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China's soaring costs could help American jobs

By Ian Williams, NBC New Correspondent

DONGGUAN, China – For Bill Green it was more than just a routine visit to his Dongguan factory.

The thuds, bangs and sparks of the factory floor were the same; the metal cut, twisted and welded in the usual shower of sparks. It had all become very familiar from five years of visiting factories in China, outsourcing his production of industrial cabinets, chasing lower costs.

For years he had generally been happy with the results, but no longer.

"If they don't sand the stuff down, that will come back through the damned paint and we'll have an issue here," he said, running his finger along the edge of one unfinished cabinet.

Later, hunched over a laptop, the factory boss at his side, his frustration came pouring out.

"This is unacceptable, we can't have this," he complained. "This is rust coming out from here."

The factory boss looked to his chief engineer who became defensive, "We can't fix every problem. It takes too much manpower," he complained.

The boss said Green was being too demanding.

"None of these problems are hard to fix," Green shot back. "We work to these standards all the time in the United States."

Green owns a metal-processing factory in Mobile, Ala., where his workforce shrunk from 60 to just 25 as more work, on cabinets and also on lamps, was outsourced to China.

But after this trip he made a decision – to bring at least some of that work back home.

"Everybody knew you could get anything made in China, and make money on it back in the United States. But things are changing," he told me later. "Prices are going up, and its making it harder to import stuff from here."

More than that, attitudes were changing. "Used to be when you'd come over here everyone wanted your business. Now it’s harder and harder to get them to cooperate with you."

So Green is planning to shift the final assembly of cabinets back to Alabama, and will divide much of the lamp production between India and the U.S.

Is China as the ‘world’s factory’ done?

The area Green was visiting, around Dongguan in southern China, has been called the workshop of the world, China's export powerhouse.

There are tens of thousands of factories, sprawling for miles from the Hong Kong border, their stained peach and white tiled walls lining the motorways. Laundry hangs in the windows of the adjacent dormitories that have been home to millions of migrant workers, the foot-soldiers of China's export machine.

For 17 years, Tao Dong, now chief Asia economist with Credit Suisse, has been covering its breakneck growth. But when I met him in Hong Kong recently, he told me, "China as the world factory, the best time is behind us."

Labor costs are soaring by 40 percent a year, as migrant workers are becoming pickier, since there are more job opportunities at home. Also China's one-child policy means there is no longer such a huge pool of young, dexterous workers. Bank lending is tightening and China's currency is also appreciating by around 6 percent a year against the U.S. dollar, not quickly enough for US and European policymakers, but sufficient for factories on low margins to feel the pain.

"This is the first time I've seen so many Chinese exporters collectively turning down orders from the U.S., from Europe," Dong told me. "They're bleeding," he said. "Costs are rising so much. They are just not profitable. They are actually dying."

As Green discovered, it wasn't the costs alone. Labor shortages, and what he suspected to be corner-cutting by the factories were impacting quality, and he found himself paying as much to have a cabinets put right in the U.S., as he was paying for the original product in China.

"We've reached a point where the risks are not worth the rewards," he told me.

‘Poor quality is expensive’

Green's agent in Dongguan is Ben Schwall, a veteran import-export man, and one of the most astute observers of the local economic scene as you could hope to meet. He's become a regular point of call when I visit the area, and this time Schwall told me his job was becoming much more complicated.

Factories are responding to cost pressures by demanding bigger orders or larger down payments, he told me, or abandoning exports and looking to the growing domestic market.

"A lot of the problems we have now are delivery times and the cutting of corners. It's more than just price. All these things end up having a cost, though. Poor quality is expensive, angry customers are expensive. Missed shipments are expensive,” said Schwall.

But he thinks it’s too early to write an obituary for China Inc. The supply chain is still second to none, he said, and the latest trade figures show exports from China overall still to be strong.

That said, Schwall's just got himself a five-year visa for India. "I'm also planning to go to Vietnam in the near future to look at some factories. Offshoring, outsourcing, no longer means just China. There are other places we need to look, and, yes, there's also the

American solution of bringing some products back to the U.S.”

Exporting U.S. goods to China?

Before he returned to Alabama, Green was faced with an intriguing offer.

One factory boss said he wanted to re-orientate his production of lamps towards China's domestic market. "We've got a lot of rich people now," he said, "and we want to offer them a complete American flavor." He explained that middle-class Chinese associated American products with higher quality, and asked whether Green would work with him to bring U.S.-style lamps to the Chinese market.

The proposal was short on detail, but Green found it tantalizing all the same. "It's a fantastic idea," he said. "I didn't realize the market was ready at this point. We are going to pioneer it."

Back at my hotel, there was an unusual sight from my 26th-floor window. I could actually see the factories of Dongguan, sprawling for miles below me. I'd never seen it so clear. Usually it’s just a smudge through a thick miasma that hangs over the factories.

The lobby too was different, almost empty. Usually it’s packed with buyers from every corner of the planet on their phones and iPods, waiting to be whisked away to factories by a fleet of mini-buses. The pianist was still there half way up a spiral staircase, but serenading just two or three lonely buyers beneath the lobby's artificial palm trees.

Further evidence of a slowdown at the factories? Schwall warned me not to read too much into it. The summer's always quieter. The Christmas buyers hadn't yet arrived.

But something was certainly changing. "Five years ago it was a no-brainer. If you wanted variety and low costs on a whole range of goods, you'd come here. Now it’s a lot more complicated," Schwall told me.

For American business people like Green, it’s no longer a one way street. There are new opportunities. And Green returned to Alabama preparing for the first time in years to create new jobs – in America.