The Current State of the Pearl River Delta Manufacturing

1/8/2010 -  After many years of working directly with manufacturers in the Pearl River delta, Seth Peterson knows how the intricate operations are run there.  While some face 2010 with trepidation, Seth sees optimism in the changes taking place in the Pearl River delta.  





TCBN: Greetings everyone I’m Michael McCune and this is The China Business Network.

A Nebraska native, Seth Peterson began his China career in the early 1990s as a management consultant focused on market entry for global manufacturers. A fluent Mandarin speaker, he soon transitioned into operational roles, leading PRC companies with thousands of workers and hundreds of millions dollars in P & L responsibility. Now based in Hong Kong, Seth serves as an advisor and board director to a few enterprises with operations in the PRC and Asia pacific. Seth, thanks for joining us today.

PETERSON: Hi Mike, good to talk to you.

TCBN: Look, I want to jump right in and talk about the Pearl River delta. The manufacturing sector there - how has it been weathering past year’s economic turmoil?

PETERSON: Well, I think it’s been a very challenging year, particularly for export oriented manufacturers. And more specifically, for the - what we call SMEs, the small and medium sized enterprises - that are export oriented. They have really suffered, and a lot of them have gone under with the downturn in their main export markets, being the US and Europe.

Those that have gone under probably are under, or they’re consolidated - taken up by their survivors or by larger peers. But we’re starting to see signs of some improvement in orders. I think people I’m talking to are seeing increased orders. This may partly be the pre-Chinese New Year seasonal kind of pattern; it may also be everybody speculating that inventories have been drawn down and so forth. Some of these businesses that have survived are seeing some improvement in their order books, and I think it’s also evidenced in some of the booking on containers that are they’re getting fully booked up. I think there’s some tentative signs improvement there.

TCBN: Now you had focused your comment on small and medium enterprises that were focused on exports. What about the enterprises focused on the domestic market?

PETERSON: Well, I think the businesses that are - particularly the larger multinationals that have been focused on China market, they’re established. They had the resources to weather this, and they, because of their presence and focus on the China market, they have not been as vulnerable, haven’t suffered as much as the pure export oriented businesses. A combination of their size and their scale and diversification in their customer base and the geographic focus has helped those companies.

TCBN: I want to touch a little on labor market there. This downturn, we heard not only about the factory closings but also about all the workers themselves that were no longer employed. A lot of speculations on where went, whether they stayed? Did they go home back to the countryside? Stay waiting to be the first in line for the next reopenings? What’s been the state of the labor market there in the Pearl River delta?

PETERSON: I think that that is also a key challenge for businesses in the Pearl River delta. There is a shortage of labor. It’s less attractive now to migrant workers. Over the last ten years, before some of the other regions like Yangtze River delta became more prosperous, Guangdong/Pearl River delta was the main destination. A combination of the emergence of other regions - may be closer to home for some migrant workers - and also narrowing wage gap. They’re not going to necessarily net that much more by coming to Guangdong than they would have if they stayed in Anhui, especially consider for example, travel challenges. It’s hard for them to sometimes get train tickets go back to Chinese New Year, for example. I think that migrant workers are becoming more picky, in a sense. So I think that’s contributing to the shortage of labor. 

There are also other challenges from the labor standpoint in the Pearl River delta, and this does not just apply to the Pearl River delta, the new labor law that came into effect in January 2008 puts extra burden onto employers. And there’s pretty strict compliance there. And then you’ve had a continuous series of annual minimum wage increases in Guangdong, which have averaged 15-20% each year for the past several years, and anticipated that it’s going to come again this year. With the new labor law as well, there are actually stricter policies on overtime. So a lot of the pure direct manufacturing labor workers, their total income is: they have their base, and they get their dormitory and subsidies for food, etc in the canteens, but then they would also often be looking for making up an extra 20-30%+ a month on overtime. And in the past there wasn’t strict enforcement in terms of hours employers do overtime. With the new labor law, particularly for larger and particularly foreign companies, they want to be compliant, and so they’re not able to offer as much in the way of overtime hours and that does have an effect.

The other challenges from a technical standpoint - not necessarily the direct labor on the production floor, but for, say, R & D and engineers and so forth. The challenge has always been in parts of Pearl River delta that there aren’t necessarily technical schools nearby. So that’s one of the other challenges that employers will face: is that they need to target. Sometimes you’ll see employers setting up sourcing recruitment relationships with certain technical schools, maybe even outside Guangdong province. So go up to Hunan, set up something with Changsha Technical University or technical college to have a continuous ongoing recruiting relationship with these types of schools. These are some of the measures that companies can take to try to counter some of these challenges they face on the labor and particularly skilled labor side in Pearl River Delta.

TCBN: And I know that most of our discussion here today has been focused on some of your perspectives on Pearl River delta experiences, but I wonder if you could maybe step back on a more macro level before we go and talk about sort the Pearl River delta as a region and its competitiveness, its ability to continue growing economically vis a vis other regions in China, or even now with the ASEAN + ONE free trade zone coming online, where does this region fit in the scheme of things, and what its outlook overall?

PETERSON: Well, I think it’s a dynamic part of the world and a dynamic part of China. I think there’s a lot happening from a macro policy and infrastructure standpoint that with help keep this greater Pearl River delta competitive and CEPA is another. The CEPA is the Closer Economic Partnership Agreement between Hong Kong and the mainland. The greater Pearl River Delta, so not just talking about Guangdong, but Hunan and some of the greater southern China, greater Pearl River delta region. I think it will continue to evolve, and it stays dynamic. I think it continues to have a future. It just depends from a foreign company’s perspective in terms of their focus, if it’s export oriented, there’s still great advantages to Guangdong/Pearl River delta and proximity to Hong Kong. There’s a lot of investment, I think still, the investment into Pearl River delta from foreign direct investment greater than Yangtze River delta. At least it was the last time I checked. So I think it continues to have future. Dynamic and it has to remain competitive for sure.

TCBN: I’ve been speaking with Seth Peterson, a manufacturing leader and expert based in Hong Kong. Seth, it sounds like we should touch base again after the Chinese New Year see how the demand is holding up. And I hope you’ll be available with us for a follow up conversation.

PETERSON: Absolutely Mike. I look forward to speaking with you then.


Seth Peterson is a Lincoln, Nebraska native based in Hong Kong. He speaks Mandarin fluently and has managed manufacturing businesses in the Asia region over the last seventeen years. After starting hiscareer in Management Consulting in the early '90s in Hong Kong and Shanghai, he subsequently spent a total of nine years with Emerson Electric and later served as VP-GM for Asia of Hong Kong-listed Techtronic Industries’ Floor Care Business. He currently serves as an independent advisor to Asia-Pacific businesses and as a director on the Board of a Pudong-based Optical Components business owned by a UK Private Equity Fund.