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Guangdong Manufacturers: “The Reports Of Our Death Have Been Greatly Exaggerated”

February 26th, 2008

Ten years ago, there was plenty of talk about how growth on the coastal cities was doomed. Everyone was looking to the second- and third-tier cities, and Sichuan Province was really where it was at, brother. Taking a page from American history, the Chinese government had urged everyone: “Go West!”

The latest buzz is a push into the north, apparently. Guess what: Anhui is the new Sichuan! Oh, my god. Don’t get me wrong. I love Anhui, especially the people. But there is nothing happening there, especially not for those involved in contract manufacturing.

For whatever reason, people like to talk about the demise of Guandong Province (h/t CLB.com). We’ve been hearing it for years. The factories are moving to Shanghai, or else they are heading inland, or they are off to Vietnam. What most fail to understand is the value of manufacturing clusters. Numerous economists have described the phenomenon, and it is why industry is not going anywhere anytime soon.

Consider that in order to get a products made, factories need a critical mass of sub-suppliers and service providers. If you’re making shoes, for example, you need to be able to pick up the phone and quickly get any number of people over to your office immediately: Leather vendors, adhesives suppliers, machine repairmen, a supplier of cardboard boxes. There are dozens of behind-the-scenes players who are necessary in a production process like this one.

On one project I was involved in, there was a problem with some packaging labels. The factory called the agent who provided the labels, and he was there in no time flat. He also knew what he was talking about. There were many different types of adhesives, which went on the back of the labels. Long story short, it makes a big difference that you have a critical mass of game players there all in the same space.

Companies that do not rely upon clustering and its benefits may move inland, but there is no way that entire industries - whole clusters – are picking up and moving to another region. When the regions clusters were originally formed, it had a lot to do with a tremendous cost differential. Today, the incremental benefit – if there even is one – is marginal at best. Whatever savings there are in labor are typically eaten up by increases in logistics costs, I am afraid to say.

The title of this post is a quote from an aging Mark Twain, who was very much alive at the time he said it: “The reports of my death have been greatly exaggerated.” This one applies to Guangdong Province and its robust manufacturing sector.

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