Ch.

3 Changing industrial
location – How and why
does it change over
space and time?
3.1 How has the location of manufacturing industries in Hong Kong changed over time?

What is manufacturing? What is industry?

Industry
- Broad: activities that produce good and services
- Narrow: manufacturing in which raw materials (RM) are assembled, processed or
transformed into more valuable products

Four sectors of industry

Primary Secondary
- Industries which extract or collect - Makes things from RM or
RM found in nature semi-finished → more valuable
- Example: farming, fishing, lumbering, products
mining - Example: manufacturing,
construction

Tertiary Quaternary
- Provide services to other industries - Concentrated with information, its
or people application, manipulation and
- Example: banking, retailing transmission
- Example: space industry, medical
research, software development and
media

How can we classify manufacturing industries?

By weight and amount of RM and products
- Light industry: light RM and products
- E.g. electronics, textiles
- Heavy industry: heavy and bulky RM, heavy products
- E.g. iron and steel

By inputs of capital and labour

- Labour-intensive: much labour used
- E.g. textile and garment
- Capital-intensive: much capital used
- E.g. petrochemical

By level of technology and R&D

- Low-tech: little investment and few resources put into R&D, traditional methods used
- E.g. incense stick making
- High-tech: much investment and many resources put into R&D, advanced technology
used
- E.g. Smartphone making

How was the manufacturing industry developed in HK from 1950s to 1970s

Major types of industries (1950-1970)
- Textiles, garments, plastics, electronics

Light Watches, clothes (RM is light)

Labour-intensive Many workers producing the goods

Low-tech Simple tools and machines (e.g. tweezers,

sewing machines) were used

Location of the industries

1950s (on the two sides of Victoria Harbour)
1. Large influx of migrants from Mainland provided a large pool of cheap labour
2. Brought capital, managerial skills and technology
3. Deep natural harbour
4. Free port policy
5. Good port facilities and transport connections abroad
(3-5: easy and free import of RM and export of finished products to overseas markets)

1960s (to urban areas further north, east, west)

1. Better transport infrastructure → urban areas expanded
2. Large-scale development of housing estates with flatted factory buildings → could get
labour easily
3. Better telecommunications and postal facilities
4. Good supply of high quality managers, accountants and technicians
5. SImple tax system with low tax rates
6. Well-established legal system

1970s (to industrial estates and areas in new towns)

1. Expansion of urban areas to New Territories (NT) due to better transport network
2. More space provided in new towns
3. Large-scale new town development with industrial estates and areas → get labour
easily
4. Lower land rents in new towns/NT
5. Industrial estates/areas are well-planned with adequate infrastructure (e.g. sewage
systems, parking facilities for lorries and road network

How has the importance of the manufacturing industry changed in HK since the 1980s?
- % of workers employed in manufacturing industries ↓ (secondary)
- % in tertiary ↑
- Economic restructuring

How has the location of the manufacturing industry in HK changed from the 1980s to the
early 2000s?
Manufacturing firm
 - Has various departments responsible for different manufacturing activities

Types of manufacturing activities being manufactured

- Preferred placing production operations in the ZDR
- Headquarters, sales and marketing, design and R&D activities in HK
→ front shop, back factory

Changes in the mode of production

- Before 1980s: firms carried out all manufacturing activities at one location
(single-point production)
- Since 1980s: move factories to ZDR, leave headquarters in HK → manufacturing
activities were carried out in different locations (multi-point production)
*front shop back factory is a kind of multi-point production

Factors causing the relocation of manufacturing activities

Pull factors of ZDR
1. Low labour costs
2. Extensive flat land
3. Low land prices
4. Less strict controls on pollution
5. Incentives were given to HK industrialists
6. Near HK (Proximity to HK)
7. HK industrialists know the place, had good connections

Push factors of HK
1. High labour costs
2. Limited flat land
3. High land prices
4. Strict government controls on pollution

1. Labour costs
- Labour-intensive → wages accounted for a large share of production costs
- Move to ZDR (supply of cheap labour was abundant) → cut costs

2. Land
a. Land availability
- Land has long been scarce in HK
- In HK forced to carry out production in flatted factories (hard to expand)
→ hinder expansion and reduce production efficiency
- ZDR has extensive flat land e.g. farmland
b. Land prices
- Shortages in supply → expensive land in HK
- Price of land in ZDR lower

3. Government policies
 - HK pass new laws to protect environment → increase production costs
- ZDR less strict with environmental laws
- Improve infrastructure e.g. transport, electricity, water supplies
- Offer incentives to foreign investors (e.g. tax concessions, lower land rents)

4. Proximity to HK
- Many ppl in HK are Cantonese and know relatives in ZDR → knew the places better,
had good connections
- Could manage factories more easily → could be reached within one-day travel
distance from HK
- Take advantage of advanced transport infrastructure in HK (e.g. import RM and export
products through HK → save transport costs)

CASE STUDY - Vitasoy (P17)

How has the location of the manufacturing industry in HK changed since the early 2000s?
- Production costs (esp. Labour costs) rise in ZDR
- ‘Emptying the cage and letting the right birds in’
→ low-value added and polluting industries no longer welcomed → favour high-tech or
high-value added industries

- HK industrialists move out from ZDR to

- lower-cost locations in Mainland such as northern part of Guangdong
- inland provinces such as Hunan
- South and South-east Asian countries such as Vietnam, Indonesia
- Labour + land cost low
- Environmental protection regulations are lenient
- Tax incentives for foreign investors

Why do the manufacturing firms still keep headquarters in HK?

1. Availability of supporting services and efficient telecommunication facilities
- Provide excellent banking and legal services
- Can have frequent communication with banks and legal firms
- Easy to get access to latest market trends

2. Stable political and business environments

- Well-established legal systems
- Easy to get access to information about government policies and regulations

3. Efficient transport networks

- Enable business trips

4. Good supply of talents

- Large pool of high-quality managers, accountants, engineers, technicians
3.2 What are the factors affecting the location of the manufacturing industry?
What location factors matter?
- Choose low-cost locations to maximise profits
- Consider various location factors
- Vary with nature of manufacturing activities

1. Government policy
- Efficiency of govt affects production costs
- Favourable policies:
- Encourage investment by offering incentives such as tax concessions and
cheap land
- Improve infrastructure such as highways and railways
- Unfavourable policies:
- Regulate supply of land
- Tighten pollution controls → discourage industries to develop in certain areas

2. Availability of capital
- Financial capital (money)
- fixed/physical capital (plants or machinery)
- Heavy industries (iron and steel, car-making) → capital-intensive industries
- Some industries require huge investment on R&D to start (IT & pharmaceutical)
- returns are not guaranteed
- Business is successful → high growth potential
- Professionals and investors provide venture capital to finance the creation of
these businesses

3. Land attributes
- Heavy industries
- demand extensive flat and cheap land for the installation of heavy machines,
production and expansion
- High-tech industries
- Suburban industrial parks
- Good amenities and environment attract quality labour (scientists and
skilled labour)
- Cheap land in suburbs
- Room for expansion
- Locate R&D centres near university campuses in suburbs → gain access
to researchers and scientists + new ideas

4. Access to raw materials

- Raw material-oriented industries

Characteristic of RM Industry and its location Benefits

Heavy and bulky - Iron and steel Save transport costs

 industry close to iron
ore fields
- Copper smelting
close to copper ore
fields

Perishable - Sugar mills close to - Avoid costs for

sugar cane fields preserving RM
- Dairy products - Keep RM fresh for
manufacturing close processing
to dairy farms
- Importance for RM declining
★ Advancements in production technologies: enable production use fewer RM or
to use substitutes
★ Bulk carriers: heavy and bulky RM use bulk carriers to transport (with large
capacity) → reduce per-unit transport cost
★ Advancements in refrigeration technologies: allow perishable RM to be
delivered over a long distance

5. Access to power resources

- Power-oriented industries
● Coal: iron and steel: coal is heavy and bulky → expensive to transport
● Electricity: aluminium smelting close to hydroelectric power (HEP) as it requires large
amount of energy

- Technological improvements lower importance of PR

★ Better production technologies (e.g. use less coal)
★ Bulk carriers lower transport costs
★ Improved transmission technologies → electricity can be transmitted by cable
over long distances

6. Access to labour
- Costs of labour: wages and other expenses
- Quantity of labour: abundant cheap → favourable for labour-intensive industries
- Quality of labour: education and skill levels → favourable for high-tech

- Strong labour unions + frequent strikes → less preferable as production costs are
higher
- Automation (robots) more common → reduce location importance of labour

7. Access to markets
- Market-oriented industries
-
Characteristic of product Industry Benefit
 Heavy and bulky Furniture making Save transport costs

perishable Bakery, brewery, - Avoid costs of

newspaper printing preserving
- Able to provide
fresh products

fragile Glassware manufacturing Avoid loss through

damage in transit

8. Access to business partners

- Face-to-face contact with suppliers and customers to gather information
- Provide production plants with feedback for improvement

9. Transport and telecommunications

- Well-developed transport → make movement of goods (RM, PR, finished products)
efficient
- Facilitates the flow of personnel
- Sites with convenient transport networks (railways, waterways) favourable for them

- Effective telecommunications infrastructure (satellite telephone, computer networks)

enable an efficient exchange of information between offices and production plants
- Facilitate multi-point production

10. Access to management

- Qualified management team → cut production costs, maximise profit

11. Technology and innovation

- Crucial for high-tech industries (require plenty of inputs in R&D)
- In MDCs, governments and private sectors have spent large amount of money in R&D
→ high-tech industries are attracted

Will manufacturing industries remain at the same location?

- Some industrialists decide to remain in an existing site even though favourable
location factors no longer exist (e.g. UK iron and steel still produced in Sheffield even
though supplies of iron ore ran out some time ago)
- Industrial inertia
- Difficult to move heavy machinery, buildings are immovable
- Relocation involves high costs
- Depends on pool of specifically skilled labour (workers unwilling to move away
from hometown)
- Established good linkages with business partners (such as suppliers and
customers)
- Personal preferences
3.3 How has the location of the iron and steel industry in China changed over time?
How important is the iron and steel industry in China?
- Backbone of all industry
- Steel production growing significantly
- China: largest steel producer in the world

How has the location of the iron and steel industry in China changed over time?
1. Before 1950: in North-east China (e.g. Anshan)
a. Proximity to RM and PR: save transport costs (RM-oriented + PR-oriented)
i. RM and PR (iron ore and coal) are heavy and bulky
ii. RM lost a lot of weight during the production (weight-losing industry)
b. Availability of extensive flat land
i. Involves large machinery in production (Anshan is situated on
floodplain → extensive flat land)
c. Large domestic market
i. Heavy industries like shipbuilding and car-making concentrated in
north-east → large demand for iron and steel
d. Well-developed transport network
i. Well-developed railways facilitated the transport of iron ore and
delivery of finished products to market

2. 1950-70s: Inland shift to central and western China (Wuhan, Panzhihua)

a. Government policy (Five-year Plans since 1953 → new iron and steel work set
up in inland regions)
i. Strategic reasons: China and western countries (USA) → tense →
international conflicts (Korean War). factories at coastal regions easily
attacked → govt adopt policy of ‘moving industries into inland regions’
to safeguard its industries
ii. Economic reasons:
1. Raise living standard in inland regions → achieve a more
balanced economic development between regions
2. Relieve the problem of overpopulation in coastal regions
b. Proximity to RM and PR
i. Coalfields and iron ore fields found inland
ii. Transport links between inland and coastal not well-developed
→ minimise production cost by developing inland

3. 1980-early 2000s: Coastal shift (Beijing, Shanghai)

a. Government policy
i. Open policy since 1978: allow to make production decision in response
to market trends
ii. Having some regions developed first: coastal region with more
advanced economy were chosen
b. Presence of large domestic markets
 i. Rapid growth in population and economic activities in coastal cities
push up demand for iron and steel
ii. Iron and steel consuming industries (shipbuilding car-making) found
there → large market
iii. Industrial clusters (industrial agglomeration) → enjoy agglomeration
economies
1. Reduce transport costs
2. Share infrastructure and supporting services
3. Establish business contacts
4. Facilitate exchange of market and technical information
5. Develop a large pool of skilled workers related to the industry
6. Build business reputations
c. Technological and transport advancements (reduce location importance of RM
and PR)
i. Smaller amounts of RM and PR are needed
ii. Technological advancements
1. Equipped with new furnaces to use scrap iron and steel as
substitutes (many coastal cities have abundant supply of scrap
iron and steel) → reduce transport costs
iii. Transport advancements
1. Bulk carriers + advancements in rail transport → reduce
transport costs of heavy and bulky materials
d. Comparative advantages of coastal regions
- Constraints inland
1. Transport system less developed → comparatively low accessibility
2. Far away from major markets in coastal regions
3. Low population + education level → less skilled labour
4. Harsh physical environment with rugged relief and extreme climate
5. Inadequate supply of water for cooling
6. Quality of iron ore and coal inferior
- Advantages of coastal regions
1. Well developed infrastructure
- Easy import of RM and easy export of iron and steel products
overseas
2. Existence of industrial centres
- Large pool of skilled labour
- Scrap iron and steel
3. Sufficient supply of cooling water and extensive flat land
- Easy access to cooling water at coastal areas
- Extensive flat land for building
- Expansion is possible by reclamation

4. Since the early 2000s: to South China (Guangdong)

a. Set up more production centres in south
 i. Imbalance between production and consumption of iron and steel in
South China (demand > supply)
ii. Establish new iron and steel production centres in Zhanjiang
iii. Local government provide favourable policies to promote development
of iron and steel industry: tax cuts + securing capital for iron and steel
enterprises
b. Increasing importance of port locations
i. Supply of coal cannot meet demand → have to import large amount of
coal → higher dependency ratio
ii. Iron ore → shortages in domestic supply (low grade of local ore) → high
dependency ratio of iron ore in China
iii. Located near port facilities with efficient railway network ** coastal east
and south
c. Moving away from large cities
i. Air pollution problems (smog, acid rain, reduced visibility) CO2 →
greenhouse effect, global warming
ii. Old and inefficient iron and steel works → force to close (e.g. Jinan,
Guangzhou, Hangzhou)
iii. Move away from large cities (e.g. central gov move Shougang Group in
Beijing to Caofeidian in Tangshan, Hebei)
iv. Scarce land in large cities → profitable to convert the land to into other
urban land uses such as commercial

Why do some iron and steel works remain in original locations?

E.g. Ansteel Group in Anshan (industrial inertia) (local resources depleted + outdated
machinery + overburdened transport system) → less economical
- Continue to operate
- Costs of building iron and steel works and related infrastructure huge
- Pool of skilled labour + good linkages with business partners
- Cause widespread unemployment + adversely affect many other industries
esp. Iron and steel consuming industries
- Tax revenue of government adversely affected
3.4 What are the location factors of the information technology industry?
What is the IT industry?
- High-tech
- Manufacture computers, related electronic products and communication equipment
- Development of computer software and network + related services

What are the characteristics of the IT industry?

1. Capital-, technology- and R&D-intensive
- Invest huge sums of money in R&D

2. Short life cycle of IT products

- Stage 1 Development: much work on R&D (scientists and engineers for R&D)
- Stage 2 Introduction and Growth: introduction of the product to the market → sales
grow (skilled workers, cut costs by sharing basic infrastructure, efficient management)
- Stage 3 Maturity: competition from new producers (semi-skilled workers +
standardised production line)
- Stage 4 Decline: New products come out → sales decline (semi-skilled workers +
standardised production line)

3. Multi-point and multinational production

a. R&D centres at MDCs
i. High technological and educational levels → provide a large pool of IT
professionals
ii. Pollution control is better (attract talents)
iii. Legal protection for intellectual property is better
iv. Financial system is better → better access to capital such as venture
capital
b. Production plants at LDCs and low-wage countries/regions
i. Mass production is labour-intensive → abundant cheap and semi-skilled
labour to carry out standardised production
→ many firms are multinational enterprises → multinational + multi-point production
→ made possible by modern communication technologies and development of logistics

4. Concentration of clusters
- Form industrial clusters → enjoy agglomeration economies
- R&D centres:
- induce innovation by exchanging market and technical information
- Establish business contacts
- Share infrastructure and facilities (such as WiFi and industrial 3D printers)
- Create a distinct innovative culture and business environment which can
further attract IT firms and talents
- Build business reputations → easier for firms to access venture capital
- Production plants
- Share infrastructure → cut costs and increase competitiveness
- Attract labour
 - Benefit from low land rents offered by local gov

5. Importance of global markets

- Design products that suit tastes of customers in both local and global markets →
enlarge markets and increase revenue (cover huge sums of money spent on R&D)

Where is the IT industry in the USA?

- In clusters (e.g. SIlicon Valley)

Characteristics of IT industrial sites

- Plenty of greenery + office-plant-laboratory buildings
1. Near major universities and research institutes: collaborate with universities in
researches, get easy access to IT professionals, facilitate exchange of new ideas
2. Low, modern and dispersed office-plant-laboratory buildings: nice building designs
attract IT professionals, facilitate flow of work
3. Pleasant working environment: good community services and amenities, plenty of
greenery → attract IT professionals
4. Well-connected with city centre: convenient to seek services

Location R&D (Development stage) Production (Maturity stage)

factor

Access to - Good access to scientists, - Abundant cheap and

labour technicians, researchers for semi-skilled labour to carry
R&D out standardised production
- Skilled labour in pilot - LDCs
production
- MDCs

Availability of - Good access to venture - Large amounts in the form

capital capital to support innovation of foreign direct investment
and new products (FDI) to set up factories
overseas
- Less capital required if
outsourcing

Government - Government provides - Local governments provide

policies financial support for R&D infrastructure, amenities and
- Government policies help various incentives
maintain favourable
business environment with
innovative culture

Land - Suburban site of large city - Cheap land site in industrial

attributes with good amenities cluster with good
infrastructure → cut
production costs
 Access to - Large global market is - Large global market is
market + needed needed
business - Ease of access to suppliers - Ease of access to suppliers
partners and customers helps gather and customers helps gather
information for improvement information for improvement

Transport and - Good transport networks for - Good transport networks for
telecommunic efficient logistics efficient logistics
ations - Well-established - Well-established
telecommunications telecommunications
infrastructure infrastructure

Technology - Regions with good - Regions ready to receive

and innovative climate and good transferred technology from
innovation access to high levels of high-tech regions
technology
- R&D laboratories and pilot
plants are near major
universities or research
institutes

What are the recent changes in the location of the IT industry in the USA?

1. Intensification of outsourcing (offshoring)

- Move software development and computer system maintenance work to LDCs (e.g.
India)
- Set up their back offices for software development and related services
- Favourable factors:
- Lower average salary
- Maximise productivity by working 24h a day
- Abundant supply of well-educated labour who is proficient in english
- Well-developed telecommunications infrastructure, incentives by Indian gov

2. Moving production operations back to the USA (reshoring)

- Push factor in China
- Rising labour costs
- Increasing land costs
- Appreciation of currency
- Insufficient legal protection against intellectual property
- Pull factors in USA
- Government policies
- Local: tax incentives, credit and technical support
- Federal: high tariffs on imported IT products
- Automation: lower importance of cheap labour
- Large local market: save transport costs, allow firms to respond to market
changes quickly
- Higher labour quality: better productivity
 - Better image and quality: Made in USA means better quality → increase sales +
reduce brand risk due to poor quality

- Political influence:
- Outsourcing led to unemployment in USA → urge US IT giants to move
production lines back to home country

- Scale of reshoring is small:

- Production costs in LDCs are still very low
- Relocation incurs high costs
- Labour unions and still stronger in USA
- Pollution controls and labour regulations are stricter in USA
Reshoring may weaken competitiveness in overseas markets

Do the iron and steel industry and the IT industry share the same group of location factors?
Refer P.82-83

What impact has globalisation had on the location of the IT industry?

A phenomenon referring to the increasing integration of economies and societies around the
world
- Implications:
- Rise and expansion of multinational enterprises
- Integration of markets

1. Globalisation in marketing
a. Manufacturing a product in home country then selling it in the foreign market
(exports)
b. Granting a licence to a producer to manufacture the product in a foreign
market
c. Establishing a plant in the foreign market as FDI and sell products there

2. Globalisation in production
a. Keep headquarters/R&D centres in home countries (MDCs)
b. Outsource production operations to the LDCs (low costs)

3. Globalisation in sourcing inputs

a. Requires many components from various sources
b. Bulk purchases for most inputs → great bargaining power over component
suppliers so they can get reliable and quality inputs at the most competitive
price
c. Adopt a worldwide supplier network for RM and components
3.5 What is the impact of changes in industrial location and modes of production?
How do industrial relocation and new modes of production affect the areas where factories
move in?
Socio-economic benefits
1. Economic growth (multiplier effect → cycle of growth)
a. New industries → jobs created → more money available for spending in local
shops and on local goods and services → economy grows → increase in tax
revenue → improved social services and infrastructure → more people come to
the area
2. Transfer of technology
a. When US move production to LDCs: managerial personnel and specialists from
USA sent to these factories → international flow of labour
b. LDCs can learn and adapt technology and management skills → encourages
transfer of technology know-how

Environmental problems
Refer to P91

How do industrial relocation and new modes of production affect the areas where factories
move out?
Socio-economic problems
1. Unemployment
a. Iron and steel works in North-east China were outdated in technology → close,
lay off workers → unemployment (e.g. Ansteel group → restructure and adopt
automation → workers unemployed)
b. Relocation of production plants to LDCs (USA): decrease in number of
employees in the manufacturing sector (many LDCs such as India and China
have improved R&D capability → US take advantage by setting up R&D centres
there) → loss of IT related jobs in Silicon Valley
2. Economic decline (multiplier effect)
a. Refer to page 93
3. Environmental benefits
a. Ease pollution problems + improve the environmental quality (e.g. relocation of
Shougang Steel Group in Beijing → reduction in PM10)

What are the other effects of industrial relocation and new modes of production?
1. Specialisation and changes in the employment structure
a. Outsourcing + multi-point production → division of labour between MDCs and
LDCs
b. MDCs specialise in management, supporting services and R&D
c. LDCs focus on mass production
d. E.g. HK transformed into a centre for providing management support for
factories in Mainland after the factories moved out → tertiary industry grow
rapidly → change in employment structure
2. Increase in world trade and economic interdependence
 a. Globalisation in production results as different countries specialise in their jobs
+ globalisation in sourcing inputs -> world trade increases + interdependent
economy

How can we ease the problems caused by industrial location and new modes of production?
Refer P95-100