There are news reports almost every day about factories downing their shutters in Guangdong, one of China's most populous and prosperous provinces.
Some are shutting down because the companies that own them are going bankrupt, while other corporations are moving inland. For instance, shoe-manufacturer Guangzhou Constant has relocated its manufacturing facility to Yongzhou in Hunan, lured by tax breaks and by the prospect of wage costs that are between 15% and 20% lower. Similarly, Foxconn, which opened a factory in Zhengzhou in north-central China last year, has moved thousands of jobs out of Guangdong. Several multinational corporations, such as America's Coach, are planning to move their production out of the province (and China) over the next five years, to other nations such as Vietnam and India.
This migratory trend is symptomatic of the long-term challenges facing Guangdong, which has become China's export-manufacturing hub over the last 25 years. Will the province be able to sustain its growth trajectory, or, like Michigan in the U.S., could Guangdong lose its manufacturing base before it can reinvent itself?
Look at the data. While Guangdong's exports accounted for as much as 37% of China's exports by 2000, its share dropped to 28% in 2011. The province's exports growth rate, which was 26% in 2010, fell to 22% in the first nine months of 2011, and it has continued to decline ever since.
That's why Guangdong's population of migrant workers declined by 3% every year between 2005 and 2010. The only positive fallout has been a modest diversification of the local economy, with exports as a percentage of the province's GDP declining from as much as 85% in 2005 to a still-high 66% in 2010.
Many officials in the Guangdong government believe that the state is well prepared to weather these changes. In 2008, after identifying the weaknesses of the economy, the provincial government drew up a plan to transform Guangdong by focusing on the development of the Pearl River Delta.
Manufacturers' relocation will free land for commercial and residential development, they believe, which will result in the urbanization of the province. The rather optimistic underlying assumption is that toxic materials haven't poisoned the land and made it unlivable for human beings.
Officials also argue that many factories added little value; paid minimum taxes; and created few jobs. Closures and relocation will have a negligible impact on employment; only migrant workers, who make up 35% of Guangdong's population and contribute 25% of its economic output, will feel the pinch.
The movement of low-tech manufacturing out of the province will also result in greater social cohesion, some argue, because the region's rural areas will endeavor to close income, development, and education gaps. In fact, the government has been planning an orderly transformation to an economy characterized by modern manufacturing — more R&D as well as more skill-intensive industries — and services.
Can Guangdong manage such a transition before its current manufacturing base is eroded? It's difficult to say.
The pressures are evident. As the province becomes less central to Chinese exports, foreign investments have started to decline. Foreign direct investment in Guangdong grew by 24% a year in the 1990s, but rose by only 5% annually thereafter, compared to China's 10% a year.
Guangdong will need highly trained workers to cater to more advanced sectors. But it doesn't seem to have people with those skills. Only 9% of Guangdong's population — a smaller proportion than the national average of 10% — has a college degree. There aren't enough people in Guangdong who can work in the industries that the government has prioritized, such as pharmaceuticals, high-tech, and renewable energy.
Moreover, the proportion of people under the age of 15 in Guangdong has fallen to 17% compared to 25% in 2000. That means there will be fewer young people entering the workforce in the next 10 years. The government will have to turn older workers into lower-skilled service providers, which will require a lot of retraining. Besides, older workers are harder to retrain and retain.
Guangdong may well be able to ride out the fluctuations in the global economy, but it's far from clear that it will be able to sustain its growth through the structural transitions of the local economy. Does that sound familiar?
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