Shenzhen manufacturing : No worries, be happy? Or time to panic?

China Law Blog points to these two conflicting reports from the blogosphere on the current economic conditions of Shenzhen/South China’s manufacturing/export industries. Shenzhen undercover says “No Manufacturing, No Problem” as he points to the local government’s long standing and long term plans to transform the city away from the low-cost item manufacturing that made it famous into an international metropolis on a scale of Hong Kong or even Singapore:

The thing is, as much as this economic downturn in the globalized economy has hurt a lot of export-driven businesses, and its workers in Shenzhen, it’s really helping Shenzhen transform itself to what it wants to become. For the past 2 years since I’ve been living here, there has been a constant trend and push by local officials to develop Shenzhen as a city dominated by high-tech research rather than lower value-added manufacturing. It wants to go from labor intensive, basic and easy things like the toy industry to industries higher on the totem pole of innovation.

As much as Shenzhen was able to get its start from being that factory town “across the border” for Hong Kong businessmen, its goal is to move away from that persona into an international city of something other than toys, eye glass frames and furniture. It wants to be a city on the same scale as Beijing and Shanghai, or better than Singapore.

I like Shenzhen and it’s made incredible progress from the time I first visited it more than 10 years ago. But it’s no Singapore and it’s got a long ways to go before it gets there. Still, the author makes some valid points and he is on the ground in Shenzhen while I sit here in the states.

An opposing viewpoint is expressed by Silk Road International who says the situation is “bad and getting worse“:

Second, the fact that the bottom dropped out of the 40% of the economy that was based on exports means that maybe up to 20% of the total economy is just gone now. And it just will not be back next year either. There is no way that the other 80% are going to remain untouched. A few (or even a lot of) domestic infrastructure projects are not going to make up for that.

The buying slow down is going to kill the 4Q numbers too. I have a friend in the technology business. He told me of buyers that came over to finalize Christmas shipments of LCD TV’s for the US market. They usually extract penalties and airfreight for the % of the Christmas orders that are late. Not this year. When the supplier said that 30% of the order would be late they told them to just keep it. There is no market for it any more.

If I was a betting man, I’d put money on 4Q numbers being below 8.5% and next years numbers even lower. (Honest numbers will be below 8.5% for sure but “official” numbers will not be that low because of the need to control a bit of the domestic collective psychology—like the US will never have another “great depression” because it sound’s so awful, 8.5% is the magic number that has to be hit just to keep the new entrants into the workforce employed in China. A drop below 8.5% and people will start thinking ‘89 again.)

Third, like toys, many industries are now scared of being “Made in China” and will not come back (or will not come back as much as they were here before). In the last year I’ve had three clients in the toy industry tell me that they’ll work with factories anywhere but China. Even Chinese owned factories using Chinese materials in Cambodia, Lao, Indonesia or Burma are fine, said one guy. Just so long that it doesn’t say “Made in China” on the tag. This was happening before the slow down and so there were many factories that were compliments to the toy industry that were hurting and are now being pushed over the edge.

These are two opposing viewpoints from people on the ground in China, so their opinion means a lot more than mine, but I’ll just say that short and long term pain are not unexpected for Shenzhen as labor costs have risen, overseas demand continues to slow, and production continues to move further inland to cheaper areas (both labor and real estate). However, as Shenzhen Undercover states, if Shenzhen really is trying to move beyond low-end manufacturing then they are going to have to endure some serious pain as the export/manufacturing economy dries up. What do you think?