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Wednesday 24 July 2013

Hope in China's small manufacturers transitioning from low to high value manufactuing

My very unsophisticated and entirely labourious method of working down the list of Hong Kong Stocks have led me to Sinoref, a small manufacturer of advance steel flow control products.  Its products are critical consumable components in the production of semi-finished slabs and steel billets.  The slabs and billets are rolled in rolling mills into various kinds of steel products. 

It is one of those rare private enterprises that manufactures high-value products that is the domain of foreign companies.  Steel production is highly polluting and the Chinese government have been shutting down inefficient mills forcing the industry to clean up its act.  Sinoref's products, being classified as "high-end" is benefitting from the move to more modern steel production techniques.

It is these small incremental contributions from businesses such as Sinoref that will eventually help shape the upgrading of China's manufacturing industry from low to high value, dirtier to cleaner and inefficient to efficient.

If the long term outlook for the manufacturing industry transition looks promising.  The short to medium term is unfortunately fraught with uncertainty.  China has to contend with five main issues
  • Excessesive malinvestments in real-estate and white elephant projects,
  • Over capacity in manufacturing,
  • Rapidly falling demand
  • Excessive credit growth; and
  • Monumental environmental degradation and social problems
Paring down these issues is going to test the resilience of the nation.  The enormity of problems likewise is going to put a lot of stress on the manufacturing sector already starved of orders. 

Is there hope?  Is the embryonic transition dead in its track before even started?  I am hopeful it will not and my hope comes from my two years in China.

Cycling in Dongguan 

A good friend of mine, Karsten Meyer a furniture designer from Germany, is a China bull.  His positive attitude about China can be infectious and he is not the only laowai to think so. 

Karsten and I would spend much time biking around Dongguan's old towns and following paths that meander along the hundreds of small rivers and tributuries that mark the flat plains of the Pearl River Delta.  Late afternoons to early evenings are the best times.  We would start from Nan Cheng, my home and cycle all the way to towns such as Houjie, Gaobu, Shilong, Dong Cheng, Guang Cheng and Daojiao.  Stopping for a coffee (it's quite good!) and then some local food at small eateries before heading back.

Dongguan is an aglomeration of over 32 small towns and districts hastily cobbled together.  Some smart idea of local bureaucrats that decided this was the best course of action as no one wanted or could seem to fit all these rapidly urbanizing areas into Guangzhou, the centre of Lignan culture and Shenzhen the ultra confident, ultra modern capitalist centre of the Pearl River Delta.  Dongguan was the backyard where all low value manufacturing occured.  Clothes in Humen. Furniture and shoes in Houjie and Dalingshan.

Manufacturing in Dongguan peaked well before the onset of the global financial crisis which merely served to confirm its death knell.  While there is still a whiff of the glory days with entrepreneurial wealth still percolating within the local economy, much have changed.  The old dirty industries are slowly giving way to more high tech enterprises such as ZTE and Huawei.  Huawei have an R&D centre near Shong Shan lake.  But Dongguan is an urban sprawl in some areas, an unfinished construction site in others, ghost towns -dilapidated and forgotten and an oasis of tranquility in others if one cares to look.

The people have disappeared, at peak the population numbered some 8 million, now it is closer to 4-5 million.  The spring festival holidays halves that number again.  With the industries and people having abandoned it, the one thing that remains now is the environmental damage.  But hope is there.  Dongguan is a much improved town since the end of its manufacturing heydays.  A lot of effort have been put into beautifying the town.  Indeed cycling routes in Dongguan is one of the best and most extensive.

It was on one of our pit stops that we stopped to admire the sunset that I started to chip away at my negativity and for once started to be hopeful for my ancestors' homeland.  Karsten, being the China bull was doing the selling job on me.  Look at the sunset and beautiful bike paths (they looked more like gardens) it would not look out of place in some Eurropean cities.  What more could you want? 

I begged to differ pointing at the floating pile of garbage (dead rat included) on the Dong Jiang, one of the major tributuries that flowed into the Pearl River.  It reeked of rotten flesh.  His come back?  The situation was similar when he grew up in Hamburg.  Environmental protection was relegated to below the list in Germany in the sixties when it rebuilt its bombed out industrial capacity and cities.  So he was hopeful things will change.  

The air is much better now than 10 years ago when one could hardly breathe properly.  And you have some good days where there are blueish skies.  He has been in Dongguan for over 10 years - I respected his views.  But being in his mid-fifties he said he is not going to see its full transformation.  I hope he does live to see it. 

As we positioned our bikes on the pathway, a barge made its appearance, dredging the soil from the river bed.  A river cleaning operation is underway.  "See what I mean?"  Karsten said.  I nodded in agreement. 

Dongguan wants to survice, out of necessity, it is now slowly cleaning up its act.  This will create space for more environmental conscious industries to emerge.

There is hope yet.

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