By Thomas Chan

Head of China Business Centre

The Hong Kong Polythecnic University

Lying between the old metropolis of Guangzhou and the newly emergent city of Shenzhen is a place known as ‘the world’s factory’ – Dongguan. Over 10 million people work here in the industrial processing of various items, such as textiles and garments, bags and shoes, toys and furniture. Also manufactured here are all kinds of miscellaneous industrial goods that are sold in the world’s largest discount stores, like Wal-Mart and Carrefour, plus the most-updated consumer electronics and computers as well as peripherals for export.

With annual industrial value added at 181.3 billion yuan, GDP at 424.6 billion yuan and exports of US$ 69.6 billion (or 452 billion yuan) in 2010, Dongguan’s economic scale is as large as many industrial economies in the world. Its per capita GDP at just over US$ 10,000 and annual economic growth of 13.3 per cent over the past five years has put it amongst the most dynamic emergent economies in the world. However, in China and in the Pearl River Delta (PRD) region, it is only one city among many.

Relocated factories

The economic good fortunes of Dongguan have emerged mostly from the relocation of labour-intensive industrial processing from Hong Kong. Together with territory outside the Special Economic Zone in Shenzhen, they have seen a concentration of relocated industries from Hong Kong that has grown at least several dozen times in terms of scale over the past 20 or so years.

Industrial growth in the prefecture-city has not been guided by any planning or local strategy. Market forces have dictated the relocation of the Hong Kong industries, who were attracted by low land, labour and tax costs and the absence of any conscious attempts of the local authorities to regulate them. The result has been a rapid growth of industries along the highways linking them to Hong Kong. Producer services have also flourished, including the container port in Dongguan, along with the services available at village and town level. It has produced growth in an urban-sprawl type fashion.

The relocated Hong Kong firms have led to the creation of even larger numbers of local firms around them as their subcontractors and suppliers, as well as local companies starting up in their footsteps. They form clusters and have achieved such a scale and dynamism that even the Italians come to study them in comparison with their own world-famous clusters in industrial districts.

Before the financial tsunami in 2008/09, no one in Dongguan would have envisaged the need to alter their successful business model of industrial processing. One exception to this was the provincial party secretary Wang Yang, who urged a double transformation of the local economy at a time when the Dongguan model was being praised both inside and outside of China. Wang’s double transformation consists of local industrial upgrading and the relocation out of the locality of low-cost, low-value-added, labour-intensive, pollution-intensive industries.

Disaster for exports

The financial tsunami brought with it a disaster for the local exporting sector. In 2009 exports declined by a massive 16 per cent against annual double-digit growth for decades, and local GDP recorded one of the slowest growths since the economic reform at 5.3 per cent. It was worse than the national average and other cities in the PRD which had not relied so much on export-oriented industrial processing.

The Dongguan business model and economy have been under serious doubt and stress lately. But following the provincial party secretary’s advice to effect a double transformation, the local government has undertaken a bold turnaround in economic policy. In order to implement the double transformation, the city’s relative laissez-faire approach and decentralisation trends are to be replaced by a more conscious city-wide development strategy.

The intervention by the city government to help the ailing firms has been successful. In particular, Hong Kong-invested firms suffering from declining export orders have shifted parts of their businesses to domestic sales not affected by the financial tsunami. This led to the city economy recovering quite well in 2010 both in terms of economic growth (10.3 per cent) and exports (26.1 per cent). It has affirmed the decision to opt for a more proactive developmentalist-style government by the local leadership.

In the 12th Five-year Plan formulated in 2011, we have seen a more aggressive strategy to upgrade the local economy into a world-class innovative economy that would compete even in knowledge-intensive industries. The rationale for the strategy is that Dongguan is now at a critical stage of development and urbanisation with per capita GDP above US$ 10,000. The city no longer sees itself as a struggling developing economy that relies on labour-intensive and often pollution-intensive industrial processing. It needs more advanced manufacturing industries.

New strategy

There are three major elements of the ambitious strategy.

Firstly, a priority is the development of ‘modern services’. The concept of ‘modern services’ is Chinese and refers to what is classified conventionally as advanced producer’s services, such as finance, conferences and exhibitions, IT services, cultural and creative services, and ‘corporate headquarters economies’. However in the actual listings in Dongguan it includes some traditional producer’s services like logistics.

The target set for 2015 is for ‘modern services’ to constitute over 30 per cent of local GDP. Service-industry development is something new to Dongguan, where the emphasis in the past few decades has been overwhelmingly on the industries themselves. The development of services was at the relatively low level of 48.2 per cent of the local GDP in 2010, an increase of a meagre 1.2 percentage points in the entire period of the 11th Five-year Plan. The target for the 12th Five-year Plan is modestly higher, at a 1.8-percentage-points increase for the five-year period. This may explain the rather vague and generalised discussion about the development of ‘modern services’ in the plan, with its ambitious-looking target of over 30 per cent of GDP.

Up the value chain

Secondly, the main thrust of the plan is about the upgrading of Dongguan into an important modern manufacturing centre at an international level. Starting from the traditional labour-intensive industries already there, the challenge is to expand into the upstream stages of the value chain. This would involve designing and producing development through the more extensive use of semiconductor and IT technologies and new process technologies.

The ambitious element of this industrial upgrading lies in the focus on the development of equipment manufacturing, as well as automobiles, parts and components, and petrochemical and ship-building industries – all advanced manufacturing industries that befit an economy at the early stages of becoming developed. The plan sets the target for these advanced manufacturing industries to aim at as over 50 per cent of the local gross industrial value added by 2015. This would overshadow all the traditional industries the city has developed over more than 20 years. In addition, the plan proposes to turn the city into an important production base for national strategic emergent industries that the central government has outlined in the 12th national Five-year Plan. These include industries in advanced information, electric cars, semiconductor lighting, solar energy, biopharmaceuticals, civilian nuclear uses, new materials, energy saving, and environmental and oceanic industries.

The plan also mentioned, though with less emphasis, the upgrading of industrial processing activities from OEM (original equipment manufacturing) to ODM (original design manufacturing) and further to OBM (original brand manufacturing).

New Research and Development,

New Talent

Thirdly, Dongguan is to become an innovation city. Research and Development (R & D) platforms set up by universities invited from the province – mainly from Guangzhou – will support a policy of importing new talent to the scale of 1.57 million by 2015. This will be alongside an increased budget for R & D (from 1.15 per cent of local GDP to 1.5 per cent – a large jump but still very much behind the level already achieved in Guangzhou and Shenzhen).

Dongguan has long been criticised for lacking proper urban planning, instead allowing the urban sprawls that have sprung up over the past few decades. Local urbanisation levels are very high – over 80 per cent since 2006, reaching 87 per cent in 2010 – yet the extensive and uncoordinated nature of urbanisation in Dongguan has not made it a city in the proper sense of the term. Instead there are patches of urbanisation mingled with industrialisation (urban sprawls plus factories scattered everywhere) in the 28 towns of the city territory.

The lack of infrastructure and urban services (eg public transport is underdeveloped and not well connected) has made urban living rather unattractive. Such an urban environment will not help to attract the professionals that the city is planning to export from elsewhere. The 12th Five-year Plan has therefore been obliged to address the issue.

What has emerged from the plan is an overall strategy of smart growth. Urbanisation levels over the next five years will be increased from 87 to 88 per cent, with the focus on better coordination and planning to improve the quality of local urban life. Urban growth will be concentrated in the main city centre, which will comprise the Central Business District and the three major towns – Houjie, Humen and Changan. The city will upgrade the existing network of highways and build a local light rail to link up with the inter-city railways and high-speed railways that pass through its territory. The aim is to create a one-hour commuter zone with the neighbouring cities and a half-hour living zone within the city.

With the emphasis on the railway network, the city has shifted towards public transport assuming a leading role in local transport, replacing the over-reliance on private cars that has co-evolved with the extensive urban sprawls.

Transformation of the city

With the new strategy and fresh measures incorporated into the 12th Five-year Plan, Dongguan seems to be under pressure from the central and provincial governments, and hard pressed by competition from Guangzhou and other cities in the PRD region, to transform itself. However, to become a city of the developed world (with per capita GDP above US$10,000), there are many hurdles the city has to overcome. It has to replace its previous extensive development strategy by one that is characterised by low carbon emissions and an emphasis on social and cultural values.

The 12th Five-year Plan of Dongguan does touch on these issues, but with its pre-occupation with manufacturing industries, it may not be easy for it to transform itself to enable it to come to terms with the metropolitanisation process unleashed by the rapid growth of Guangzhou.

If Dongguan continues to lag in the improvement of the quality of local urban life, it will be marginalised in the metropolitanisation process of the region.