The Pearl River Delta: Too Expensive for Manufacturing?
- Shenzhen and the Pearl River Delta have become the world’s manufacturing center, but a recent rise in manufacturing and labor costs have forced some industries to move elsewhere. Carlton Harris, of Asia Tool Source, is staying in Shenzhen by streamlining his production processes, and he attended the ChinaPLAS convention this spring with high expectations.
: I’m Janet Carmosky, this is The China Business Network, and we are talking to Carlton Harris, who is the owner of Asia Tool Source
. He is a turnkey tool and die building executive who’s been helping people who need precision tool and die equipment and parts to lower their costs of production for the last 7 years or so. And he’s located in Shenzhen right now. Welcome Carlton.
: Thank you Janet, it’s a pleasure.
: It’s a pleasure to be talking to someone in the Pearl River Delta, always intriguing spot to which to gather data about the world’s manufacturing floor, as it is. I spent many years myself there in the early 1990s watching that turn into the world’s manufacturing floor. And of course now Shenzhen and the Pearl River Delta are the world’s procurement headquarters, more or less.
Tell me what you see in Shenzhen these days, and in the Pearl River Delta in general. What’s changing in the landscape for sourcing and manufacturing there?
: I think that you sort of implied one thing going on when you spoke in that it’s changing into a center of resourcing in Shenzhen, not necessarily for the manufacturing itself, but speaking about more broadly about Guangdong province in total, what’s happening is that labor costs are going up. They’re going up because of labor shortages, and rates have to go up to attract people. It’s going up because of the impact of the labor laws that were passed in China – and by the way, most of the provisions were always on the books, but they’re being enforced much more stringently than they were before. Things related to minimum wage, to maternity leave, contracts for all employees, things like that, which are good things for employees, but do increase the costs manufacturers have.
So labor costs are going up, and among the companies we work with it’s ranging from a low of maybe 10-12% or high or 25-30% over a period from 2Q last year to 2Q this year.
: Well that’s significant. If you’re in something like tool mold and die, I guess the labor costs can be as much as 40% of the finished product. So if you’ve got a 12-25% increase in labor costs, to stay in the Pearl River Delta, what do you do?
: Well, the only way of dealing with it, I think in tool and die specifically – tool and die is one of the industries that will stay in the Pearl River Delta because of the capability that exists there, which is very difficult to duplicate elsewhere. The reason why it can stay there is because of labor productivity. Back when I started buying tools in this area seven years ago, you would go into a tool-making tool plant and walk by a line of CNCs and there would be a person at every CNC
But today when I go to the same plants, there might be one person for every 2 or 3 CNCs. I think that’s just a matter of attitude, expectation. The people that are running the plants, their expectations are and their belief is they can get higher labor productivity. And so they’re cutting back on the number of people, to the extent they can, and then tooling tool increasing finding ways of taking labor out of the product.
So, all the labor costs are going up, as I said, 15-20% currently. And by the way, that’s after a relatively stable period and even some declines that occurred in 2008-2009, but with labor rates going up as much as they are, still labor productivity improvements which are occurring, I think are almost fully offsetting that. We’re not seeing a lot of increases in the tooling we buy.
: So what kind of industries are leaving the Pearl River Delta, and where they going? Are they going to Vietnam or the Philippines or Latin America or inland in China or back to the US or Europe or Russia? What’s happening and who’s moving?
: The ones that are moving, mostly, and you know, every company has their own solution and has their own ideas about this. The ones that are going to tend to move, or have already moved, are the ones who have high labor content that can’t be automated very well. So if you have something that, say, involves hand painting – more craftsman type of work – or sewing work that can’t be automated with machinery to an extent – shoemaking, things of that sort. Those industries are going to tend to move away. A lot of them are moving to the western provinces in China. I think Vietnam to some extent, too. Of course in the clothing industry, a lot of that has shifted toward places like Bangladesh, the Philippines. So I think there are a lot of different places where things are going and it’s the industries that can’t automate their way out are increasing productivity to offset the labor increases are the ones that are going to tend to move.
: You’re going to be going to ChinaPLAS at the end of the month, as I suppose everyone who’s in the plastics industry, or should be. Tell us if you expect to see anything different and what kind of trends do you see between the US and China, in specific?
: I think that when I go to ChinaPLAS I expect it to look a lot more like NPE
(International Plastics Showcase) in the States than it has in the past. I expect that I’m going to see a lot of automation equipment, a lot of robotics that really signifies the investment that plastics companies – molders – in China are making in robotics and automation in order to reduce their labor costs. I expect to see higher cavitation tooling and more automated actions. And, as I said before, something that looks more like a show you’d visit in Germany or the United States today than going to ChinaPLAS or similar shows 8-10 years ago. But it will be interesting to see. You know, we’ll see what it looks like.
: You also do metal, so what’s the different between your metal business and your plastics and rubber business? How does China play into that?
: Most of what we do in metal is die casting. Die casting is very similar to injection molding of plastics. It’s pretty much the same, I would say, except die casting can be a little tougher to automate than plastics, but other than that I think in terms of the trends going on in the industry with labor rates, automation, and productivity, I think it’s pretty much going to be the same in China.
China is moving up the value-added curve, and starting to produce things – not starting but well into the process of producing things with higher value and higher quality. Depending more on its domestic demand, to drive its growth it’s maturing in a way the United States did in its economy decades ago.
: Thank you for being with us today Carlton. I hope everybody who’s listening to this will come meet you at ChinaPLAS, and if you can’t be there, you can log onto The China Business Network, go to the directory
, search plastics, search Shenzhen, search Carlton, search Harris, search tool and die, and you’ll get to his profile, and you can hit the little button that says “contact me,” shoot him an email, and start your own conversation. Thanks again, Carlton, hope to see you soon.
: Thanks a lot, Janet.
Carlton Harris has had a extremely diverse career, but his experience has centered in three areas: M&A, manufacturing and business improvement, and doing business in China. Currently, he owns a business that sources tool & die and other products in China for customers in North America. Read more.