Export or die?

For the past three years, Hong Kong has endured a barrage of whingeing from tycoons lamenting the end of the Pearl River Delta (PRD) manufacturing model.

Before the global economic crisis kicked in last autumn, the fat cats sitting in their mansions on the Peak complained about rising costs, notably those arising from the new Labor Contract Law. Although it is hard to feel sorry for factory owners who complain about the cost of being forced to treat workers fairly, times are certainly tough. And things have only got tougher since Americans and Europeans lost their appetite for cheap Chinese goods.

With export markets collapsing, thousands of manufacturers have collapsed with them. Government statistics indicate that more than 60,000 factories shut their gates last year alone, and thousands more closed this year. Small- and medium-sized businesses have been hit particularly badly.

But talk about the end being nigh is vastly exaggerated, and the export-processing model that has served the denizens of the Peak so well for so many years is not doomed.

First, don’t take the statistics too seriously. While thousands of factories have closed, the majority were small outfits with fewer than 50 workers. More importantly, the Guangdong government estimates that 100,000 new factories were established in 2008, giving a net gain of nearly 40,000. Officials in Dongguan say there has been no obvious increase in the number of factories shutting down. The key point is that high factory turnover is part and parcel of business in the PRD.

Second, for decent companies operating in the PRD, the slump may prove a boon in the long run. The death of cowboy suppliers means guys who play by the rules will no longer be undercut by buckaroos running sweatshops. This is part of a wider restructuring process that should strip out some of the unseemly competition in the PRD, which has brought lower prices to Western consumers, but at a considerable human and environmental cost in China.

For the larger survivors, export processing remains a viable industry, and PRD products will remain globally competitive. Rather than moving to Vietnam or Bangladesh, Hong Kong-owned processors need to place a greater emphasis on quality and branding rather than price.

However, the drop in external demand means that manufacturers need to look to markets closer to home – notably, the mainland market itself.

Although traditional export processers – Hong Kong is said to have more than 10,000 of these in the PRD – enjoy certain customs conveniences and tax benefits, they are not allowed to sell in the domestic market. Even the 40,000 wholly owned or joint venture factories, which are allowed to sell in China, remain focused on foreign markets. Most Western firms operating in the PRD, meanwhile, manufacture for the domestic market.

Sure, Chinese consumers are not as rich as those in the West. But Hong Kong manufacturers can no longer afford to ignore the consumers on their doorstep. For aspiring tycoons who dream of buying a pad on the Peak, the answer is simple: Convert to foreign company status, set up distribution channels in the mainland, and start selling to the only market in the world that is still growing.