China manufacturers face fall in demand The packed showroom at the Jia Hong factory in the city of Dongguan in southern China features tubs of modelling clay and paint kits that the company has sold to western retailers for years but also newer toys developed for the Chinese market, which now accounts for 15 per cent of sales. Nothing, however, prepared the company for the 30 per cent drop in demand this year from its main export markets in Europe, the US and Russia. The latest data, published at the weekend, highlighted the industrial slowdown across China, with the country's manufacturing activity falling to a nine-month low in August. "Both the domestic and overseas markets are not good at this time," says Zhong Jianrong, Jia Hong's factory manager. We had to reduce overtime work because of a shortage of orders and 30 per cent of our workers left because of this. A toy factory nearby closed down this year. By contrast, last summer Mr Zhong had to hire an extra 30 college students to work part-time to meet orders. Labour-intensive industries across Dongguan, a city of 8m that from a distance resembles a forest of factories, are grappling with a drop in orders from the west at a time when double-digit Chinese wage inflation over the past couple of years has prompted western retailers to move orders to south-east Asia and Bangladesh. The weakness in consumer demand in Europe and the US has prompted retailers to delay orders and extend payment terms from 60 days to 90 days, putting more pressure on manufacturers in the city. Bernie Ting, chairman of the Hong Kong Toys Council and director of a childcare products and toy company, says: "It's a complicated year, similar in scope to 2008. In a normal year, we would have one or two factors affecting us. This year, it's five-10 factors. Dongguan exemplifies the challenges facing the highly industrialised southern Chinese province of Guangdong as jobs in garments, toys and shoes move to south-east Asia. The association of Chinese textile exporters said last week that garment exports fell 0.2 per cent in the first seven months of the year, compared with a 24 per cent increase in same period last year. China's garment exports in 2011 totalled just under $250bn, which may mark a peak. The association estimates that Japan's imports of garments from south-east Asia rose 22 per cent in the first half of this year. In the woollen knitwear-producing Dongguan suburb of Dalang, manufacturers complain that gross margins have collapsed from 30-50 per cent in the late 1990s to five to eight per cent today. Wen Jiabao, China's premier, promised tax rebates for exporters while on a tour of southern Chinese cities, including Dongguan, late last month.. Chungping Ip, the chairman of Forever Holdings, which makes household products and supplies timber to furniture factories in Dongguan, has seen a shift in production from the city to Shunde, also in Guangdong province, and to Nankang in Jiangxi province. He predicts a further hollowing-out of Dongguan's labour-intensive industries because most of the city's factories are owned by itinerant entrepreneurs who moved from Hong Kong and Taiwan in the 1980s as China began opening up to foreign investment. "It's easy for them to move twice," Mr Ip says. The charismatic party secretary of Guangdong, Wang Yang, who is a candidate for elevation to the country's ruling politburo standing committee in Beijing's upcoming leadership transition, uses a metaphor of emptying a bird cage to accommodate new birds to explain how high-tech and value-added industries should replace labour-intensive factories. When land and labour costs rise and bubbles burst, enterprises themselves want to change Ding Li, Guangdong academy of social science Billy Wong, economist at the Hong Kong trade development council, says that transition is under way, noting that Hong Kong firms use the city as a hub for logistics management and design. Dongguan's economy grew 7.4 per cent in the first seven months of the year, according to government figures. The question is whether cities such as Dongguan can prove nimble enough to become like Shenzhen, just across the border from Hong Kong, where factories the size of mini-cities make products for Apple and Fuji-Xerox. Shenzhen is also home to the headquarters of Chinese tech firms including ZTE and Huawei. Dongguan's financial and high-tech industrial development zone looks like a verdant Potemkin village, in contrast to the bustle of its grimy factory neighbourhoods. While governments can propose new directions, the market has the final say, says Ding Li of the Guangdong academy of social science. "When land and labour costs rise and bubbles burst, enterprises themselves want to change," Mr Ding says. He sounds a cautionary note over what could face cities such as Dongguan, chasing the dream of being a financial and high-tech centre without the rule of law and a tradition of international banking. As they try to develop a more sophisticated manufacturing and services sector, "the hens could fly away and the eggs in the coop could be broken," Mr Ding says.