomlets. As a result, migrants who once traveled hundreds of miles in search of jobs in China's export factories located mainly near the eastern seaboard in industrial enclaves like Dongguan can now find decent work closer to home, creating labor shortages and causing salaries to rise precipitously along the coast. The average monthly pay of China's factory workers increased 66% between 2004 and 2007 to $234, an amount that is well above the wages earned in other Asian countries. Factory workers in Indonesia, for example, take home half as much. Then there's the appreciating Chinese currency. In 2005, China unpegged the yuan from the U.S. dollar and allowed it to more accurately reflect its market value. The yuan has climbed ever since, strengthening by about 10% against the dollar in the past year alone. This increase has made exports from China more expensive while increasing the cost of imported raw materials and components.