On the factory floor: Inside China's engine room

Thousands of migrant workers line up at dawn outside the factory walls in Shenzhen, the wild southern boom town just across the border from Hong Kong, before clocking in at the world's biggest manufacturing plants.

During their shifts, they assemble the mobile phones and laptop computers we use, make the toys our children - or we - play with; stitch together our trousers, shirts and skirts or put together the watches we wear.

China is the factory of the world and the country's remarkable economic boom has been driven by those facilities making toys, shoes and clothes.

All are low-tech, low-value goods - your expensive laptop might be made in China, but the high value components, such as the microprocessor, come from America.

The Chinese government wants that to change. Innovation is at a premium these days and, during his trip to the US this week, President Hu Jintao has been looking to some of the world's great innovators for help, including Bill Gates.

You can drive for hours in southern China in the cities around Shenzhen and just see factories everywhere you look.

But they don't come much bigger than the Taiwanese electronics group Foxconn. It makes motherboards and other components and its parts feature in nearly every electronic device, from mobile phones to laptops.

Estimates vary for how many people actually work at the complex once all its factories are added up, ranging from 70,000 to more than 200,000 people, one local businessman says, and the number keeps doubling and trebling, hard to keep track of. The canteen's butchers slaughters 3,000 pigs a day to feed the workers in the factories.

The overall figures give an idea of how important Foxconn is to Shenzhen. Last year, exports from Shenzhen broke the $100bn (£56bn) barrier for the first time, making it the first Chinese city to do so. The 10 biggest exporters in Shenzhen accounted for 28 per cent of the city's entire export value in 2005, and three of those firms were part of Foxconn.

Other big exporters in Shenzhen include the Quanta group, the world's largest notebook maker, and Compal followed close behind. Other Taiwanese manufacturers on the list included Inventec, BenQ and LiteOn, which make everything from servers to mobile phones on the mainland.

Just across the road from Foxconn is the Chinese telecoms giant Huawei, where thousands also work. Growth is so spectacular in this part of the world that the big firms are beginning to see signs of a labour shortage.

Shenzhen is the ultimate postmodern city. In 1980, the sleepy fishing village of 30,000 was turned into a special economic zone, a testing ground for capitalism in China just across the border from hypercapitalist Hong Kong.

Now there are nearly eight million people here, most of them workers from the provinces of Jiangxi, Hubei or Sichuan, living and working in the city's thronged mass of skyscrapers. Shenzhen is China's Dodge City, the hustler capital of New China, a classic frontier town, a place on the make, unashamedly nouveau riche, with an average age of less than 30.

The city is home to the world's biggest golf club, the opulent and breathtakingly large Mission Hills, which has 180 holes spread out over 10 courses, each designed by a different top golfer.

Shenzhen reportedly has 120,000 sex workers, making it also China's vice capital.

Deng Xiaoping, the leader who set the ball rolling in China in 1979 when he proclaimed: "To get rich is glorious", came here on his emperor-like tour in 1992, seeking to shake China out of the torpor and political isolation brought on by the 1989 massacre in Beijing.

His speech signalling economic reform given at Shenzhen train station was a defining moment in China's economic liberalisation.

You wonder what he would have made of Shaki, another beacon of liberalisation. Shaki manufactures sex toys, 90 per cent of them for export although the Chinese market is growing.

Its founder and general manager Fang Hong was working at a TV manufacturer when he went to Japan and his eyes were opened to the world of sex toys.

"These products are good for our health. They improve sexual dysfunction so people can enjoy erotic pleasure. It's human nature and we want to bring erotic pleasure all over the world," Feng said in an interview in a room full of blow-up sex dolls and boxes full of whips was cleared to make way for the foreign journalist.

China remains a prudish place and sex shops have only recently started to figure. Feng does not appear a prurient kind of man - to him and to most of his employees, including easily embarrassed assembly line workers, this is just a job and these silicon devices are just another product. More or less.

Later, walking through the factory floor as the firm's 300 employees assemble various battery-powered delights - 20 million sex toys a year, in fact - Feng explains why China is the world's factory.

"It's simple. Our competitive advantage is manufacturing - cheap labour costs, mostly." It is easy to imagine half of the world's manufactured goods coming out of China. In fact, you could imagine them coming out of Shenzhen and the area.

Most handbags in the world come from places such as Dongguan, adjacent to Shenzhen, where Wan-Peng Tseng, sales manager at Ya Jia, shows the materials that go into making the nine million handbags her company makes each year.

She and her husband Yi-Chen Deng are young Taiwanese who got married in February but decided to spend the honeymoon in the factory - they live in an apartment on the grounds, and will wait until next year to go on holiday. The handbag business is good and it's good to be available in case of problems.

Like many young Taiwanese, Tseng has a cosmopolitan background - she studied and lived in Highgate and Hawaii. But her father owns the company and duty called. Now she and Deng are learning about bags from the bottom up.

Ya Jia has 1,000 workers at three factories: the one in Dongguan, one in a remote part of Jiangsu province and a third in Hangzhou in the booming economic miracle province of Zhejiang in eastern China. Zhejiang province is the second most popular venue for handbag making in China and nearly all the bags from China come from these two provinces. Tseng's father works out of the Hangzhou factory - the air is there is traditionally considered good for the lungs. Turnover from the three factories is about £18m each year.

"The material is cut by hand, it's very labour intensive, and then stitched, then sewn together," she says as we walk through the factory.

There are masses of different materials lying around - lurid pinks for the Batman backpacks and black canvas for the iPod holders. Then there are the piles of leatherette for white and brown handbags, which many of the 200 workers in this plant are working on today. The factory works eight hours a day and Tseng says the government is very strict on making sure rules on working conditions are observed.

Most workers earn about £70 a month, which is about average for the area. The high-speed seamsters are on about £100 a month.

The raw materials for the handbags are locally produced, although a lot of items also come from Yiwu, the material capital of China, which is not far from Hangzhou and is also famous as the place where over half of the world's socks are made.

There are 20 firms in the industrial estate making handbags, some of them with more than 1,000 workers. All told there are nearly 6,000 handbag manufacturers in China, and more than 2,000 are big companies. The latest data is three years old, but even in 2003 there were 300,000 workers in the industry and total annual sales of £2.75bn.

There are more sinister reasons why China is the world's factory. Non-government trade unions are banned in China and organising strikes can lead to imprisonment. At the same time, the growing labour shortage means there have been individual incidents of industrial disputes at factories where workers call for more money or better conditions. There is still exploitation of workers in factories, particularly of children. The sweatshops using child labour still exist in southern China, although they are moving further inland to escape the attentions of increasingly vigilant state agencies.

Added to that, there is an element of exaggeration and Chinese hubris about China's manufacturing muscle. According to World Bank data, the United States' share of global manufacturing industry has remained consistent at about one quarter of the world total and Japan, too, is still far stronger than China.

And it's probably more accurate to discuss China as the world's biggest assembly line at the moment, as there is little "value-added" at a local level for the time being.

But China is rising quickly, particularly when it comes to value-added manufacturing, which was reported at £135bn in 1995, £228bn in 2001, and £392bn in 2004, compared to the UK which peaked at £142bn in 1998.

By some estimates, about two-thirds of the value of Chinese products is imported and much of what is described as high-tech manufacturing is in fact low-tech assembly of high-tech goods.

While the US has seen rising output from its factories, employment in the sector is declining, a sign of how much more productive American workers are than Chinese workers. The Chinese government is keen to replicate that kind of productivity.

Driving that new approach will be companies such as Lenovo, who few outside, or even inside, the IT industry had heard of before 2004, when it bought IBM's PC business. It expects to buy £670m worth of Microsoft software in the next 12 months, including about £112m for the Chinese market.

Two decades of growth have given Chinese companies the cash to buy foreign firms and they are coming up with better products.

At the Hongti Community Canteen in the Bagualing Industrial Centre in Shenzhen, workers pick up their food at the windows and eat them at long canteen tables. Like everywhere else in Shenzhen, no one appears to be over 30 years of age and most are women; 60 per cent of migrant workers are female.

Qu Jan, who works for a computer screen company, says: "I like living in Shenzhen because it's warmer than my home town of Jilin. My husband and I have an apartment here," she said, sipping from a Pepsi can emblazoned with a picture of the Arsenal striker Thierry Henry.

The heart of manufacturing

* Shenzhen has been China's biggest exporter since 1993 and state media reckons high-tech exports accounted for almost half of these exports, growing 34 per cent year-on-year

* According to China's Commerce Ministry, mainland China's 100 largest exporters in 2004 were electronics manufacturers: 53 of them were foreign-invested companies, 21 of which were Taiwanese

* Foxconn's founder. Terry Gou, from Taiwan, is listed in 'Forbes' rich list as the 147th richest man in the world

* Mr Gou founded Hon Hai Precision, which is the world's largest contract manufacturer and Foxconn is its majority-owned international division. Foxconn shares have tripled in value since they were listed last year in Hong Kong

* Gou pays himself an annual salary, one Taiwanese dollar, slightly less than 2p. He prefers to live off the dividends of his shares in the company

* Foxconn also has a subsidiary company that is based in Renfrew in Scotland.