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China’s small factory towns face painful transition

  • Author:naky
  • Source:www.diecastingpartsupplier.com
  • Release on :2015-07-09
China’s emergence as the world’s workshop over the past two decades has rested in large part on its small manufacturing towns, where hundreds or in some cases thousands of factories specialise in one type of product, underpinned by a steady supply of cheap migrant labour.

However, such small factories are facing significant stress as they struggle to remain competitive amid slowing demand, rising labour costs and a glut of capacity.

Their distress is underscored by a recent survey of 48 owners of small and medium sized factories - defined as those with 20 to 2,000 employees and annual revenues of Rmb20m to Rmb400m ($3.2m to $64.4m) - in 13 towns nationwide by FT Confidential Research, a research service from the Financial Times.

More than half of them - 55.6 per cent - reported zero or negative revenue growth in the first quarter of this year. Profit growth also stalled, with just 42.2 per cent seeing an increase in net income.

This has made overhauling their businesses a top priority for the owners, as they struggle to stay afloat in an increasingly competitive environment.

Three quarters of them - 77.8 per cent - had branched into new areas of business over the past two years. While some factories are moving downstream or upstream within their own industries, others are moving into brand new territory. Nearly a third - 28.9 per cent - had invested in new areas outside their core business; another 4.4 per cent had exited their old businesses altogether to focus on new industries.

Others are overhauling their sales models or investing in automation in a bid to boost productivity.

However, a combination of skills shortages, high borrowing costs and poor intellectual property protection are making these transitions difficult. Weak IP protection was the number one factor hindering innovation, cited by 40.5 per cent of factory owners, ahead of access to credit and a shortage of skilled labour (both cited by 35.7 per cent). This creates a conundrum, in which factory bosses are reluctant to invest in research and development, even though they realise that innovation holds the key to their survival.

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