The managers of Chinese factories presenting their products at the recent Hong Kong Optical Fair generally reported that sales were up this year, but cautioned that the year 2003 had been so terrible that increases were almost preordained. Nonetheless, manufacturers in China are facing a perfect storm of factors that are eating into profits. Oil prices and metal prices have risen, translating into a 3-15 percent increase in materials prices over 2003. A shortage of electricity is also causing headaches in the industry. China's outdated power grid no longer provides electricity 24 hours a day and 7 days a week: one factory in the Shanghai area that recently spent two days a week without power has purchased its own generator so it can still operate on power-free days, but doing so is more expensive than using state-provided electricity.

Factory managers in the eyewear industry are not complaining about labor turnover, at least for the time being, but recent experiences in other manufacturing sectors have caused experts to conclude that, believe it or not, China actually has a labor shortage now. The effect of the shortage, once it hits the eyewear industry, will either be higher wages or less qualified workers. One factory manager acknowledged that workers in the Shenzhen region are getting smarter and that they now want to progress after spending three years in a certain plant. Besides, pressure from Western clients and licensors for the institution of better working conditions in Chinese factories is going to drive up labor costs anyhow.

If the big manufacturers don't raise their prices, then the little ones cannot do so either. This suggests that either prices will have to go up, or there will be a consolidation of the factory base as smaller players are forced to close up shop. The timing on these developments is anyone's guess.

Meanwhile, several manufacturers with operations in Shenzhen have started to move north. Land is becoming scarce in the city just across the border from Hong Kong, and Shenzhen's attractiveness has declined in recent years. Labor costs are higher than they are elsewhere in China, and the municipal government is tightening environmental restrictions. Furthermore, since Shenzhen is fairly built up by now, other less developed parts of China are offering more benefits that used to be Shenzhen's hallmark, such as tax breaks for foreign enterprises.

Arts Optical says its purchase of roughly 500,000-square-meter of land in He Yuan will be used as a reserve for future development, while adding that it intends to continue developing its factory in Shenzhen. Another Hong Kong-listed company, Sun Hing Optical, recently bought land north of Shenzhen, but refused to speak on the issue.