Thursday, November 6, 2008

Caught in the Middle

Dongguan, a city near Shenzhen in the Pearl River Delta is witnessing a lot of factory closings lately.

It's been called the world's factory floor, with over 30 percent of the world's toys made there.

But many companies there with mostly Hong Kong and Taiwanese owners are closing up shop without giving much advance warning.

It started with Smart Union, a toy company that closed suddenly on October 15, leaving thousands of workers without pay. And now the Dongguan Weixu Shoe Company has also mysteriously closed its doors.

The owners say it's because of falling orders because of the global financial crisis, but some workers who have been at these factories for years, think they're using it as an excuse to bail out and take their profits with them.

Many of the factories in the southern Chinese city are foreign owned and most just rent the premises and warehouse space. Few actually sink in much investment to build their own factories, which probably explains the poor working conditions the workers must put up with.

And up until recently, things were good, with cash rolling in from orders from the United States and Europe.

But with the new labour law that came into effect in January that incurred more costs on factory owners, as well as the rising costs of oil and other raw materials, profits started getting squeezed. And now with the global financial meltdown starting to happen, many find it doesn't make any business sense to keep going.

Or there have been some who have taken all the profits and poured them into poor investments, as we've seen stocks here plummet this year, or used the money for their own devices rather than reinvesting back into the company.

So instead of doing the proper thing of paying off workers' salaries and giving notice, these owners have literally fled, some without a trace, and leaving employees and the Dongguan government holding the bag.

Many laid-off workers hang out at the abandoned factories, hoping someone will show up to pay them, or find work elsewhere.

But these restless people that are up in the tens of thousands are making the Dongguan government nervous, as these migrant workers could cause social unrest that could lead to chaos.

So the municipal government has had to take the responsibility of looking after these migrant workers, by using public coffers to pay these laid-off workers the salaries owed to them.

And while some workers are pleased they are getting money from somewhere, others are concerned about the future; that even if they do find another job there, the salary may be lower or that they could be laid off again.

It sounds like the good times have come to an end. China is trying to stimulate domestic demand, but really, most middle class people who were ambitious, put a lot of money in stocks and don't have the extra money to spend.

The government is also trying to push companies to establish their own brands, but there isn't much innovation in the market that's coming out of China, except for OK copies of things.

It'll be interesting to see how the country gets out of this quagmire, that's only beginning.

Economists are still trying to paint an optimistic picture, that China's GDP will still go strong at 9.4 percent, which is the first time in over a decade that it's dipped below double digits.

But when over 60 percent of your economy is based on exports, it really doesn't look too good for the country.

People are going to be choosier with their money which could eventually lead to better services and products -- but not without lots of layoffs and cost cutting ahead.

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