1970-01-01 08:33:28
Liu Changyou has been walking the streets of Qingdao, Shandong Province, for a month since losing his job at a Korean-funded enterprise that suddenly shut down.
Hailing from the northeastern province of Heilongjiang, Liu was once a worker in the Modern Artware Plant in Qingdao. But when he returned from the Lunar New Year holiday in early February, he found that his boss, who was from the Republic of Korea (ROK), had not.
"The local labor authority told me the Korean boss was dead after he went back to the Republic of Korea during the Chinese New Year," Liu said. But Liu thought it more likely that the manager had fled, something that's been happening with a number of ROK-invested factories.
Situated in the Qiantian area of Qingdao's Chengyang District, the Modern Artware Plant was shut. Its gate was closed and bore a notice "for lease."
The factory, and its workers, are among the many that have been affected by changes sweeping China's manufacturing industry: rising labor costs, changes in tax rates and rebates, a stronger currency and policies that favor capital- and technology-intensive industries over the low-tech, labor-intensive sectors.
In many cases, factories simply shut down, stranding workers without pay. In Qinqdao alone, a couple of hundred ROK enterprises, mostly smaller factories, have shut down abruptly in recent years. Workers show up for their shifts one day, only to find the factory gate padlocked and the managers gone -- without paying their debts or their workers.
Most of the foreign investors in these factories don't go through the formalities of declaring bankruptcy: they simply slip away in the night, abandoning their equipment. Or as the Shandong Department of Foreign Trade and Economic Cooperation (SDFTEC) put sit, these investors left through "abnormal" procedures
"There are four artware (ceramics) plants that have left here since the Chinese New Year," said Li Zhicheng, the director of the neighborhood committee in Qiantian. "Another four left at the end of last year without any prior notice."
Qiantian has had the largest number of ROK enterprises in Qingdao. Li said that in recent years, more of these enterprises had withdrawn and the pace appeared to be picking up. Several years ago, only one or two plants shut each year, but in less than three months this year, four had closed.
"He owes me 1,000 yuan," Liu said as he surfed the web at an Internet cafe near the plant. The amount is equivalent to about 143 U.S. dollars.
Liu and his 60-plus former colleagues don't know where to turn to get most of the wages they're owed. After the boss fled, the workers from the Modern Artware Plant got together to demand their back pay. Finally, after the local labor authority got involved, the plant equipment was sold to pay off the debts. Liu got one-third of his overdue pay. The owner of the factory lost 200,000 yuan in rent.
According to the Korea Business Development Center in Qingdao (KBDC), these "fleeing" enterprises mostly produced textiles, leather goods and ceramics and other labor-intensive items.
The manager of the KBDC in Qingdao, Lee Byong Jik, said from 2000 to 2007, there were 206 ROK enterprises that left Qingdao through "abnormal procedures." The number is similar to that given by SDFTEC, which said that last year alone, investors at 80 enterprises from the ROK simply walked away.
LEAVING LITTLE BUT DEBT, BAD IMAGE
The fugitive factory managers mostly operated on the cheap, officials in the region said.
"These enterprises made few contributions to the development of the local community, except hiring some local labor," said Li. He noted that many of these ROK investors had just rented existing facilities that had near-obsolete equipment, meaning they put up little money of their own. When conditions worsened and the managers fled, the assets they abandoned couldn't offset their liabilities -- wages, loans and rent.
SDFTEC said among the 206 fugitive enterprises, 30 percent had produced ceramics and 15 percent and 13 percent had produced textiles and leather goods, respectively. Many were small, with investments of only 300,000 to 500,000 dollars, and 55 percent had fewer than 50 workers.
But they left behind plenty of debt and ill will. These 206 enterprises were behind on bank loans of 700 million yuan. These enterprises owed 160 million yuan of wages to about 26,000 workers, SDFTEC said.
"It has really undermined Korean investors' image," said Cho HakRae, president of Qingdao Cuckoo Electronics Co., Ltd., which is still operating. "They should go through legal procedures, instead of fleeing."
OVERWHELMED BY CHANGE
"The business environment has changed and (the fleeing investors) faced great challenges," said Kwang Jae Won, vice president of the Korea Trade Center (KTC) in Qingdao. The center is part of the Korea Trade-Investment Promotion Agency. Kwang noted that new Chinese labor and tax policies have had a large impact on these small enterprises.
For small and medium-sized, labor-intensive enterprises, the cost of labor is a key factor in their survival. But China's labor costs have been rising in recent years, despite its seemingly inexhaustible labor supply.
That pool of cheap workers was an almost unbeatable advantage when the country opened its doors to the outside world in the late 1970s. Chinese commodities were very cost-competitive and factories could depend on big profit margins.
However, Chinese workers' living standards lagged the country's rapid economic growth and huge domestic economic disparities developed. China's government has turned its attention to workers' demand for higher pay.
A labor contract law was brought into effect this year. Employers must contribute to workers' social security accounts and set wage standards for workers on probation and overtime. The KTC's Kwang estimated that the new law had driven up labor costs by 30 percent.
Separately, China has revamped its tax policies for foreign investors. In 2007, the enterprise income tax law was adopted, ending two decades of preferential tax treatment for foreign investors. The law established a uniform income tax rate for domestic and foreign companies of 25 percent. Previously, the effective income tax rate for Chinese companies was 25 percent, while that for foreign enterprises was 15 percent.
Also, in a bid to slow down its rapid export growth, which has caused trade friction, China adjusted its tax rebate policies last July, ending or cutting the rebate rates for some export products.
All these changes are parts of the policy of transforming the Chinese economy, but they have adversely affected many export-oriented enterprises.
Qingdao Sejung Musical Instruments Co., Ltd. is a case in point. As a large labor-intensive ROK-funded company, Sejung's products are mainly exported. General manger Nan Fanzhu said that his business clearly felt the impact of the new policies.
Nan said that due to the labor contract law, the company had to shrink its labor force from 5,000 to 2,000 to cut costs. Meanwhile, the unified tax law caused a 10 percent rise in foreign enterprises' tax liabilities.
Further, export tax rebates on labor-intensive products, including musical instruments, textiles and toys, have been reduced. Nan said that the rebate on pianos and guitars fell from 17 percent to 13 percent.
Due to these factors and the appreciation of the Chinese yuan, which has appreciated by 14 percent against the U.S. dollar since 2005, Sejung's profit margin plummeted from 10 percent in 2004 to 0.3 percent.
Nan said some small foreign companies must move to Vietnam or some other Southeast Asian country as they cannot adapt to changed environment.
According to Piao Jianyi, a researcher at the Chinese Academy of Social Sciences (CASS), "95 percent of Korea-funded enterprises in China are labor-intensive and energy-consuming industries with low technology." Piao said that these sunset industries couldn't survive in the ROK and moved to China to keep going.
Now, they're on the move again.
Cho Hak Rae of Cuckoo Electronics, based in the ROK, said his company had been losing money in China since 2004. The parent company originally planned to build some support facilities and an institute to accompany its manufacturing facilities. But due to the changing investment environment, the planned investment will go into lower-cost Southeast Asian countries.
WELCOME MAT WITHDRAWN FOR LOW-TECH INDUSTRY
At the dawn of China's opening-door era, in 1978, foreign investment was badly needed for economic development. A series of favorable policies, including taxes and land, were provided to attract foreign investors. The sunset industries left the ROK for China, where they could boost profit margins. They had no incentive to improve their management or innovate. They're vulnerable in a changing investment environment, Piao added.
"The prices of all factors of production will increase for a long time to come," said Sang Baichuan, a professor at the Foreign Economic and Trade University. He added that cheap labor and land prices hindered the upgrading of industries.
China wants to move up the industrial ladder, Sang said, and it's not surprising that sunset industries will move to less-developed countries. Foreign investment in China will face a structural change, Sang said.
In its latest brochure for prospective foreign investors, issued in 2007 by the Ministry of Commerce, foreign enterprises are not encouraged to go into traditional manufacturing and export-oriented industries.
And foreign investment direct investment (FDI) in China is measurably changing. The National Bureau of Statistics said that FDI in actual use reached 11.2 billion U.S. dollars in January, up 109 percent year-on-year.
However, the number of new foreign enterprises has been declining. In January, 2,918 new foreign-funded enterprises were set up, a 13.41 percent decrease from a year earlier. More money invested by fewer firms means that the average investment of each enterprise has increased.
"We should focus on the outflow effect and internal innovation when utilizing FDI," said Sang. "The structural adjustment will adapt to the needs of times."
Source: Xinhua