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Plenty of factory owners feel less constrained. Garment makers and other low-tech manufacturers are increasingly shifting production from Shenzhen to cheaper locales, often the poor provinces of western China or, on occasion, other Asian countries like Indonesia and Vietnam. When companies moved into Shenzhen, "they never thought they'd have to leave a few years later," says Ruby Zhu, senior China economist for the Hong Kong General Chamber of Commerce.
One reason for Shenzhen's rapidly rising labor costs is a shortage of workers. Millions of poor Chinese who in the past sought work in southern China's factories can now find jobs closer to home, and Shenzhen is becoming less of a migrant-worker magnet. That means there are fewer workers to fill the lowliest jobs, and employers must pay more to attract them. At a large job market in downtown Shenzhen, hundreds of positions are posted on bulletin boards and rows of recruiters wait to collect applications, but the trail of employment seekers is frustratingly short. At one booth, recruiter Zhong Man says entry-level salaries at her Shenzhen-based apparel company have doubled in the past two years to $250 a month, but that hasn't alleviated a chronic staff shortage. "It's a little harder to find average workers these days, because the development of the interior is getting better," she says. The government has tried solving the problem by raising the minimum wage to attract more workers from outside Shenzhen. After a 13% increase last year, the government recently boosted the minimum wage within the city's special economic zone by 17% to more than $100 a month?the highest minimum wage in China.
Add in the rising cost of property, lofty electricity prices, water and power shortages and stricter environmental regulations, and Shenzhen has become one of the most expensive places in the country for factory operations. Adaptation is the order of the day. For example, Hong Kong-based Top Form, the world's largest bra maker, has transferred much of the manufacturing of basic bras from its Shenzhen factory to other facilities such as its plant at Long Nan in Jiangxi province, where labor costs (including benefits) are 60% lower. Top Form's Shenzhen factory is now focused on manufacturing high-fashion bras featuring delicate fabrics and complicated designs, which require more talent to produce, but also fetch higher prices in European boutiques. Last year, Top Form also opened a product-development center in Shenzhen to create its own bras. "Shenzhen is not a place for low-skilled manufacturing any more," says Kevin Wong, Top Form's manager for corporate development. "We're moving up the value chain."
Shenzhen's manufacturers are facing many of the same problems that bedevil South Korea and Taiwan, where makers of low-end products, beset by competition and eroding margins, have in recent years been trying to make the transition to more sophisticated products. Shenzhen is trying to jump-start that transition by removing obstacles facing inventive startups. Six years ago, Xian-Ping Lu left his job as director of research at an R&D center for a pharmaceutical firm in the U.S. and, with other researchers, planned to set up their own company in China. Although they considered cities like Shanghai, Lu and his team chose Shenzhen. "We really felt there was a strong market-driven atmosphere in Shenzhen," compared with other cities in China, he says. It was easy to set up his firm and import the advanced equipment he needed for his labs. He has also received about $2.5 million in government research grants, a chunk of which came from the city. Today, Lu's drug-development firm, Shenzhen Chipscreen Biosciences, employs about 45 people working to develop cancer and diabetes treatments in a university-style building at a research park designated for biotech outfits and other advanced start-ups. "If we built this company somewhere else," says Lu, "I don't think we'd have such good luck."
What's good for Lu is good for Shenzhen?and all of China. As the nation's economy roars ahead, growing 11.3% in the second quarter, more parts of the country will face the same challenges of rising costs, labor shortages and aggressive competition. Chinese employers "cannot forever have cheap labor," says Hong Liang, chief China economist at Goldman Sachs in Hong Kong. "They cannot just count on low-cost manufacturing." Soon the entire Chinese economy may be faced with the painful transition Shenzhen must confront today. Shenzhen is "trying to do what the country needs to do," says Chipscreen's Lu. Perhaps this hard-working, ever-mutating city will provide the answer for China, once again.