If China is the workshop of the world, the southern province of Guangdong is the engine room. For over two decades, its industrial heartland, the Pearl River Delta (PRD), has been making toys, garments, shoes, electrical appliances, computer accessories, refined chemicals and numerous other light industrial products for the world market.

This low-lying area of 43,000km2 alongside China’s third-longest river constitutes less than 1% of the country’s land area but has generated close to 20% of its GDP in most years. This farmland turned industrial powerhouse is China’s largest export base, producing, among other things, three-quarters of the world’s photocopiers and one-third of its microwave ovens.

Rival region

In recent years, however, this Chinese miracle has lost some of its glory to another even faster-growing rival: the greater Shanghai region composed of Shanghai, Jiangsu and Zhejiang. Since 2001, this economic bloc in eastern China has outpaced Guangdong in GDP and attracting foreign investment.

Guangdong, an area of 180,000km2 of land and 87 million people, used to get half of all China’s FDI, 80% of which went to the vibrant delta region. Its share has fallen in recent years, while its eastern rival his risen to occupy the top spot.

Shanghai, the dragon head of this rising Yangtze River Delta, has replaced Guangdong as the most popular destination for foreign investors, in a country that has become the world’s largest recipient of FDI in recent years. Last year, though, Guangdong reclaimed the number-one spot, with a year-on-year 43.6% rise in contracted FDI to $19.36bn, compared to $11.7bn for Shanghai. Utilised FDI in Guangdong reached $10bn, an increase of 34%. Half of these were investments of over $10m each.

Business associations in the province’s capital of Guangzhou report a substantial increase in foreign interest in this southern gateway. The local American Chamber of Commerce now has 750 members, up from 250 in 2002. The German Chamber of Commerce notes the same rising trend, with many of the newcomers being small to medium-sized companies, ranging from machinery producers to candy exporters, says Paul Gervais, a manager of the chamber in Guangzhou.

Recently, the most high-profile foreign-funded projects include the investments of three major Japanese car companies, Toyota, Honda and Nissan in Guangzhou. In May last year, BP completed construction of its $86m oil terminal in Nansha, the new port of Guangzhou, able to store up to 360,000 cubic meters of oil and chemicals.

Gear shift

Guangdong cannot let up its efforts, as it has to cope with energy shortages and rising costs, national problems that are more pronounced in the south because of its fast pace of growth. It also has to shift to higher value-added industries, as its edge in producing low-end products is being eroded steadily by cheaper places in inland China and Southeast Asia.

Still, the province has made a good start with its comeback, with the launching of the Pan-PRD Regional Co-operation and Development Forum. First expounded after the region was devastated by the attack of SARS in the summer of 2003, this is an ambitious plan to create a much expanded market in southern China. Its so-called “nine plus two” members are Guangdong, Guangxi, Fujian, Hainan, Jiangxi, Hunan, Guizhou, Yunan and Sichuan, and the two Special Administrative Regions of Hong Kong and Macau.

Zhang Dejiang, party secretary of Guangdong, explains why a greater PRD is needed. “Shanghai has the Yangtze River Delta provinces behind it, and this is the same case with the Bohai Bay region [in the north]. Both have big supporting hinterlands. We too need a bigger hinterland in southern China, operating like a European-style common market.”

Cost savings

Since 1980, when the first assembly factory was set up in Dongguan, the delta has used cheap labour, land and energy to lure investors. It has three of the country’s officially designated Special Economic Zones, in Shenzhen, Zhuhai and Shantou which offered generous tax holidays and other preferential treatment to those willing to try the untested China market.

Hong Kong’s small-time manufacturers were the first to come in droves, to produce low-margin textiles, toys and electrical gadgets. They imported raw materials, parts and components, machinery, and other semi-finished goods, processed them in their sweat-shop factories in southern China, and exported them at unbeatable prices worldwide.

The next wave was Taiwanese companies, which came in the 1990s for the same reason. Their participation broadened the scope of goods the delta could produce, as they were original equipment manufacturers of multinationals like IBM, HP and Nike. Soon, this obscure region was producing most of the world’s sports shoes, small machines, monitors and computer accessories.

Such an influx of investment propelled Guangdong into becoming China’s biggest exporter, accounting for half of all national exports at one time. Where once there was farmland, skyscrapers and multi-storey factories sprang up, forming new cities, each with millions of migrant workers. An unbroken industrial belt runs from Shenzhen to Guangzhou, making cheap goods for consumption worldwide.

Today, the region also attracts global firms such as IBM, Intel, Hitachi, Samsung, Nokia, Sony, General Electric, P&G, Amway, ICI, Ericsson, Siemens, Panasonic, Bosch, Toshiba, Sanyo, Nestlé, Pepsi, Coca-Cola and Mitsubishi.

Small firms rule

Despite such an impressive list, the delta is still dominated by tens of thousands of small companies competing with each other with ever-shrinking margins. Eighty per cent of its exports are still processed products using imported parts.

Worse, the delta’s success is now being duplicated all over China, especially in the Yangtze River Delta. There, local governments are offering not only cheap labour and low taxes, but also the lure of a growing market in eastern China. Many Taiwanese companies have relocated to Suzhou, Hangzhou, Wuxi, Kunshan and other cities near Shanghai, rather than the south.

Dave Cui, president of Guangzhou Development Zone Construction Development Corporation, says: “We need to be one step ahead of others; we need to upgrade our industries. Low-end ones can be phased out to inland provinces or other developing Asian economies.”

Peter Leung of the Hong Kong trade office says southern China needs to change its slash-and-burn mode of production. “Dongguan, for example, is aware that environmentally-unfriendly, energy-wasting low-cost production is not sustainable. It now wants to be, in its own words, an international manufacturing city with better urban planning.”

High-tech progress

Guangdong says it is already moving up the technology ladder, even though critics say it still needs to do much. It says that electronics and telecommunications, industries it regards as “high-tech”, account for over 20% of its industrial output value.

Guangzhou, the political and commercial centre of Guangdong, has had a facelift to match the new orientation of the region. “In the last two years, there have been incredible changes: a new metro, a new airport, new buildings and a whole new commercial district being opened up. The city is also building the world’s largest exhibition hall,” notes Mr Gervais of the German Chamber of Commerce, pointing out of his window at the multi-lane carriageways and commercial blocks under construction.

Nansha, the southern suburb, is developing its port and warehouse facilities. It aims to be a hub of heavy, high-tech and cargo transportation industries in southern China. Toyota, an early bird in this new district, has a $265m engine plant there, which is expected to produce up to 300,000 engines each year.

In Guangzhou’s premier industrial zone, the occupants are top multinationals, like Procter & Gambler, Pepsi, Kelloggs, Amway, Sony, Nissan and Total, Bayer and Dupont. To facilitate investment, the zone’s management has a stake of 5% of each of its tenants’ business in its compound. “This way, we understand better the needs of our clients and can respond faster to their requirements,” says Mr Cui, head of the zone. He proudly adds that it is the number-one zone in China in terms of tax revenue and value-added industrial output.

Mr Cui believes more investors will come for the domestic market, and less for traditional export processing. “Guangdong has the country’s highest per capita income, with substantial purchasing power. Why do you think Sony set up a major R&D centre in Guangzhou and not elsewhere?” he asks.

In moving up, there will be pain, he says. “We have to be prepared to let go 10 labour-intensive operations in exchange for one high-tech one, even if it means some job losses temporarily.” However, with the growing labour shortages in the delta, the province is likely to hasten towards such restructuring.

TRANSPORT DEVELOPMENT

The greater PRD region has 450 million people and a GDP of $630bn, or 40% of the country’s total. It includes resource-rich but largely undeveloped south-west provinces like Guizhou and Yunnan, as well as highly industrialised but resource-poor Fujian and Guangdong. These provinces have limited cross-border transport links, thanks to local protectionism and insufficient investment in infrastructure.

The new nine-plus-two blueprint aims to overcome such barriers and build a three to four-hour transport network that will radiate from Hong Kong, Guangzhou and other major cities in the south.

The heads of the new group met in Hong Kong on June 1, 2004 for the first of its annual summits. The group is to work closely in 10 sectors, including investment, trade, tourism, labour service, environmental protection and transport infrastructure. The last of these will receive the most attention.

The new economic bloc has agreed to build more railways, highways, mass transit facilities and waterways, to bring all the cities in the bloc within hours travelling time. Such investment is long overdue. “Most infrastructure in the south was built for moving goods from factories to ports,” notes Claire Lawrence, a consul at the British Consulate in Guangzhou. “[The emphasis now] is to link up the major cities by rail, so that the delta region can be fairly accessible to the domestic market.”

Of all transport links, railways deserve priority. Guangdong has 8%-9% of the national population, but only 2% of China’s total railway lines. “The region’s existing railway networks have lagged behind its social and economic developments”, admitted Railways Minister Liu Zhijun at a recent conference. There is, he cited as an example, no direct train service from the south to the east, while the railway lines in south-west are “in a very bad shape”.

There are plans to increase the existing 19,000km of railways to 29,000km by 2020. When completed, travelling time from Sichuan, Fujian, Guizhou, Jiangxi and Hunan to Guangzhou will be reduced by half.

Plans are also afoot to build 22 new superhighways of 30,000km. One, between Hong Kong and western Shenzhen, will greatly alleviate the heavy traffic now concentrated at the border of Lowu.

A more ambitious plan, soon to be approved, is to have a 29km, multi-billion bridge linking Hong Kong, Zhuhai and Macau. This will open up the underdeveloped, west of Guangdong and consolidate Hong Kong’s position as a transport hub.

“All these will bring us together closer physically – and psychologically as well,” says Peter Leung, director of the Hong Kong Economic and Trade Office in Guangdong.

The new transport network will invigorate a region that has already come a long way.