Manufacturers struggle in changing times

Suicide attempt highlights hardships facing OEMs

Gao Min, chairman of troubled mobile phone manufacturer Dongguan Zhaoxin Communications Industrial Co, is said to have attempted suicide on January 3, an event which sent chills through China's original-equipment manufacturer (OEM) community.

Fortunately, local media say Gao's attempt to take his own life was unsuccessful. Nevertheless, the extremity of Gao's actions, which some have attributed to the dire financial straits reportedly facing his company, hints at weakening conditions within the country's sprawling manufacturing sector. Indeed, Gao is said to have apologized to his employees, suppliers and creditors in his suicide note.

According to reports, Zhaoxin Communications is on the hook for over 40 million yuan ($6.44 million) in overdue wages as well as debts to suppliers and loan sharks. As many know, a lack of access to bank financing has sent China's small entrepreneurs and factory bosses scrounging for credit in the country's shadow banking market, where borrowing costs are high and the pressure to repay can be enormous.

Not helping matters for business owners has been a tidal shift in the country's economy, one which now threatens the very advantages which once made China the world's manufacturing center of choice.

For starters, China's vanishing demographic dividend is cutting into its workforce and disrupting traditional dynamics in the labor market. The country's population of young adult workers is expected to decline by an average of 1.4 percent annually over the coming decade. This - among other factors, of course - is having an impact on salaries as the young workers who traditionally take up unskilled manufacturing jobs become harder to find. Figures from the Chinese Academy of Social Sciences show that labor remuneration has risen over 266 percent from 2003 to 2010 - compared with growth of 100 percent in India and 182 percent in Brazil over the same period.

Such developments have not gone unnoticed by factory owners and multinational businesses with manufacturing operations in China. Many companies, both foreign- and Chinese-funded, are now relocating their plants and shifting jobs to Southeast Asian and South American countries where wages are lower.

More specifically, for contracted mobile phone manufacturers like Zhaoxin Communications, thinning industry margins are pushing some smaller OEMs to the breaking point.

Things may only get worse for manufacturers as China accelerates its industrial transformation and tilts its economy away from low value-added assembly and production. Over time, technological advances and upgrades will reduce demand for cheap labor. Tomorrow's jobs will require a more skilled class of worker, who can also command higher pay.

With the writing more or less on the wall, China's OEM industry must actively prepare for change.

Brand-building is broadly seen as one potential avenue of development. Doing so could come at high costs for some manufacturers. Clients may withhold contracts or design information if they see their suppliers taking shape as potential competitors.

Perhaps a better step now would be for contacted manufacturers to explore downstream services. OEMs should think seriously about helping their clients sell their products in China. In such a configuration, the complementary interests of both parties could provide a sound basis for partnership.

Helping clients drum up sales would serve manufacturers, who could surely benefit from the establishment of their own marketing and distribution channels. With time, such channels could offer ambitious OEMs a springboard into the lucrative consumer world.

China is now the world's largest and most important market for many types of consumer goods. Despite the fading of traditional advantages, opportunities abound.

The road to future development is sure to be bumpy and filled with delays, but those with wisdom and perseverance should be rewarded for their hard work.