The New New World: China Transforms, and a Factory Owner Struggles to Follow

Shao Chunyou exemplifies the Chinese dream. Over three decades, he rose from an assembly line worker to an electronics business owner, following China’s rise from an economic backwater to the world’s No. 2 economy. He now owns two factories and employs over 2,000 workers.

Now, as China changes, Mr. Shao must reinvent himself again.

Fast growth is fading. Competition has intensified. And in a country sometimes called the world’s factory floor, it sometimes seems as if nobody wants to work in a factory anymore.

“There were more workers and fewer factories then,” Mr. Shao said, referring to the old days. “Now we have to beg workers.”

China’s economy is slowing, yes, and government policies have made business tougher for many. But there are bigger, broader forces at work challenging the entrepreneurs like Mr. Shao who lifted China out of poverty.

China has moved up the value chain, and its people have moved up along with it. They want higher wages and a better life. China is no longer the world’s cheap factory.

The country must now embrace high-value manufacturing, automation and innovation if it hopes to keep growing at a steady clip. Success depends on the ability of people like Mr. Shao to pivot away from their traditional business methods.

Mr. Shao’s pivot won’t be easy or cheap. He is replacing people with robots. He is making more sophisticated gadgets that could flummox copycats but could also be disastrously expensive if they fail. And in a shift for a businessman who prides himself on doing it alone, he is for the first time accepting direct government help.

“Doing business is like releasing the arrow from a bow,” said Yu Youfu, Mr. Shao’s wife. “Once it’s in motion, there’s no way to turn it back.”

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Mr. Shao’s company, Quankang, is working with Xiaomi to design and make smart home appliances such as space heaters and electric fans. CreditLam Yik Fei for The New York Times

Everybody calls Mr. Shao “boss,” even his wife. A portly man with a poof of hair that invites comparison to the American president’s, Mr. Shao owns an electronics company called Quankang. Ms. Yu, a slender, intense woman, oversees factory operations, finance and administration. Their 27-year-old son, Shao Qiang, heads Quankang’s new research and development department. The company traditionally made parts for smartphones and other gadgets, though it is now setting its sights higher.

The family is defined by its factories. For years, the couple slept in their office next to the factory, and Ms. Yu still crashes there from time to time even though their spacious apartment is a 15-minute drive away.

“I sleep better with the noise of the machines,” she said. “If they’re noisy, it means they’re functioning.”

Mr. Shao was born in Jiujiang, a medium-size city in China’s interior. At 16, he became an apprentice carpenter, making roughly 60 cents a day, barely enough to feed himself.

In 1989, the same year the authorities gunned down protesters in Tiananmen Square, Mr. Shao, then 20, went south. Deng Xiaoping, then China’s paramount leader, had opened special economic zones — essentially areas where entrepreneurs could start businesses and court foreign investors — in southern cities like Shenzhen and Zhuhai. The newly built factories there were hiring.

Mr. Shao left home with about $5 in his pocket. Highways and high-speed trains didn’t crisscross China as they do now. He had to take a one-hour bus ride to the provincial capital, then a 15-hour train ride.

“The trains were always packed, like the ones shipping pigs,” he said.

It wasn’t easy to find a job, without which Mr. Shao couldn’t get permission to live in Shenzhen. Whenever the authorities raided dormitories looking for trespassers, he and others would hide overnight in a nearby cemetery.

He finally found a job as an apprentice, making much less than $1 a day. Working overtime earned him a few cents more per hour.

Within three years, he was promoted to supervisor and was making roughly $375 a month. Ms. Yu, also from Jiujiang, joined him in Shenzhen with Shao Qiang, then 2 months old.

“I would work from 8 a.m. till 11 p.m. or even midnight.” Mr. Shao said. “We all wanted to earn the overtime pay. Nobody complained.”

Workers eating lunch in the factory canteen. Like most factory owners, Mr. Shao provides Quankang workers with housing and meals.CreditLam Yik Fei for The New York Times

In 2004, Mr. Shao started a small metal-molding company while working at his day job. Ms. Yu dealt with clients and managed the books. They called the company Quankang, which can mean “all healthy” or “all good.” They sent their son back home to be raised by his grandparents, as many migrant workers in China had done. Two years later, they moved from Shenzhen to neighboring Dongguan, a city of cheap factory buildings.

Government and state-owned banks typically didn’t help small business owners like Mr. Shao and Ms. Yu, and they struggled at first. They once turned away a big customer because they didn’t have the cash to buy the materials. To win over another customer, they rented a huge metalworking machine and moved it into their factory overnight to show the client who visited in the morning that they could do the work. They got the order.

They started by making metal parts for MP3 players, then cellphone casings. They spent $13,000 of their savings on a polishing machine, a fortune for most Chinese at the time.

“My heart was filled with trepidation,” Mr. Shao said. “If we failed, we would lose everything.”

They didn’t fail. Helped by China’s surging growth, they became part of a vast web of suppliers that has helped China dominate the business of manufacturing electronics.

But as China began to mature, business got tougher. Competitors emerged. Pricing became brutal. Mr. Shao and Ms. Yu found they had to evolve or die.

In 2015, the couple started working with Chinese manufacturers like Xiaomi and Huawei to make key metal parts for their headsets as smartphone sales took off. They took out millions of dollars in bank loans and invested in 120 tooling machines. The bet paid off until the competition became too fierce that they began considering harder-to-replicate products, such as appliances.

“In China, once you have a product that sells well, many companies will rush in to make the same thing,” Mr. Shao said.

The biggest problem the couple and many other Chinese manufacturers face is the growing cost of labor and increasingly scarce workers.

Mr. Shao and Ms. Yu paid their workers about 1,000 renminbi a month in 2004, or about $150 at current exchange rates. Now pay is at least five times that, and can go as high as eight times that.

Like most factories Quankang also provides housing and meals. It used to pay four types of social benefits. Now it pays six.

The couple know they are lucky to have survived. After the financial crisis, many multinational manufacturers in Dongguan moved their factories to lower-cost countries like Vietnam. Many of the couple’s friends and competitors closed their factories.

Over lunch recently, Ms. Yu shook her head as she told her husband that a nearby electronic component factory that hired 7,000 workers at its peak had just filed for bankruptcy.

In 2017, they came up with an ambitious survival plan: Move, climb the value chain and automate.

Workers walking to their dorm rooms at the Shao family’s factory in Dongguan.CreditLam Yik Fei for The New York Times

Quankang is working with Xiaomi to design and make smart home appliances such as space heaters and electric fans. Mr. Shao and Ms. Yu plan to build three fully automated assembly lines. The first is expected to be running by March.

And for the first time, Quankang is accepting direct government support. Mr. Shao’s modernization campaign will happen on more than 30 acres far away from Dongguan, in neighboring Hunan Province. The local government there is giving Quankang the land almost free of charge. The local government of Yanling County is more interested in tax revenue and job creation than revenue from land sales, Mr. Shao said. So far, he has spent nearly $12 million on the Hunan plant.

China’s boom started when the Communist Party unleashed the country’s entrepreneurs and largely left them alone. This next stage of growth may not be so easy. To help it along, the central government is spending vast amounts to upgrade manufacturing. Local officials in less developed provinces are trying to lure companies to replicate southern China’s economic miracle.

It proves appealing to entrepreneurs like Mr. Shao and Ms. Yu, who are desperate to find a new niche to survive and thrive.

“The business of our factories isn’t as good as before,” Ms. Yu said. “But since we’ve been doing this, we’ll keep charging ahead because behind us it’s a precipice. We’ll fall if we step back.”

This article is from NYT – go to source

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