Pearl River Delta Here to Stay

With the recent spate of Foxconn suicides and the accompanying wage rises in numerous factories in the Pearl River Delta – China’s manufacturing hub – it is no wonder that there has been speculation that the bulk of manufacturing may shift from the Pearl River Delta to lower-cost regions like the impoverished Henan province.

Indeed, wages have risen 50% since 2005 and 20-30% this year alone as a result of worker strikes and pressure from the government. Coupled with a strengthening yuan which will reduce the competitiveness of exports, some may say that the move to more far-flung places is and no-brainer in order to protect slim profit margins.

This said, a survey by the Hong Kong Trade Development Council revealed that 21.8% of factory owners planned to expand production in the Pearl River Delta and 66.3% said they would make no change.

Presumably, the reason for this is external economies of scale experienced in the Delta. A sophisticated supply chain of ancillary firms (ie, firms that help each other – for example, a parts manufacturer and a finished goods manufacturer) has grown over the past 25 years in a concentrated area. Such a network of firms doesn’t exist in other provinces. There is also no shortage of migrant labour and, importantly, the Delta has a large pool of labour with the appropriate skills. In rural areas, labour is scarcer and spread out, making them relatively expensive.

Also, even though provinces like Henan may be physically closer to raw materials, the ever-growing rail and road network in China is mitigating logistical issues. Due to the external economies of ancillary firms, suitable labour, and infrastructure, the dominance of the Pearl River Delta as the manufacturing heart of China looks set to continue.