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China: Find Me That Factory! Part II

By Dan Harris and Steve Dickinson

A few days ago, in a post entitled, "China: Find Me That Factory," I wrote of how not a single client of my firm has been impacted by factory closures in China and I wondered what sort of factories it is that are closing:

But, and I know this is going to sound strange, I have been asking my firm's China clients just about every weekday for the last month how they have been impacted by the Global and China downturn and not a one of them has mentioned factory closings. Indeed, I have asked many of them if they have experienced any problems from factory closings of their own or of their suppliers and the only response I have gotten is "no." So yes, like All Roads, I absolutely believe factories are closing in China and with that, massive worker and community dislocation. But also like All Roads, I have very real questions as to what sort of factories those were.

China Bystander (a perennially excellent blog on China's economy) recently did a post, entitled, "Pearl River Delta's Silver Lining," that goes a long way towards explaining why American and European companies doing business in or with China have been so little affected:

If the Pearl River Delta were an emerging sovereign economy, there would be reason to believe that it was moving up the development ladder despite the global slowdown being caused by the global financial crisis. The delta is the heartland of southern China?s manufacturing industry and many small and medium sized labor intensive light manufacturers are suffering horribly. In the first half of the year, 15% of all firms with Hong Kong investment closed down, including half of shoe manufacturers and toy makers. Official figures show that 50,000 enterprises closed down in the first three quarters of this year, although provincial officials have said an offsetting number of new businesses have registered (those may be mostly mom-and-pop operations of the newly unemployed). However, larger machinery and electronics companies are still showing robust growth with export orders holding up. Provincial GDP grew 10.7% in the first half of the year. Slow by recent standards but still above the national average. The pattern emerging: low-end consolidation and a move to higher value production as the region?s price advantages are eroded. Classic emerging markets development.

This seems to confirm what I have suspected all along. Most of the factories closing are low end toy and shoe and costume jewelry operations, most of which had Hong Kong, Taiwan, or South Korean connections, not North American or European connections.

Full post as published by China Law Blog on November 23, 2008 (boomark / email).