Chinese manufacturing giant outgrows its cradle

In 30-year-old cradle of Chinese capitalism, factories brace for more wrenching change

DONGGUAN, China-- When China opened up to capitalists 30 years ago, Jeffrey Lam was one of the pioneers. But the only space he could find for his factory was an old town hall. For workers, he had 25 farmers who had never operated a sewing machine.

Today the Hong Kong businessman has five toy factories employing thousands of workers in southern China. He personifies the experiment begun in December 1978 that would ultimately transform the face of world trade.

Still, Lam says, the early days pale before the challenge now looming -- to retool factories that make shoes, toys and textiles into an innovating high-tech industries.

"It's going to be much more difficult now," he said.

The global economic slowdown is hitting hard. Here in Guangdong province where the manufacturing push began, more than 7,000 companies closed or moved elsewhere in the first nine months of the year, the China Daily newspaper reported.

It's not just the global slowdown. In Guangdong's Pearl River delta, where the capitalist drive was launched on the coattails of rich neighbor Hong Kong, a new realization is taking hold -- raw materials cost more, labor and environmental laws have grown stricter, exporters are getting fewer tax breaks, and a string of product recalls have raised questions about Chinese quality.

So China has a sweeping plan to transform the region. Rather than bail out weak, labor-intensive factories, it wants them to move to the interior so that Guangdong can become the country's auto maker and its Silicon Valley.

"We have a policy to empty the cage for the new birds," said Wan Qingliang, a provincial vice governor.

The financially troubled world is watching, especially the United States, China's biggest trading partner, something Wan possibly had in mind in meeting foreign reporters for a rare briefing.

The market turbulence makes the task more urgent, he said. "History tells us that after 20 to 30 years, the growth pattern of an economy becomes mature and must be changed. Guangdong has to be the pioneer now in economic restructuring."

When Chinese leaders started experimenting with capitalism, Missouri-sized Guangdong seemed an obvious choice -- rich in land and cheap labor, close to Hong Kong's investors, cash, and business expertise, and a good 1,000 miles from meddling communist bureaucrats in Beijing.

In the province once known to Westerners as Canton, the saying was: "Heaven is high, the emperor is far away."

And if things ended badly, the government in Beijing, still finding its feet two years after the death of communist founding father Mao Zedong, wouldn't take all the blame.

All went smoothly. Investors poured in from Hong Kong, Taiwan, the U.S. and Europe. Places such as Shenzhen and Dongguan, villages of rice paddies and fish farms, blossomed into cities with industrial parks making Adidas sneakers, and later iPods and Nokia Corp. cell phones.

In 1992, the region got a huge psychological boost from a visit by Deng Xiaoping, China's visionary paramount leader, famous for having declared: "To get rich is glorious."

Since 1978, Guangdong's economy has posted average annual growth of 13.8 percent, the province's highest-ranking Communist Party official, Wang Yang, said in a speech last week marking the 30th anniversary of the reforms.

Guangdong accounts for one-third of China's foreign trade and a quarter of its foreign investment, Wang said. Its economy is larger than that of Singapore, Hong Kong or Taiwan.

But senior provincial officials worry that too many factory owners are content to make cheap goods for export rather than innovate and develop their own products. There's also fear that Guangdong is being eclipsed by the Shanghai region, whose boom started later but was more planned and orderly.

"Liberate your thinking" and "retool and upgrade" are the current buzz-terms here.

Companies are also being urged to focus on the domestic market so that China's economy can break its dependence on exports.

That won't be easy for many factories. They're great at taking a design from a foreign customer and making the product, but not at marketing and distributing their own designs to Chinese consumers.

"People here can afford our equipment now," said Sam Hsieh, general manager of Chain Horn Commerce Ltd., which makes movie projectors and medical equipment. "But we haven't figured out how we're going to distribute the product yet."

Lam, the toy maker, says his Forward Winsome Industries, Ltd., already is designing products and developing its own brands to sell in China.

But moving out of Guangdong will be a challenge for many companies, dependent on local suppliers that have taken years to cultivate.

Andy Xie, an independent economist in Shanghai, is skeptical about the government's plan, though not necessarily the province's future.

"Guangdong offers you a playground. You go there and then hire people from other places. The advantage of Guangdong is flexibility," Xie said. "Eventually, that will be the solution. It won't be a government solution."