As former king of low-cost exports loses its appeal, region must refocus on high-tech production for domestic economy, survey suggests

South China, particularly Guangdong province, needs to move away from its traditional labor-intensive manufacturing growth model and focus on growth driven by high-tech industries if it wants to maintain its standing as the manufacturing center of the world, a new survey released on July 2 says.

According to a survey by the European Union Chamber of Commerce in China, the province needs to take drastic measures to prevent companies relocating investments to other destinations.

The number of European companies in South China that are relocating investments to other markets surged by 17 percentage points from last year to 24 percent in 2015, while the country's overall average increased by 5 percentage points to 16 percent.

Part of the reason why several European firms are moving away from South China is because of its fading appeal as a low-cost manufacturing destination. Guangdong had been the top investment choice for European investors in this sector for more than 15 years, says Donato Vairo, a board member of the South China Chapter of the chamber.

"Many European companies in Guangdong are export-oriented manufacturers and they were attracted to the region mostly due to low labor costs," says Vairo, who is also the general manager of an automotive electronics device manufacturer based in Shenzhen.

"With labor costs rising in Guangdong, it is natural that European manufacturers will move to Southeast Asia or even Eastern Europe to capitalize on the cheaper labor costs in these markets."

There is no doubt that the focus of the European companies will still be on the huge domestic market in China and they will strive to sell most of their products in the country rather than ship them back to Europe, says Vivian Desmonts, vice-chairman of the South China Chapter of the European chamber.

The chamber, however, felt that the European companies in South China lag their peers in adapting to changing market situations.

About 53 percent of the European companies operating in South China said that the primary reason for their presence in China is to provide goods and services to the Chinese market, while the country's overall average is 71 percent, according to the Business Confidence Survey 2015 of European business in China, a joint survey conducted by the chamber and consultancy firm Roland Berger Strategy Consultants.

A total of 550 European companies, including 94 from South China, participated in the survey.

However, 23 percent of the surveyed European companies in South China said they are operating in China to serve the European market.

"However, Guangdong does not need to emulate Beijing or Shanghai and transform itself into a financial center or be the headquarters for multinational companies," Desmonts says.

"Guangdong has set up a solid supply chain for manufacturing and a well-developed logistics network. This is something that the regions with lower labor costs cannot emulate. So the province must play to its strengths and upgrade its economy to smart manufacturing for the domestic market."

South China should also take advantage of its geographical location to further enhance cooperation with Hong Kong and Macao through the China (Guangdong) Pilot Free Trade Zone and actively participate in the 21st Century Maritime Silk Road initiative, says Alberto Vettoretti, chairman of the South China Chapter of the European chamber.

Besides the rising cost caused by the appreciation of the yuan, the European companies in South China are also facing hurdles related to intellectual property rights protection, visa processing time, the efficiency of customs verification, inconsistent implementation of policies across different cities and market access for European small and medium-sized enterprises.

"To achieve the economic upgrade, Guangdong and the South China region as a whole need to improve upon the flows of people, goods and services and information," Vettoretti said.

xujingxi@chinadaily.com.cn