Why the crisis is good for China’s Pearl River Delta

At Galanz’s main factory in Shunde, an industrial town an hour’s drive south of Guangzhou, hundreds of blue-shirted young men bend over 200m-long trestle tables, drilling screws into a line of shiny new microwaves.

Galanz, a household name in China but still unknown in much of the world, makes one of every two microwaves found in households across the globe.

This scene, repeated in thousands of factories lining the Pearl River Delta in Guangdong province, is an example of what the “factory of the world” does best: marshalling millions of migrant workers to produce cheap consumer products in dizzying quantities. Galanz’s 47,000 workers have the capacity to produce 28m microwaves per year.

But if countless media reports are to be believed, Galanz – along with thousands of other export processors in the PRD – should be in its death throes. With export markets collapsing across the developed world, thousands of manufacturers are teetering on the verge of collapse.

And with government statistics indicating that more than 60,000 factories shut their gates last year alone, armies of unemployed migrants are preparing to rampage across southern China, leaving destruction in their wake.

Yet, amid all this doom and gloom, Galanz expects sales to rise from last year’s Rmb25bn to Rmb30bn this year. Down the road, executives at Midea – China’s biggest maker of household appliances – expect to sell Rmb98bn of air-conditioners, rice cookers, kettles and microwaves, up from Rmb90bn last year. Export forecasts have been revised down, but overseas sales are still expected to rise from $3.8bn to $4bn.

Yu Yaochang, vice president of Galanz, says that strong demand from South America, the Middle East and Africa means that exports will actually make up a bigger share of sales than last year. And Galanz has yet to lay off any workers as a result of the global crisis.

So what is going on? The first message from two weeks of trudging through PRD factories is that many smaller businesses, often vulnerable to a single cancelled order, have not survived the crisis. But in most respects the big boys, who rely on regular orders from large foreign buyers, are thriving.

A manager at one of the biggest toy makers in Dongguan, a cluster of factory towns sandwiched between Shenzhen and Guangzhou, estimates that 6,000 toy factories have closed down in the city since the export slump kicked in.

But sales at his factory, which manufactures under licence for toy giants Mattel and Hasbro, have not dropped this year. “We are lucky to be one of the main suppliers for our customers. They select the companies that can survive, and try to build up a strong vendor base of better quality,” he says.

For bigger and better-run factories, the export slump has actually done a useful job of clearing out the dead wood. “During the last three to five months, a lot of the cowboy suppliers in the PRD have died. All that business is now going to better run companies producing quality items. These bankruptcies mean that better companies have benefited from the crisis,” says Christopher Devereux of ChinaSavvy, an independent outsourcing company based in Guangzhou.

The second message is to not take statistics too seriously. Undoubtedly, thousands of (mainly smaller) factories have closed. And the provincial government’s estimate of roughly 60,000 is as good as any.

But the government also estimates that 100,000 new factories were established in 2008, giving a net gain of nearly 40,000. The key point is that high factory turnover is part and parcel of business in the PRD.

Wang Zhaohong, an official in Dongguan’s economic planning department, admits that times are tough. The local government has even tried to help cash-strapped employers by temporarily relaxing mandatory environmental protection and social insurance requirements.

But Mr Wang is adamant that fears of an employment crisis are exaggerated.

“There has been no obvious increase in the numbers of factories shutting down since the crisis started. Factories close and enterprises restructure every year; this is quite normal. It is hard to understand why the media constantly harps on about this,” he says.

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