The Siren Song of Shenzhen

The Chinese economic development zone close to Hong Kong is growing by leaps and bounds--with a reason

by Teri Tan -- Publishers Weekly, 6/24/2002

To understand and to know Shenzhen one must be familiar with its big context: China, or Middle Kingdom as it is known in its official dialect. Newly admitted into the hallowed halls of WTO, China boasts a population of 1.3 billion and counting, despite its one-child-per-family policy. In the first quarter of 2001, when the U.S. economy slowly nose- dipped, no other country in the world, save for China, was spared from sharing the same boat. China's economy grew an enviable 7.5% in 2001 and the same percentage is assumed for each of the next five to six years or even longer. Its huge domestic market--new to Adam Smith's capitalist world and disposable income--almost guarantees a healthy growth unperturbed by external forces.

But it is the potential for free trade resulting directly from its WTO membership and the now-flimsier bamboo curtain that has done wonders for China's economic growth. In 2000 alone, China absorbed $66 billion in foreign investment, more than several of its neighboring countries collectively received in total.

China is a complex country, geographically, politically and culturally. On the map, it is divided into 23 provinces, four municipalities, five autonomous regions, 174 prefectures and 2150-odd counties. Guangdong--occupying the southeastern region--was one of the two provinces opened to foreign direct investment in 1980. Five years later, Deng Xiaoping designated the whole Pearl River Delta an open economic zone. The counties in this 42,000-square-kilometer zone include Shenzhen, Zhuhai, Shantou, Shaoguan, Foshan, Heyuan, Meizhou, Huizhou, Shanwei, Dongguan, Zhongshan, Jiangmen, Maoming, Zhaoqing, Qingyuan, Chaozhou and Jieyang. The 400-sq.-km. Shenzhen Special Economic Zone (SEZ)--the most well-known county to the outside world--produces at least 50% of the total printed books destined for worldwide consumption.

Pearl River Delta is China's most dynamic region. Overall, its 20-plus million population boasts the nation's highest per capita income at $4,000. If that's not enough to show you the rate this region is growing, consider this: in the last year alone, Guangdong's economy grew by 9.5%, nearly 10 times that of Hong Kong. To be fair, it is not because Hong Kong is going slow, but because China is moving so fast.

Let's go back to Guangdong. There are 51 state-approved ports here; among them, Yantian handles 54% of Shenzhen's total container throughput, Shekou 27% and Chiwan 16%. Yantian is currently China's second largest port in terms of container-handling capacity, just slightly behind Shanghai. Major shipping operators such as Hapag-Lloyd, P&O Containers, Maersk Line, Hanjin Shipping and Global Alliance make regular calls at these ports. According to some suppliers, shipping through Yantian or Shekou would save about 20%-30% on haulage/shipping costs. The problem is that most shipping companies accept only full container loads, and this restricts more direct shipping and cost-savings transferable to publishers.

Shenzhen has a fairy-tale history. In 1979, when Deng envisioned a free economic zone close to Hong Kong--the indisputable East-West hub that would later return to Beijing's fold--not everybody bought it, much less endorsed it. But that was Deng's game plan: Shenzhen would be his guinea pig for capitalism, the case study for further experimentation and living proof of China's new economic reforms. Since then, the sleepy fishing/ farming village of 14,000 has been transformed into a bustling region populated by more than four million (average age: 26), with four-lane highways, a skyline quickly replicating Hong Kong of the 1980s and a subway system nearing completion.

Approximately 75% of Shenzhen's foreign investment is channeled through Hong Kong. Any sizable manufacturing concern previously located in Hong Kong has moved across the border to this free economic zone. The strategic business question nowadays is not whether to move--for that is very much assumed--but when and how soon. And this relocation doesn't apply just to labor-intensive manufacturing. The high-tech/telecommunications industry is also making a beeline for Shenzhen and other areas in Guangdong. One example: the $200-million CyberCity Industrial Park, the Chinese government's planned equivalent to Silicon Valley, is growing at high speed.

In Shenzhen, an enterprise set up by foreigners--a status also conferred on Hong Kong-registered companies, courtesy of the "one country, two systems" policy--is entitled to tax breaks. That, according to many suppliers PW interviewed, is the beauty of relocating across the Luo Wu border. Throw in lower capital costs, cheap and abundant labor, vastly improved infrastructure, vibrant domestic demand, low inflation and a stable currency, and it is easy to see why most Hong Kong suppliers (and one U.S. company--see "The American Connection." p. S14) jump ship (or border) to Shenzhen and its neighboring counties.

There is no shortage of land or labor in this city, or, for that matter, in the whole of China. Savings in terms of wages are tremendous for suppliers. On the average, unskilled workers draw less than $100 per month, while university graduates earn three times that amount--if they are lucky. Compared to the wage scale in Hong Kong, we are looking at 30%-40% savings. Multiply that by the thousands of workers in hand-assembly lines and you will no longer wonder what the relocation fuss is all about.

During PW's visit to Hua Yang's factory in Xixiang and later to Hung Hing (Shenzhen), we see crowds of people lining up outside the gates looking for jobs. It's a heyday for employers and employees alike. The biggest challenge facing the suppliers is just this: finding experienced workers. For most, the best method is the old, reliable way: training, training and more training. Most suppliers play a variation of the same game: placing veterans from Hong Kong side by side with young, hardworking but inexperienced Chinese workers, using a tried-and-tested management structure. The result is a new breed of workers with fast-paced Hong Kong work ethics.

The issue of toiling in the fields vs. working in air-conditioned comfort does not require much thought. In China, young people from the northern--as far as Yunnan--or the western provinces such as Xi'an all head for the cities to look for better-paying jobs and a brighter future. The living conditions are better, too. Both Hung Hing and Hua Yang provide room and board to their workers. Hua Yang rents additional apartments while Hung Hing erects dormitory complexes around its main factories. Both provide amenities and recreational facilities to ensure their workers' welfare is not neglected in the pursuit for better efficiency and productivity.

Many suppliers reject as baseless the long-held opinion that young Shenzhen workers have a lackadaisical attitude toward learning and improving themselves.. "On the contrary, these workers, though young, are most keen to learn and to upgrade themselves. We are talking about the Internet generation here. Their intention to work in Shenzhen boils down to two things: money and prospects," says Kevin Murphy of Hua Yang. "By working here, these workers enjoy a higher standard of living, better working conditions and a relatively higher salary than their counterparts in other cities," adds Raymond Chan, general manager of Hung Hing (Shenzhen).

Not all Hong Kong suppliers share the eagerness to relocate. But what makes these few remain faithful to a higher-cost Hong Kong? One main reason is that many experienced workers did not follow their employers to Shenzhen. So in a way, companies remaining in Hong Kong have the pick of the crop. Another compelling reason is that despite the "free-zone" status, Chinese customs still impose tricky rules such as the "raw-material-in-equals-waste-plus-produced-goods-out" regulation. A 5%-10% variation in the raw tonnage is deemed acceptable. If it is more, fines and/or taxes will be imposed. There is also the all-too-pressing problem of deadlines and cycle time that would be better met by manufacturing in Hong Kong itself.

Those wanting the best of both worlds retain a small operation in Hong Kong for urgent and simple projects, and a bigger operation in Shenzhen/Guangdong for complicated printing and hand-assembly.

This year PW visits two Shenzhen-based hand-assembly operations to give you a clearer picture of what is going on behind that glossy board book or the impeccably manufactured pop-up book. Our destinations: Hua Yang (Xixiang) and Hung Hing (Shenzhen).

At Hua Yang, a pop-up/fold-out book on T-Rex seems to be the project of the day on the second floor of the company. At least 100 hand-assembly workers are inspecting the finished books page by page, while tens more are busy wiping traces of fingerprints from the covers. Though it's close to lunch time, a staggered roster ensures that production continues at a steady pace. The two shifts of operation go from 7 a.m.- 11 p.m.

At one end of the hand-assembly hall, two operators pick up little strips of paper, the ends already applied with glue. With a perfectly synchronized turn of the wrist, they quickly but precisely construct a pop-up model building for an architecture book. As on production/manufacturing floors anywhere in the world, tasks are highly specialized and regulated: there is a person to sort out the correct strip to be used, someone else to apply glue to the strip, yet another to dab away traces of glue from the highly engineered pop-up, and still another to check that the model folds properly and neatly between the pages. All this is accomplished in near complete silence. Tasks that seem too tedious or even ridiculous are performed manually: flipping through pages to look for defects after hand-assembly, counting stacks of little strips of paper to ensure the correct quantity is supplied, or putting glue on every little tab or strip.

The operators are mostly young women eager to be successful in their first job. "As you probably saw earlier at the factory gate, hiring is not a problem over here. There aren't many printers doing hand-assembly in the vicinity, and we have more applicants than vacancies at any time of the year," Kevin Murphy explains. This surplus of supply vs. demand enables the management team to match production needs with the required headcount in the shortest time possible. "We stabilize our hand-assembly headcount at about 4,000 because there is not much of a high or low season nowadays. Publishers often start manufacturing titles meant for year-end sales as early as June or July, which used to be the quietest months in the past. I think they know that overloading during the last quarter of the year is not a good idea. So they plan and schedule way ahead of their in-store deadlines."

The sprawling Shenzhen Hung Hing complex--wholly-owned and set up in 1994--extends to include its huge paper and corrugated board facility, Tai Hing Paper Products. Here, a total of 2.4 million square feet of production space accommodate a skilled workforce of 6,000 to 8,000 people. The Tai Hing facility houses the largest 2.8-meter high-speed corrugator in China--a fully automated machine extending from one end of the cavernous hall to the other, equipped with sensor-activated conveyor belts and capable of producing more than 500,000 square meters of double-wall liner-board daily.

In yet another building, this one dedicated to children's products, hand-assembly operators in uniform and caps give the production floor a clean-room feel. PW notices that those in the packing area wear gloves to ensure final products are untainted by fingerprints. Different parts of the football field-sized hall provide different glimpses of work-in-progress and titles being assembled. There are rows of operators working on pop-ups, another few on putting pull-tags on sheets of printed pages, and yet more rows assembling different items into plastic boxes. All regimented processes, all performed with sheer concentration. Children's products manufactured in this eight-story air-conditioned building include standard board books, padded board books, pop-up books, die-cut flap board books, bath books, foam books, sound modules, touch-and-feel, jigsaw books and tabulated-and-shaped board books.

Next to the hand-assembly plant is the four-story printing facility set up to cope with increased sales volume and the need to expand capacity beyond the Tai Po factory. "We have an 8-color medium press with in-line coating finishing, 7-C and 6-C in full-sheet size printing presses--also with in-line coating finishing--laminating, calendaring, stamping, silkscreening, die-cutting and other equipment here," Raymond Chan says.

It is easy to see why Hung Hing was named by Forbes as one of the best small companies in the world in both 2000 and 2001. Quality control, documentation on work-in-progress, cleanliness, working conditions down to workers' quarters, are all carefully monitored.

 Getting around

If you are in Hong Kong and making a trip to Shenzhen, chances are your supplier will be chauffeuring you around. Travel time from Hong Kong to Shenzhen has shortened dramatically since the highways were built several years ago. Still, you are talking about at least 90 minutes from Tsimshatsui to Shenzhen city center, perhaps two hours, depending on the traffic. You might be better off taking the ferry from Tsimshatsui to Fu Yong terminal, which is located near Shenzhen Airport. This way, you will avoid the crowd at the Luo Wu checkpoint, where more than a quarter of a million people pass through each day. The ferry takes an hour each way and leaves almost every hour from the terminal; the journey is smooth and enjoyable. The trick, of course, is to get your supplier to pick you up from the ferry terminal and to get you back there.

And if you are going to take several days visiting Shenzhen suppliers, then perhaps it's best to stay at Mission Golf Resort/Club or the more established hotels near the airport. Bear in mind that it is just like another industrial area--a concrete jungle, with heavy traffic and numerous cordoned-off construction sites enveloped in an ever-present smog--a sure sign of progress, alas.