Auditing the China economics

China’s five-star factory is not somewhere you would want to stay overnight, says Alexandra Harney in ‘The China Price: The True Cost of Chinese Competitive Advantage’ (www.penguin.com). “There are footprints on the walls. It’s poorly lit, with low ceilings and slippery floors…”

If that was five-star, Harney is curious on seeing the one-star type. “Though they often sit just down the road from their five-star brethren, China’s shadow factories are generally off limits to most foreign visitors. Most buyers, auditors, government officials and journalists see only the model factories.”

Eugene Chan, the owner of a local factory, agrees to take Harney on one condition: that she had to be content with a drive-by. “So one sticky summer afternoon, we left the model factory and drove for about ten minutes, passing tired-looking, tiled factories with thirsty palm trees out front, a few restaurants and new apartment buildings. The car slowed and we turned into a narrow road blocked by a metal gate manned by a guard…”

Harney finds that the first tall commercial building had reflective windows, and appeared empty. “Chinese cities are filled with mystery buildings like these, thrown up in a froth of real estate development, their intended or actual uses unclear.”The workers in these places protect the factory’s anonymity, Chan informs. They would tell any inquisitive visitor that they were unemployed; and if government inspectors came, employees would shut the door to the factory.

In spite of his chicanery, Chan’s business is not getting any more profitable, the author observes. Material costs, which account for 60 to 70 per cent of the total production bill, are on a steady rise owing to skyrocketing oil prices and rising demand in a booming economy; electricity costs tend to double because of running generators to meet power shortages; and the government has been raising the minimum wage quickly.

Labour turnover is a major challenge in these factories. It is normal to have 20 to 30 per cent turnover every month! “If your factory has too many holidays, they will go to another factory without holiday,” Chan tells Harney. He uses ‘updated management’ techniques to encourage workers to stay longer – such as holding barbecues and taking them to the beach. “He has resorted to paying his staff $39 for every new worker they bring in. And he is spending hundreds of thousands of dollars on machinery to replace his workers and relieve the headache of high turnover.”

Employees have to pass Wal-Mart’s audits for working hours and pay, but machines don’t, reasons Chan. “Plus, machines make visiting customers think he’s ‘very high-tech.’” Audits cost $19,000 to Chan annually. But why? Because many multinationals have started charging their supplier factories for audits, particularly if previous inspections have uncovered code violations, Harney discovers.

Meanwhile, local officials are keen on converting factory land into luxury property district, forcing businessmen to search for alternative sites to relocate to. Chan did his bit, travelling to cities in the Chinese interior, and meeting eager officials in those areas who courted him ‘like a man dates a girl,’ promising a ready supply of workers, good power supply, the flexibility to work around the clock.

“Just as he was about to settle on one city in northern Guangdong province, a rainstorm flooded local factories,” writes Harney. “The officials had failed to mention, over the mao-tai liquor and stuffed pig, that they were living in a flood plain…”

Prescribed read for the professional who would like to gain a perspective beyond cost.

**

BookPeek.blogspot.com

http://www.hindu.com/thehindu/holnus/006200807062074.htm

Business Financial Services

Auditing the China economics