South Korean investors quit China over rising costs

QINGDAO, China Sun Mar 23, 2008 4:05am EDT

A general view shows the factory building of a closed-down South Korean enterprise in Qingdao, Shandong province March 21, 2008. Picture taken March 21, 2008. REUTERS/Stringer

A general view shows the factory building of a closed-down South Korean enterprise in Qingdao, Shandong province March 21, 2008. Picture taken March 21, 2008.

Credit: Reuters/Stringer

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QINGDAO, China (Reuters) - Scores of South Korean-owned factories are closing surreptitiously in eastern China as their owners flee rising costs, leaving behind embittered workers like Li Hua.

Li and more than 200 colleagues have been fighting for a year to get the six weeks' wages they were owed when the owner of the toy factory where they worked fled during the 2007 Lunar New Year holidays.

"I went to work on the first day after Spring Festival, only to be told that the Korean boss had run away and the factory had been closed," Li, a 30-year-old mother of a little boy, recalled.

Her case is not a rarity in Qingdao, a major seaport and industrial city in eastern China which sits across the Yellow Sea from South Korea. A two-hour flight from Seoul and home to about 100,000 South Koreans, the city is a hub for South Korean factories benefiting from cheap labor.

But lately, a growing number of South Korean factories have abruptly closed down and the South Korean owners have disappeared as a slew of policies, including rising labor costs and an end to tax breaks, bite into their profit margins.

Many of the factories produce toys, garments and ornaments for export to the United States, Europe and back home to South Korea.

Qingdao mirrors, on a smaller scale, what is happening in the Pearl River Delta near Hong Kong.

Thousands of factories, mostly Taiwanese or Hong Kong firms, are moving inland or abroad or are simply closing as rising costs undermine the assumption that China is the world's cheapest manufacturing location.

Sung Jeung-han, manager of the Korean Society and Enterprise Association in Qingdao, said 20 to 30 percent of the 6,000 South Korean firms in the eastern port city were losing money.

"The wage rise, yuan appreciation and higher input prices are the main reasons," he told Reuters by telephone.

The minimum wage in Qingdao has risen 43 percent in the past three years to 760 yuan ($107) per month.

Other government initiatives to share China's growing wealth more widely and to minimize social tension are also deterring employers who are required to provide more mandated benefits for their workers and are paying higher pollution fees.

Employers are grumbling in particular about a new labor contract law, which went into effect at the beginning of this year, that makes it harder to lay off staff.

Dang Guoying, a rural economist at the Chinese Academy of Social Science, said the law did put pressure on companies.

"But eventually it will bring a lot of benefits despite the temporary negative impact," he said.

FLIGHT BY NIGHT

Korean media cited the Export-Import Bank of Korea as saying 206 Korean business owners melted away from Qingdao without going through the proper procedures to shut down a business, such as giving workers their backpay, in the eight years up to 2007.

Concerned about its reputation, the South Korean government has sent investigators and held talks with Chinese officials.

"Abandoning a business unlawfully is not good for the development of Sino-Korean relations," Kang Hyung-shik, South Korean consul in Qingdao, told Reuters.

"We will work to avoid things like this happening."

The consulate has set up a team to assist South Korean investors to go through liquidation formalities and has asked Beijing to simplify the procedure.

Both Lou and Kang said red tape was one of the reasons for the rising number of flights-by-night.

The Korea Herald cited Hong Ji-in, head of the Commerce Ministry's trade cooperation bureau, as saying that South Korea would penalize firms that leave China against the rules and allow Chinese workers to take their former employers to court in Korea.

For its part, Beijing sent Commerce Ministry officials to Qingdao last month to ask exporters about the impact of higher wage and input costs, the rising yuan and tax rebate cuts.

"There's a small number of firms leaving for various reasons. We're negotiating with the South Korean government to ensure that companies that are in great difficulties pull out legally," Commerce Minister Chen Deming told reporters in Beijing on March 10.

WAYS OUT

One executive said her firm, a major producer of garments and accessories with factories in and around Qingdao, was considering relocating to western China because labor there is cheaper.

"However, you have to compare the transport costs," she said.

This is also an option for Korean companies, although most of them are still seeking ways to stay in Qingdao by either revamping their product lines or raising their prices, Sung said.

If they do move, they will be following a well worn path: Youngor, a garment maker in the eastern city of Ningbo, chose the western metropolis of Chongqing for its expansion in 2005, while Hongdou Group is leading the construction of an industrial park in Cambodia that will make textiles, machinery and other products.

Mei Xinyu, a researcher at a think-tank under the Chinese Ministry of Commerce, said such migration was a positive phenomenon for China.

"Don't you know that the central business areas in Shenzhen were full of factories five or 10 years ago?" Mei said, referring to the skyscraper boomtown near Hong Kong.

"Changes like that will happen on a larger scale in more and more cities."

The world may be moving on, but for Li, the ex-toy factory worker, the most important thing is to get her unpaid wages.

"It's better to get a penny than nothing," said Li.

(Editing by Alan Wheatley and Megan Goldin)

($1=7.108 Yuan)

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