Is Foshan Falling Behind as China’s Fourth Industrial City?

Foshan seems to be “falling behind.” At the end of October, the economic data for the first three quarters of 2024 was released, revealing that Foshan’s GDP growth rate was just 1.6%, placing it at the bottom among 26 cities nationwide with over a trillion yuan in GDP, and third from the bottom in Guangdong Province, which has 21 cities.

Industrial Struggles

The data clearly indicates that the industrial sector is dragging Foshan down—during the first three quarters, the city’s industrial output value dropped by 1.2%, while the province grew by 4.7%.

Liang Jun, who has worked in Foshan’s ceramics industry for 20 years and is now an entrepreneur, notes that the situation feels worse than what the data suggests. He observed that many of his peers are struggling with declining orders and rising business closures, stating, “We all feel it’s too ‘cold.'”

Only a few years ago, Foshan was on a growth trajectory. In 2019, it became the 17th city in the country and the third in Guangdong to surpass a trillion yuan in GDP. By 2021, its GDP had nearly doubled compared to ten years earlier, and in 2023, the total industrial output surpassed 3 trillion yuan, making it the second-largest industrial hub in Guangdong after Shenzhen and the fourth in China overall, following Shenzhen, Suzhou, and Shanghai.

However, the slowdown in Foshan’s industrial growth was not unforeseen, as local authorities have long recognized the challenges. A report from the Party School of the Foshan Municipal Committee indicated issues such as an unreasonable industrial structure, insufficient endogenous development motivation, inadequate support for industrial development factors, and insufficient integration of productive services with advanced manufacturing.

These accumulated problems have begun to hinder Foshan’s economic growth. However, changing the course of such a large ship is not easy, and adjusting the industrial structure has proven to be a challenging journey for Foshan.

Real Estate’s Role

“Having a home means having Foshan-made products,” is a proud slogan in the city.

Foshan’s 32 towns host numerous home-related industrial clusters: ceramics in Chancheng’s Shiwai, metal products in Chancheng’s Lansi and Nanhai’s Dalih, furniture in Shunde’s Lecong and Longjiang, and home appliances in Shunde’s Ronggui and Beijiao.

Among Foshan’s two trillion-yuan industrial clusters, one is the home-related industry cluster. According to data provided by the Foshan Bureau of Industry and Information Technology to China News Weekly, ceramics, aluminum profiles, metal products, home appliances, plastic products, and furniture account for nearly 60% of the city’s manufacturing output. This highlights how closely Foshan’s manufacturing sector is tied to the real estate industry’s fluctuations.

“For over three decades, Foshan’s manufacturing has primarily relied on the real estate sector. This model has been quite stable, maintaining good returns, which has reduced the impetus for Foshan to break out of this model,” stated Song Ding, a researcher at the National High-end Think Tank CDI. He noted that when the real estate-driven industrial model falters, the impact on Foshan is particularly pronounced.

Currently, industries closely related to real estate and those with low repurchase rates are feeling the chill the most, with the ceramics industry being a prime example. During a recent meeting of the Foshan Ceramics Industry Association, Liang heard the association president describe the industry’s situation as “collapsing.”

A senior executive from a publicly listed ceramics company shared that since 2022, the downturn in the real estate market has begun to profoundly impact the ceramics sector. By 2024, the industry’s shutdown rate hit a historic high of 50%, with some regions experiencing shutdown rates as high as 60%. This level of downtime has not been seen since the economic reforms began.

In previous years, ceramic companies would typically shut down production in late November or early December, but this year, some companies haven’t even turned on their production lines since the start of the year, and many have begun shutting down as early as June.

Economic Consequences

Foshan’s listed ceramics companies are also facing significant profit declines. In the first three quarters of this year, Dongpeng Holdings reported revenues of 4.684 billion yuan, down 18.27% year-on-year, with a net profit of approximately 309 million yuan, down 50.95%. Meanwhile, Monalisa reported revenues of 3.572 billion yuan, a decline of 21.41%, with a net profit of 141 million yuan, down 57.85%.

While leading ceramic companies grapple with these issues, medium and small enterprises are finding it even harder to survive. Lin Junxiong, who has been in the ceramics industry for 14 years, closed his retail store in 2022 and pivoted to a business focused on clearing ceramic stocks. “It’s terrifying; many companies are liquidating, moving tens of thousands of boxes valued in the millions,” he notes, highlighting that many small ceramic firms have unsold stock piling up in warehouses, while expenses remain constant, forcing them to find ways to maintain cash flow or risk failure.

As a supplier to the real estate sector, Liang has voiced his concerns about bulk purchasing in real estate. “The real estate companies require ceramic producers to offer lower prices, extend payment terms, and increase the upfront costs, leading to a price and capital competition that severely affects many companies’ cash flows.” As numerous real estate firms face financial difficulties, many ceramic companies are accumulating debts, and some have gone bankrupt.

Reports indicate that Evergrande owes one ceramic company between 6 billion and 7 billion yuan, forcing some enterprises to accept property as payment. Statistical data shows that at least five listed ceramic firms have entered into agreements with real estate companies for property-for-debt exchanges, with Monalisa alone signing agreements worth 1.325 billion yuan. This amount nearly doubled from 765 million yuan in their 2022 annual report.

The furniture industry is experiencing a similar downturn. Officials from the Shunde Furniture Association reported that since 2008, the ratio of domestic sales for Shunde furniture has been between 60% and 70%. Following the downturn in the real estate market post-2022, domestic demand for furniture has declined sharply, leading to an industry-wide downturn.

Li Shanshan, who runs a furniture business in Foshan, has noticed a significant decrease in foot traffic this year. “We used to see 20 to 30 customers daily, but now it’s only a few. The nearby parking lot, which used to be full, now has plenty of space,” she said, noting that the number of participants in trade fairs has also dropped significantly, affecting her business.

Prior to 2022, her company employed over 70 people, but that number has dwindled to just over 20 as demand shrinks and revenues stagnate. Every order has become critical, with the minimum order quantities for wholesale drastically reduced.

Challenges in Foreign Trade

The significance of foreign trade for Foshan’s economy is evident in the numerous storefronts featuring foreign languages and the diverse clientele in local establishments. From 2019 to 2022, foreign trade consistently accounted for over 45% of Foshan’s GDP, peaking at 52.3% in 2022.

In light of reduced domestic orders, many companies are pinning their hopes on exports. A representative from the Shunde Furniture Association mentioned that orders from markets like the Middle East, India, and Southeast Asia have surged in recent years, with Li Shanshan noting that 60% of her orders now come from abroad, primarily targeting the Middle East and India. “Everyone says business is tough lately; we must rely on exports to survive.”

However, in 2024, Foshan’s foreign trade has also faced severe declines, with total exports dropping by 23.1% in the first three quarters, amounting to 291.218 billion yuan. Key export sectors like furniture, ceramics, and electromechanical products have seen significant declines—37.3%, 42.4%, and 23.3%, respectively.

Factors such as geopolitical tensions and rising trade protectionism have clearly impacted Foshan’s manufacturing exports. The Foshan Bureau of Industry and Information Technology noted that the ceramics industry has been particularly affected, frequently facing anti-dumping investigations. The EU has confirmed the continuation of a 69.7% anti-dumping tax on Chinese tiles, and in October 2024, Indonesia decided to impose similar taxes, affecting many local ceramic companies.

The U.S., once the largest market for exports from China’s home-related industry, has also experienced drastic changes. For instance, the import duty on mattresses from China has soared to 1,731%.

Feedback from the October Canton Fair indicated a dramatic drop in orders from European and American clients starting around August and September.

Structural Issues

However, tariffs and rising freight costs are not the root causes of the significant decline in Foshan’s foreign trade—its mono-industrial structure is the core issue. Song Ding suggested that with the reduction of orders from Europe and America, China’s export focus has shifted towards Southeast Asia. However, Foshan’s manufacturing sector has not adapted quickly enough, as it continues to export traditional products that do not perform well in Southeast Asian markets.

In contrast, Shenzhen has seen steady growth in foreign trade. From January to April 2024, Shenzhen’s total imports and exports reached 1.41 trillion yuan, a 31.7% year-on-year increase, overtaking Shanghai to become the leading foreign trade city. In the first three quarters of 2024, Shenzhen’s foreign trade grew by 20.9%, while Shanghai’s only saw a marginal increase of 0.03%.

According to Song Ding, Shenzhen’s impressive foreign trade growth this year results from its clear differentiation strategy. This includes not only product variety but also supplier differentiation. Although the U.S. and EU remain significant markets for Shenzhen, the products exported are mainly high value-added, making them less susceptible to large-scale replacements.

Dongguan provides another positive example within Guangdong Province. In 2023, Dongguan’s total imports and exports reached 1.28 trillion yuan, ranking second in the province. In the first three quarters of 2024, Dongguan’s exports increased by 2.5%. Professor Lin Jiang from Sun Yat-sen University noted that Dongguan’s export performance surpasses Foshan’s because its export system is better aligned with Southeast Asia’s industrial complementarity.

Internal Pressures and Economic Adjustment

“With sluggish domestic sales and challenging exports, businesses are just trying to endure,” Liang Jun commented, pointing out that demand shortages and overcapacity have led to significant internal competition, increasing operational pressures for companies.

This dilemma stems from an unbalanced industrial structure. The Foshan Bureau of Industry and Information Technology reported that traditional manufacturing holds a dominant position in Foshan’s industrial system, but these industries face issues like product homogeneity, fierce price competition, and poor brand premium capacities. Many enterprises experience growth without profit, with key sectors like aluminum, ceramics, and textiles recording profit margins below 5%.

In the ceramics sector, executives from listed companies admitted that they initially focused on high-end tiles. However, faced with a “rational consumption” era where consumers carefully evaluate costs, they began to produce mid-range and low-end products. This has triggered a price war among ceramic manufacturers, with some selling tiles at less than half their normal prices to maintain cash flow. Liang remarked that a profit margin of 5% is already meager, yet some companies believe that by surviving these tough years, they can outlast their competitors, which he termed a “suicide-type internal competition.”

The lack of robust intellectual property protection is further exacerbating this internal competition. Liang noted that imitation and even outright copying are common in the ceramics industry; once a firm releases an innovative product, others quickly follow suit.

“Inequities in intellectual property protection are a significant drain on enterprises,” a senior executive from a listed ceramics company shared. Even with an annual budget of 10 million yuan for combating counterfeiting, they struggle to address infringement and plagiarism issues effectively. Legal battles often take years, and even winning cases rarely yields compensatory amounts sufficient to cover legal fees, significantly undermining business confidence.

The increasingly dire internal competition highlights the insufficient technological innovation capacity within Foshan’s traditional manufacturing sector, which has become reliant on low-price competition.

Future Outlook

In recent years, Foshan has begun promoting the development of strategic emerging industries to adjust its industrial structure, though the outcomes have been mixed.

The Foshan Bureau of Industry and Information Technology reported that traditional industries like household electrical appliances, metal products, textiles, food and beverage, and furniture manufacturing continue to dominate, accounting for over 50% of the industrial output. However, advanced manufacturing sectors like high-end electronics, advanced equipment, and new materials have low representation, and high-tech manufacturing in pharmaceuticals and electronic communications remains weak.

Professor Zhang Zhengang from the School of Business Administration at South China University of Technology emphasized that the number of specialized and innovative “little giant” companies in a city reflects the effectiveness of its industrial structural transformation. He noted that as of September 2024, Foshan has 109 recognized “little giant” enterprises, while Shenzhen has surpassed 1,000, Guangzhou has 353, and Dongguan has about 230.

Zhang explained that the number of specialized and innovative “little giant” enterprises is closely related to the local government’s support. After only 123 companies were recognized in 2022, Guangzhou has since ramped up its support for such enterprises, evident in the progress seen in the fifth and sixth batches of selections.

Like many traditional industrial cities, Foshan faces challenges with industrial structural transformation. How to transform and to what extent will determine the city’s future. Recent government reports indicate that Foshan is focusing on cultivating strategic emerging industries such as industrial robotics, new materials, new energy storage, healthcare, and low-altitude economies, while also investing in future sectors like green hydrogen and circular economies.

However, Foshan’s attractiveness for investment in these strategic and emerging sectors remains to be seen. In January, the construction project for a 1 billion yuan intelligent manufacturing base for 3D vision perception was launched in Shunde, Foshan. The company, Aobi Zhongguang, has developed 3D vision chips and sensors widely used in robotics and consumer electronics.

According to Aobi Zhongguang’s CFO, Chen Bin, the company began planning to establish a manufacturing park in Shunde in the first half of 2023 and found that local officials took a proactive approach to the project. “They reached out to us, provided detailed introductions, and showcased the local environment,” he remarked.

Ultimately, Aobi Zhongguang found Shunde appealing due to stable housing prices, convenient living conditions, and a favorable business environment with responsive government services.

However, Chen noted that Shunde’s consumer electronics industry lacks adequate supporting infrastructure compared to its traditional sectors. There is still a significant gap between local workers’ familiarity with traditional manufacturing and the cleanroom requirements of electronics manufacturing.

Foshan aims to attract leading enterprises in niche industries like Aobi Zhongguang to foster a more extensive robotics industrial chain and eventually create an industry cluster effect.

It has been pointed out that Foshan previously invested heavily in the hydrogen industry but has yet to see significant returns. The consensus is that it cannot afford to miss out on the robotics sector. Zhang emphasized that “while the new energy vehicle industry is currently on an upward trajectory, humanoid robotics are still in the early stages of development. Foshan has a good foundation and must plan ahead, provide strong support, and seize this critical opportunity for industrial revolution.”

To achieve these goals, it’s clear that Foshan needs to provide clearer policy guidance and invest more resources. According to Song Ding, when it comes to strategic emerging industries, investors will consider the completeness of the local industrial chain, opting for locations that offer the most rational, convenient, and cost-effective solutions.

Ultimately, both local government policies and industry operations must quickly establish new industries to facilitate a transition from the old to the new. “In a city like Foshan, where industrial development has reached this level, seeking to adjust the industrial structure is not an easy task,” Song reflected. The current challenges stem from the lack of emerging industries to support the economy, leading to a precarious state of transition.

As such, upgrading traditional industries is equally essential in Foshan’s restructuring efforts. Song believes Foshan should not easily abandon its real estate-driven manufacturing chain but instead leverage its existing advantages while enhancing automation and sustainability within these industries.

Lin Jiang recalls that during discussions with the Foshan Ceramics Industry Association, the idea of developing “semiconductor ceramics” was proposed as a clear path to upgrade the industry. However, few companies supported this direction at the time. He understands their hesitation: cutting-edge technology R&D requires substantial investment, and at a time when survival is a concern, it’s hard for companies to allocate significant funds for such transitions.

Foshan is a city driven by the private economy, which contributes over 60% of the city’s GDP, more than 70% of its tax revenue, over 80% of industrial value added, and over 90% of the number of enterprises. When private enterprises lack motivation and are unwilling to invest, it inevitably reflects in the slowing industrial value added in Foshan.

To improve this situation, the Foshan Bureau of Industry and Information Technology hopes to leverage technological transformation, “fully utilize national and provincial policies for large-scale equipment renewal and technological reform, and enhance traditional industries with artificial intelligence, high-end technology, advanced equipment, industrial design, and green processes.”

However, Lin Jiang has observed that while technological reform investments did boost Foshan’s industrial value added last year, market demand has yet to recover. “Our equipment is upgraded and ready, but we haven’t seen any orders coming in, leading to this year’s difficulties.” Thus, Foshan must continue assessing market needs and produce products that meet those demands to establish a virtuous cycle.

At the Guangdong High-Quality Development Conference this year, Foshan set a goal of achieving an industrial output value of 4 trillion yuan by 2030. To reach this target, Foshan has much work ahead.