As 100's of small to mid-size manufacturers close in the Pearl Delta region, is it all about the economy, higher labor costs, RMB appreciation and more Mainland laws?
Well, yes and no. Sure the gross margins keep falling and the poorly managed companies go out of business. But, there are tremendous opportunities to increase profits, particularly in reducing waste and inefficiencies. So, why not just focus on improving the facilities and adding better processes? A big part of the decline is related to those Hong Kong owners who don't want to put capital into their Mainland factories. Many times, Mainland factories either make money (at least on the 3rd set of books seen by the owners, and not the HK or Mainland government other sets of books that always lose money), or go out of business. Increases in property values, particularly in Hong Kong (45% or so appreciation in some price categories over the past 18 months), is a big part of the paper wealth effect that China has experienced over the past 20 years.
In HK, much of appreciation has come from Mainland cash coming into HK by the truckload buying up everything in sight, thanks in part to a weak HK$. So, why put money into a Mainland factory if you already have made a bucket of money on your Happy Valley condo? Could all glory, no guts and, in many cases, no real cash be the main reason?
Sure you can mortgage your HK properties or sell them, but then what? If you don't stay in the real estate game, when, if ever, can you afford to jump back in? Wealth, at least right now in HK or the Mainland, may be more about being a certain place at a point in time more than long term wealth creation.
Wealth, to some degree is a function of liquidity and not assets. Particularly, if the assets can go up and down like a poorly engineered roller coaster (the kind where the seats going flying off). Plus, when do you get off of the roller coaster and how do you get back on? In Shanghai, it is probably already too late as parts of the real estate market contract (driven an over-stock of condos never occupied, built purely on the idea that everything always goes up). We have proven in the US that the concept of ever increasing real estate values driven by speculation and not real affordability and demand just doesn't work forever.
So, if you are rich because your HK condo has increased 2X over the months, but you are going out of the manufacturing world because you can't or won't convert that point in time condo wealth, are you really either rich or an entrepreneur? Or, are you just property rich for this afternoon and not really a business guy? Are you truly creating wealth and a better economy, or just a passenger on the roller coaster?
The takeaways: you are as rich as you believe you are, until you have to write a check...
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