Half a month after Smart Union went bankrupt, the once-bustling streets around the compound of the largest toy factory in Zhangmutou township have become a playground for children. Vans no longer deliver raw materials or packed toys. Instead, groups of youngsters try to pick up discarded toy parts from behind the locked gates of Smart Union.

Standing a few steps from the entrance, a laid-off worker of the Hong Kong-listed toy maker stares at his old office. Jiang Huajian, 27, was with Smart Union in Dongguan, Guangdong Province, for seven years, working his way up from the lowest rungs to become a floor manager.

"I just came back for a final look at the factory before heading back home to Hubei province I may not come back again," he says.

The toy factory closed suddenly on October 15, leaving more than 6,500 workers jobless. They had not received any wages since August, so the local government spent more than 24 million yuan (US$3.5 million) to pay them three months' wages.

The reason for the closure of Smart Union, owned by five Hong Kong residents, is a puzzle for many workers. Jiang says his assembly line in the electronic toys department was humming along as usual even a day before the company shut. It was trying to finish a big order for a US buyer.

Many company officials blamed the global financial crisis for the closure, a view shared by others facing similar challenges. "The economic upheaval in the US is already changing and shrinking China's vast manufacturing hub in Guangdong Province, long regarded as the world's factory floor," AP said recently.

But Jiang says his Hong Kong bosses used the financial crisis as an excuse to jump ship. "Such a big firm, which has never stopped getting orders, going bankrupt overnight is really weird," he says.

Dongguan produces more than 30 percent of the toys sold worldwide every year, according to Guangzhou-based Nanfang Daily, and Smart Union was one of its biggest companies. The Smart Union group's sales in the first half of this year was nearly US$50.3 million, up about 3 percent year-on-year, according to a corporate report published in September. Its total assets fell about 5 percent, though.

The factory has been suffering from "severe internal problems such as mismanagement and failed investments for a long time", Jiang says. It was a far cry from the days when it resting at the top.

Smart Union opened its Zhangmutou factory in 1996, and according to the Southern Metropolis Daily, it enjoyed a five-year "golden period" like many other labor-intensive manufacturing industries.

Before 2000, every toy factory boss used to play mahjong every day and still collect huge amounts of money, the newspaper said in late October. Such firms began facing problems with rising manufacturing costs, and Dongguan started changing from a labor- to technology-intensive center.

Faced with the new challenges, many toy makers began looking for new investment channels. Jiang says his former bosses were using toy factory funds to invest elsewhere. "They (the bosses) would leave some of the sales revenue for staff salaries, and 'take away' the rest."

In 2004, Lai Chiu-tai, the factory's vice-chairman, opened a traditional Chinese medicine company in Hong Kong. He reportedly exports his products to more than 10 countries and regions, including Japan, Malaysia and Singapore.

Two years ago, Lai said in an interview with China Plastic & Rubber Journal that he wished to invest in motor parts production on the mainland. "Hong Kong firms' reputation in credit standing will help Smart Union's success in the domestic market," the journal quoted him as having said.

But contrary to his expectations, Smart Union suffered a huge loss after investing up to 400 million yuan in silver reserves in Fujian Province in January.

According to the Guangzhou Daily, it's "highly possible" that the investments were made through the toy factories' corporate account. Jiang agrees with it. "After paying workers' salaries, the bosses normally left nothing for the factories' maintenance," Jiang says. The failed investments are to blame for Smart Union's cash-flow problems.

The company got listed on the Hong Kong stock exchange, a territory few labor-intensive firms ventured into then, reportedly to accumulate more capital in 2006. It performed poorly on the bourse, with its shares dropping from more than HK$1 each to about HK$0.08 before it folded up.

The company's cash-flow problem aggravated after floods hit the factory in June, causing a loss of more than US$8.6 million, according to its half-year report. That was not all, Smart Union owed about 200 million yuan to distributors, media reports said.

"The bosses have the money to pay the debts," Jiang says. Wang Zhonghua, spokesman for

Zhangmutou's local government, corroborates Jiang, saying the toy maker used the financial crisis for a "premeditated escape".

"Smart Union's bankruptcy has nothing to do with the financial crisis," Wang says. The real reason why it shut down is mismanagement and failed investments. The trend of foreign investors jumping ship is becoming common in Dongguan, especially for firms with little investments in fixed assets.

There are more than 400 overseas firms in Zhangmutou, over 60 percent of which are from Hong Kong, Wang says. Most of the foreign investors rent their warehouses, and only a "few build their own factories. Without fixed investment, jumping ship is easy And those who do so always owe factory rent and workers' wages."

Smart Union was one such factory. It had rented most of its 10,000-sq-m factory, except for two small warehouses, Jiang says. Dongguan has more than 15,000 overseas firms, including many from Hong Kong and Taiwan. According to the city's bureau of foreign trade and economic cooperation, most of these groups have rented factories. The owners of three Taiwan firms in Dongguan jumped ship last June, according to media reports.

The phenomenon is not confined to Smart Union or Dongguan. It is being seen in other parts of the country, too. In Qingdao, Shandong Province, 87 South Korean entrepreneurs escaped late last year, Xinhua said.

Yu Chin-wu, deputy secretary of the association of Taiwan enterprises in Dongguan's Shilong township, says many overseas investors came to the city only to make a "fast buck". Yu started his PC monitor factory in Shilong in 1992. And though he began with a rented factory, he spent more than 50 million yuan to build his own 84,000-sq-m factory in 1999.

But few other overseas investors would do so, he says. "More than 80 percent of Hong Kong firms carry on business in rented premises, with about two-thirds from Taiwan following similar arrangements ... They come here to earn fast money and leave once they feel the market is getting bad."

Toy makers in Dongguan have seen their orders drop by 20 percent for the last quarter of this year. And their manufacturing cost has risen more than 35 percent, according to the city's foreign investment enterprises' association.

But despite everything, Yu is surprised by Smart Union's sudden closure because such big firms should be able to cope with such crisis through other means, including laying off some staff.

Yu has cut the number of workers in his PC monitor factory from more than 2,400 last year to about 1,300. "Sudden 'escapes' are rarely seen in big firms' cases." If firms as big as Smart Union start jumping ship, it can pose a social problem, too, with thousands of migrant workers becoming jobless.

Apart from paying the Smart Union's laid-off workers their arrear salaries, the Dongguan government has also set up a 1-billion-yuan fund to help local firms tackle problems.

Moreover, the city is trying to devise measures to prevent firms from closing down suddenly, says Fang Shaoming, a director in the general office of Dongguan's bureau of foreign trade and economic cooperation. "The government is thinking of how better to support local firms especially legally, under which new measures would state clearly the responsibility of the firms."

(China Daily November 4, 2008)