China: An industrial powerhouse emerges

The map of the Pearl River delta shows large swathes of green in between the cities of Guangzhou, Shenzhen, Foshan and Zhuhai. But travelling by car between these pulsating new centres, it quickly becomes apparent that maps made just a few years ago are woefully out of date.

New industrial estates have eaten up most of the farmland that, until recently, lay between the cities.

The Pearl River's reputation as the emerging workshop of the world appears well deserved. In factory after factory, bosses recount the same story: the migration of capacity to this region is picking up, Chinese workers are not only cheap but diligent, the supply chain is virtually mature.

"The best thing about China is the workers. They are much better than workers in the UK," says Hiyoshi Sugiyama, chief of quality control at Guangzhou Honda Automobile, and formerly head of Honda's ill-fated project at Longbridge in the UK.

"The workers here are almost as good as in Japan," adds Mr Sugiyama, who, at 60, says he was delighted to be part of Honda's future in China.

The Honda operations in Guangzhou offer telling insights into some of the key questions attending China's rise as a manufacturing hub: Will the country's rise come at the expense of other countries in Asia?

Will places such as the Pearl River delta become a victim of their own success, eventually succumbing to rising labour and other costs? How long can inflows of foreign direct investment into China, which totalled $52.7bn last year, continue?

The first insight that Honda's plant offers is that the car parts supply network available in China, derided for most of the 1990s for inefficiency and shoddy work, has improved dramatically in the past few years.

Koji Kadowaki, president of Guangzhou Honda, says that about 70 per cent of the content in Honda models made in Guangzhou is locally sourced.

The number of suppliers, which, for many foreign joint ventures in China runs to more than 1,000, has been whittled down to just 70 - about 70 per cent of which are either wholly or partly owned by Honda's trusted suppliers in Japan.

With the supply chain thus streamlined, Honda is expecting a bright future. It plans to increase production to 240,000 units in 2004 from a planned 110,000 units in 2003. "In 2005, we should be making 300,000 cars," says Mr Kadowaki.

The extra efficiencies derived from scale, plus the further streamlining of suppliers, will allow Honda to launch an unprecedented project: large scale made-in-China car exports. From a new factory, 65 per cent owned by the Japanese company, Honda hopes to export 50,000 in 2004.

At the moment, China-made cars are too expensive to export. But several other manufacturers, such as Volkswagen and Nissan, have also voiced such plans.

The dynamics present in the car market are common to most foreign-invested manufacturing endeavours in China.

Unskilled labour costs about one-tenth of rates in Japan, and still undercuts that in most other Asian countries, with the exception of Indonesia, Vietnam and Cambodia.

The rapid maturity of the supply chain and the lure of the domestic market, home to about 100m middle class consumers just discovering the delights of consumer credit, have exerted a centripetal pull on investment.

Government officials predict that inflows of FDI this year may surpass $55bn, and could reach $100bn annually in a few years.

Such predictions may prove wishful thinking. But all around the Pearl River delta, expansion figures are startling.

Flextronics, the world's largest contract manufacturer of electronics goods, produced items worth $1bn at its plant in Doumen, near Zhuhai in 2002, about 500 per cent up on 2001.

Executives at Flextronics see the good times lasting for several years into the future, although growth is sure to slow from last year's phenomenal rate. The industrial mix will change, too, as the region attracts more high value-added, capital-intensive investments, such as BP's petrochemical plant at Zhuhai.

Cost savings are also being found in the form of logistics. Mitsuhiko Ikuno, managing director of Ricoh in Shenzhen, says that, until two years ago, the company had to export exclusively through Hong Kong.

Now, it can export its printers and copiers through Shenzhen's Yantian port, which last year overtook Rotterdam and Los Angeles to become the world's sixth largest.

This cuts logistics costs significantly, says Mr Ikuno. Transporting a 40-ft container to Hong Kong port from Ricoh's factory in Shenzhen costs HK$6,000 but sending it to Shenzhen costs just HK$2,000. Port handling charges are about the same in both ports.

However, it would be erroneous to pretend that the Pearl River delta is defying commercial gravity. Shoe manufacturers, such as Pou Chen, which makes 100m pairs of shoes annually at two sites in the delta, are finding that labour costs are far from static - as some analysts have claimed.

"Labour costs in China are increasing every year, especially in this part of the country," says Thomas Shih, a manager at Pou Chen, which employs 110,000 workers at its Zhuhai and Dongguan plants combined. "We are already considering moving to inland China (where labour costs are cheaper)."

Nevertheless, the ready availability of workers from among a pool of 200m peasant farmers thought to be underemployed on the land may ensure that wages rise less quickly than in other parts of Asia that have experienced a similar manufacturing boom during the past few decades.