BEIJING - Liu
Changyou has been walking the streets of Qingdao
city in China's Shandong province for a month
since losing his job at a South Korea-funded
enterprise that suddenly shut down.
Liu,
hailing from the northeastern province of
Heilongjiang, worked at the Modern Artware Plant
in Qingdao. But when he returned after the Lunar
New Year holiday in early February, he found that
his boss, who was from South Korea, had not.
"The local labor authority told me the
Korean boss was dead after he went back to the
Republic of Korea during the [lunar] New Year
holiday," Liu said. He thought it more likely that
the manager had fled, something that's been
happening with a number of Korea-invested
factories.
Located 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 Korean enterprises, mostly smaller
factories, have closed 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) puts it, these investors left
through "abnormal" procedures.
"There are
four artware [ceramics] plants that have left here
since the 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 been home to the largest number of Korean
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years, more of these enterprises had withdrawn and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.
Liu and his more than 60 former colleagues
don't know where to turn to get most of the wages
they're owed. The factory "owes me 1,000 yuan
[US$143]," Liu said as he surfed the web at an
Internet cafe near the plant. 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 that from
2000 to 2007, 206 Korean enterprises had 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 Korea simply walked away.
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 Korean 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, many were small, with investments of
only US$300,000 to $500,000, and 55% 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
changes "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%.
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%. Previously, the
effective income tax rate for Chinese companies
was 25%, while that for foreign enterprises was
15%.
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 is a case in point.
A large labor-intensive Korea-funded company,
Sejung's products are mainly exported. General
manager Nan Fanzhu said his business clearly felt
the impact of the new policies. Due to the labor
contract law, the company had to shrink its labor
force from 5,000 to 2,000 to cut costs, while the
unified tax law caused a 10% rise in foreign
enterprises' tax liabilities, he said.
Further, export tax rebates on
labor-intensive products, including musical
instruments, textiles and toys, have been reduced.
Nan said the rebate on pianos and guitars fell
from 17% to 13%.
Due to these factors and
the appreciation of the Chinese yuan, which has
appreciated by 14% against the US dollar since
2005, Sejung's profit margin plummeted to 0.3%
from 10% in 2004.
Nan said some small
foreign companies had to move to Vietnam or some
other Southeast Asian country as they could not
adapt to the changed environment.
According to Piao Jianyi, a researcher at
the Chinese Academy of Social Sciences (CASS),
"About 95% 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 Korea
and had moved to China to keep going. Now, they're
on the move again.
Cho Hak Rae of
Korea-based Cuckoo Electronics 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 At the dawn of China's
open-door era, in 1978, foreign investment was
badly needed for economic development. A series of
favorable policies, including those covering taxes
and land, were provided to attract foreign
investors. The sunset industries left Korea for
China, where they could boost profit margins. They
had no incentive to improve their management or
innovate and are vulnerable in a changing
investment environment, Piao said.
"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 faces a
structural change, he said.
In a Ministry
of Commerce brochure for prospective foreign
investors, issued in 2007, foreign enterprises are
not encouraged to go into traditional
manufacturing and export-oriented industries.
Certainly, foreign investment direct investment
(FDI) in China is measurably changing even as it
increases. The National Bureau of Statistics said
FDI in actual use reached $11.2 billion in
January, up 109% year-on-year.
The number
of new foreign enterprises has been declining. In
January, 2,918 new foreign-funded enterprises were
set up, a 13.4% 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 the times."
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