China factories face new challenge as growth slows

HONG KONG – As China’s growth inexorably slows, manufacturers such as Linan Meite Cable are discovering that being an efficient low-cost producer is no longer enough to prosper.

Factories that had thrived by using cheap migrant labor to churn out inexpensive clothing, electronics and toys for export now face changing government priorities as a growth engine based on investment and trade loses its momentum after more than a decade of double-digit expansion.

At the same time, China’s labor costs are rising and global demand is still weak, putting pressure on manufacturers to move into more advanced production, consolidate into bigger entities or shift to cheaper inland regions to survive.

Growth in the world’s second-largest economy eased to 7.4 percent last quarter, the lowest since a mini-downturn in late 2012, government figures showed Wednesday.

Last year’s expansion of 7.7 percent tied 2012 for the weakest since 1999. Leaders in Beijing have indicated that slower growth is the price to pay for long-term changes to the economy that reduce its dependence on trade and industrial and infrastructure investment. Instead, they want growth to be sustainable, less polluting and based on domestic spending by 1.2 billion consumers.

Caught in the middle are companies like Linan Meite, which sells shipping-container loads of electronics cable to customers in Europe and North and South America.

Owner Sabrina Dong is thinking of upgrading the company’s factory, one of more than 200 in Linan City in eastern Zhejiang province making coaxial and networking cable. Dong said she wants to buy a production line from Germany that can make the latest standard of computer networking cable, called Cat 7.

Only a handful of companies in China have it, so the investment would be a big competitive advantage. But the new machines plus an expanded factory building to house them would cost 30 million yuan ($5 million). The company doesn’t have that much cash and Dong’s father, who founded the company, is wary about borrowing to expand.

“I want to buy more machines to do high end cable,” said Dong, whose company was one of several thousand looking for buyers at the Global Sources electronics trade fair in Hong Kong this week.

“But my father said no, because he has done business so many years in China. He knows China won’t keep going like this” – she angled her hand upwards – “but come down like this,” she said, pointing her hand to the floor.