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More than 10,000 factories being operating in the Pearl River Delta (PRD) region by Hong Kong manufacturers are expected to close by the end of this year as production costs soar and US trades dwindle, according to a recent survey.

A total of 8.4 percent of the respondents are considering closing their factories, while 11.7 percent said ceasing production was a possibility, a survey by the Chinese Manufacturers' Association of Hong Kong (CMA) says.

Based on the figures, more than 10,000 of the approximately 60,000 Hong Kong companies operating in the PRD are likely to close down this year, CMA President Paul Yin said.

"I believe the projection is highly accurate, as it reflects the real trend," Yin said. "Factories are shutting down in several forms, including ending the business, merging with others and moving out of the region, inland or to other countries."

The survey, conducted in March, includes responses from 230 companies - mostly manufacturers in the PRD. With an average of 1,200 employees, these companies are mainly from the metal, garment, plastics, electronics, and chemicals and pharmaceuticals sectors.

Surging labor and raw-material costs, the yuan appreciation and the implementation of a new labor law are the main causes for the rise in production costs for labor-intensive manufacturers mainly engaged in exporting. The squeezing margins are forcing many companies producing low-end products to close down.

"As the US economy is slowing, manufacturers can hardly transfer the surging production costs onto consumers," Yin said. "It's happening not only to Hong Kong companies but also other companies, such as those in Taiwan province and South Korea."

Close to 60 percent of the respondents were pessimistic or very pessimistic about the outlook for the coming two years, but 65 percent said their industries face shrinkage.

However, most companies are choosing to transform to cope with the difficult times.

Over 52 percent of the responding companies will upgrade their technology, while 44.1 percent will develop value-added products. Other resolutions include the outsourcing of low-value parts and factory relocations.

"Labor-intensive industries no longer have comparative advantages in the region," CMA Vice-President Eddy Li said. "Manufacturers should shift from producing others' products to designing and developing their own brands. And more money should be used to invest in technology."

Li said the industry is trying to get more resources from the government in the period of transformation. That includes loans to upgrade technology and inventing environmental-protection facilities.

While relocating to Central and West China is one option, 40 percent said they won't consider that, and 50 percent said they will wait to make that decision. Yin said that relocation costs, high transportation costs and labor supply are the main reasons for the closures.

Close to half of the respondents said production costs rose 10 to 20 percent in the last two years, while more than half of them expect costs will continue to go up 10 to 20 percent in the next two years.

(HK Edition 04/25/2008 page2)