Hong Kong Manufacturing SMEs: Preparing for the Future

69China’s Labour Contract Law is not differentiallyapplicable at an industry level, but it is clear that thenew law will increase manufacturing costs becauseof the requirement that firms provide additionalworker benefits. This will have the greatest impacton labour intensive industries, meaning that theeffect on the garment sector is likely to be morepronounced than on many others. 133At the end of 2008 the State Council introduceda “Plan on Adjusting and Revitalising the Textilesand Garment Industry” to help the Chinesegarment industry to overcome the global economicdownturn. 134 This Plan has helped the industry inMainland China raise finances and improve theirtechnological capabilities. Raising the tax rebaterate for textile exports, providing subsidies, andpostponing social insurance payments has improvedthe textile companies’ cash flows.The NDRC Plan for the PRD and related policies haveput pressure on garment firms, particularly thosethat do contract manufacturing, to move elsewherein Guangdong, move out of Guangdong altogether,and/ or move into ODM and OBM as a means ofadding greater value. The Guangdong Governmentintroduced a “double-transfer initiative” in 2008 135to encourage companies in the Pearl River Deltaregion to relocate their labour-intensive productionfacilities to less developed regions in the East, West,and North of the Province where there is readilyavailable local labour.The relocation of a garment factory is less difficultthan other industries due to the simple natureof the machinery and production processesinvolved. Their requirement for local servicesis also lower than other industries and theirsimpler supply chain means that may not also benecessary to move their upstream suppliers aswell. Nevertheless, the garment industry has along processing and supply chain where the PRDstill has advantages. The PRD can provide fast andreliable delivery for garments products as it hasestablished a very good supply chain and flexibleservices system. The logistics costs will increaseif the garment factories move outside of thegarment manufacturing cluster.While Hong Kong firms’ ability to manageproduction in South China is still an advantage,competition with other areas of China will heat up.There will be challenges associated with movingproduction into new areas of China. Moving deeperinto China’s interior dilutes executive control fromHong Kong. It also may bring executives into moredirect competition with strong local manufacturers,and require them to deal with local governmentsless aligned with their export oriented activities.In addition, international sourcing operationstraditionally focused on Hong Kong and the PearlRiver Delta will diversify their supply locations inChina.Response Strategies of Hong Kong SMEsThe sharp decline in Hong Kong domestic garmentexports suggests that the industry in Hong Kongsuffered greater losses than in many other locationsas a result of the global economic crisis and it mayalso point to an acceleration of moves by remainingfirms to relocate garment manufacturing to theChinese Mainland. For firms already in the PRD,moving to less developed parts of Guangdongmay reduce labour costs and allow them to findsemi-skilled workers, but may impose difficultiesin finding and retaining skilled technicians andmanagement, as well as increase supply costs andthe cost of shipping finished products.133 China Statistical Yearbook 2009, calculated ratio of GIO toEmployment134 www.lawinfochina.com.135 www.newsgd.com.