China Boomtown Withers as Buyers Push Worker Rights

By John Liu and Stephanie Wong

Dec. 9 (Bloomberg) -- Li Wencheng chain smokes in the office of his candy factory in China’s southern manufacturing belt and frets over diminishing returns.

“The U.S. is really putting us into a dilemma,” says Li, who employs 100 people at his plant in Dongguan, Guangdong province, which makes candy versions of Winnie the Pooh and other Walt Disney Co. characters. “Clients talk about high-quality products and human rights in one breath, and in the next they’re telling us we have to cut prices.”

Chinese exporters are the latest victims of the global recession as sales slow and buyers in the U.S., Europe and Japan drive prices lower. At the same time, employee wages and benefit costs are rising following demands from customers, including Wal- Mart Stores Inc., that they enforce new labor laws.

The crunch may close a fifth of Guangdong’s factories and leave 6 million migrants without work next year, according to the Institute of Contemporary Observation, a labor rights group in the province. That would further slow the world economy because Guangdong accounts for 12 percent of the nation’s gross domestic product and China is the biggest driver of international growth.

The World Bank last week slashed its forecast for China’s economic expansion next year to 7.5 percent, the lowest in almost two decades, citing reduced overseas demand. China has averaged 9.9 percent annual growth for the past 30 years.

Exports Fell

Two-thirds of China’s small toy exporters closed in the first nine months of 2008, according to government statistics. Exports in November fell for the first time in more than seven years, Fan Gang, an adviser to China’s central bank, said at a forum in Beijing today.

“The bankruptcy of small and medium-sized exporters is going to have a huge effect on China’s economy,” says Guan Anping, a former trade official who is now managing partner at the law firm Anjin & Partners in Beijing.

Some 95 percent of exporters with assets of less than 40 million yuan ($29 million) may fail in the next three years, Guan estimates. China’s 42 million businesses of that size provide three-quarters of China’s urban jobs and 60 percent of GDP, according to the government.

Growth in Guangdong slid to 10.4 percent in the first three quarters, 4.3 percentage points less than the same period last year. Signs of the squeeze are littered across Dongguan, which is dotted with factories sitting empty behind padlocked gates.

Labor Law

Boxes of Christmas cards featuring Sesame Street characters are all that’s left at Yongying Factory, where until September 1,000 workers helped supply Hallmark Cards Inc. Court receivers combing the premises said the owner had disappeared.

Higher labor costs are adding to the burden of exporters already squeezed by a rising yuan, and increased prices for raw materials and energy.

China’s labor law, introduced Jan. 1, guarantees minimum pay, pensions and health benefits, and caps the number of hours employees can work each week. In Dongguan, the law imposed a 40- hour week, with 32 hours of permitted overtime, and a minimum wage of 1,000 yuan a month, according to China Labor Bulletin, a worker’s rights group based in Hong Kong.

The new rules increased costs by more than 10 percent at Strategic Sports Ltd., which makes crash helmets for cycling, horseback riding and water sports, says Chairman Philip Cheng. That’s erased profit that was growing 5 percent annually.

The laws are so strict that the company is reluctant to fire workers who fail to perform during their training period, which lasts two to three years.

‘Cheating on Quality’

“If they don’t do well, we dare not fire them,” Cheng says. “Otherwise we have to pay a lot in compensation, which we didn’t before.”

That is a good thing, says Ding Lihua, a 25-year-old from Sichuan province who’s made shoes in Dongguan for five years.

“In the past, factory owners would refuse to pay our wages and there was nothing we could do,” Ding says. “Now if they don’t pay, we sue and then they have to pay or they get fined.”

Bentonville, Arkansas-based Wal-Mart, the world’s biggest retailer, has told its 20,000 suppliers in China to follow the law or be replaced.

“A company that cheats on overtime and on the age of its labor” will “ultimately cheat on the quality of its products,” Chief Executive Officer H. Lee Scott said Oct. 22 at a conference in Beijing.

Wal-Mart’s China spokesman, Jonathan Dong, said the retailer is willing to pay more for goods to ensure its demands are met.

Swelling Population

Cheap labor fuelled China’s growth story as factories made inexpensive toys, shoes and clothes for consumers in the U.S., Japan and Europe. Guangdong’s economy increased 168-fold over 30 years to 3.1 trillion yuan ($451 billion).

Factories sprang up in roadside garages and apartment blocks next to elementary schools. The sky often turned gray from pollution as industrial output rose.

When Li opened Dongguan Fulifeng Food Co. in 1995 he had more orders than he could fill.

“Business was so easy,” says the 44-year-old Taiwanese entrepreneur. “The workers were working 14 hours a day.”

Migrant workers from rural China poured into the region to staff the new factories, swelling Dongguan’s population to 8.7 million last year from 1.1 million in 1978. Average annual wages nationwide tripled to 24,700 yuan ($3,600) from 1999 to 2007 as demand for skilled labor grew, government statistics show.

Hasbro, Mattel

U.S. toymakers Mattel Inc. and Hasbro Inc. have blamed higher worker and production costs for hurting profit. Labor expenses in China rose 30 percent from a year earlier, Hasbro Chief Financial Officer David Hargreaves said in an Oct. 20 conference call to discuss third-quarter earnings. Hasbro makes Transformers action figures and Monopoly.

Some overseas buyers are pushing that burden back onto Chinese manufacturers by seeking lower prices.

“The retail market in the Czech Republic has started to weaken,” Robert Zofka, a director at Czech toy company Jiri Models AS, said during a buying trip to Hong Kong Trade Fair in October. “There’s pressure for us to lower costs, and we will be pushing for better prices from the Chinese suppliers.”

China’s leaders, concerned mass unemployment may trigger unrest, are rolling back some provisions of the new labor law.

The country’s top labor official, Yin Weimin, on Nov. 20 said the government would let local authorities delay minimum wage increases and reduce employer contributions toward unemployment and medical insurance.

Fulifeng’s Li says rising labor costs weren’t a problem until the recession hit.

Now he’s reconsidering doing deals with U.S. companies after spending hours on the phone haggling with one unidentified buyer over a difference of 0.10 yuan -- or 1 1/2 U.S. cents -- per kilogram (2.2 pounds) of candy.

“To be blunt about it, we manufacturers profit off the workers,” he says. “The only profit we make is on how low we can push the price of labor.”

To contact the reporters on this story: John Liu in Shanghai at jliu42@bloomberg.netStephanie Wong in Shanghai at swong139@bloomberg.net