(Bloomberg) -- The heartland of Chinese manufacturing is currently facing surging wages and labor shortages, two things that threaten its role as workshop to the world.
Rather than succumbing to cheaper competitors though, factory owners in the Pearl River Delta are rising to the challenge.
That’s what Standard Chartered Plc found by surveying more than 200 manufacturers in the region, which spans the eponymous river mouth in southern China, just across the border from Hong Kong. Automation is the way out for factories facing wage pressure, according to the 68 percent of respondents who plan to increase capital expenditure this year.
Investing in automation and robotics can give the economy a "much-needed productivity boost," analysts wrote in the report of the survey published this month. "We believe that what doesn’t kill the PRD, and instead pushes the region’s manufacturers to upgrade and reinvent themselves, will make China stronger."
The poll has been run in each of the past eight years, during which factories have been complaining about rapidly increasing wages and the difficulty in hiring enough workers. The delta is located in the nation’s biggest regional economy, Guangdong, which generates more than $1 trillion a year in output, and boasts the new innovation hub of Shenzhen, commercial center Guangzhou and many smaller, prosperous cities around them.
Higher-end manufacturers in sectors such as semi-conductors prefer to stay in the increasingly expensive region with more automation and investment, while lower-end ones such as textile and garment makers, are more willing to move to cheaper nations, according to the report.
"On the one hand, you see the competitive ones are investing more to stay competitive, but at the same time, there is also the emerging trend of moving overseas because it may not be ideal for some to stay within the Pearl River Delta, " said Kelvin Lau, Hong Kong-based senior economist who led the survey.
The region would fare better by having "a better mix or a focus on higher-end manufacturing rather than trying to save everybody and trying to incubate all sorts of industries," Lau said. "Now they have moved away from the old way of manufacturing."
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Factory owners are more optimistic about business this year, as demand in overseas markets improve, the survey finds. Still, a possible trade war between the U.S. and China is clouding the outlook.
Owners expect to increase wages for workers more than last year, according to the report. The government is no longer as adamant as before on mandating minimum wage increases, but collective wage bargaining from workers still poses stubborn pressure, the survey shows.
For employees, the trend is clear. The double-digit pay raises of the past are over for now.
Among those who chose to relocate, inland provinces are not as attractive as Southeast Asian nations such as Cambodia or Vietnam, whose market potential helps lure investors.
Fiercer competition is also seen on the horizon, as the "middle ground" is shrinking and winners are squeezing the losers out of the market completely. More-competitive manufacturers are gaining market share at the expense of others, the survey finds.
That fiercer competition in the pace of upgrading "will force companies either to invest more or to consider moving out," Lau said. "In the end it will do more good than bad, but the economic pain in the short term will still be material."
With assistance from Editorial Board