Smaller players reeling from bale of bad news

2008-07-18 03:32:56 GMT       2008-07-18 11:32:56 (Beijing Time)       China Daily

A worker walks past lines of bobbins in a workshop of a textile company in Anhui province on July 9 2008. Small and medium-sized enterprises in the country have been reeling from a host of challenges that include rising material costs and sluggish global demand. [China Daily]

The big company names hog the headlines of global business, but China is a country of small enterprises.

They are known as the SMEs, or small and-medium-sized enterprises.

Used to riding on the economic growth of the past few decades, these SMEs are now faced with a host of new challenges.

There are nearly 300,000 SMEs in China, providing more than 56 million jobs compared with the 17 million in large companies, figures from the National Bureau of Statistics have shown.

Since the end of last year, SMEs in China have been hampered by rising material costs and sluggish demand worldwide, as well as by higher labor costs and new government regulations at home. As profit margins wear thin, many are throwing in the towel.

The name of the game has turned to one of waiting - waiting for the next cheap site to relocate businesses, waiting to learn of the next resource-saving technique, and perhaps, more importantly, waiting for any sort of guidance from Beijing for the road ahead.

Until then, anything goes.

Staying or leaving

It is a question that has been bugging Simon Leung for some time.

The Hong Kong businessman owns a toy factory in Dongguan, the southern boomtown famous for small manufacturing outfits set up by overseas investors.

For the last several months, Leung has been mulling over new inroads for his business - relocating his plant to Vietnam, or remaining in the Pearl River Delta city.

"It's not an easy choice," Leung told China Daily last Friday.

"I really don't know how I can make any profit by staying here, while relocating would bring with it more uncertainties."

Leung said his worries from staying in China are, among others:

*a rise in the minimum wage set by the local government;

*the government's raising of environmental standards;

*a short supply of labor and electricity;

*hikes in raw material prices;

*the appreciation of the yuan against the US dollar;

*and the new labor contract law which makes it more difficult to terminate employment contracts.

Yet, for all his grouses, moving to Vietnam is not expected to bring with it much assurance. Investors have to set up their own factories there and cannot rent manufacturing facilities as easily as in Dongguan, he said. That alone is making him hesitate.

There are other considerations, such as the region's unstable economic situation and the nascent logistics sector.

Ding Li, a researcher with the Guangdong Academy of Social Sciences, said many Hong Kong- and Taiwan- funded companies in the Pearl River Delta are in a situation similar to Leung's, especially those involved in labor-intensive sectors covering shoes, garments, toys, furniture, plastic products and hardware.

"If nothing is done by the government to reverse the situation, a growing number of labor-intensive firms in the Pearl River Delta, especially smaller ones with no more than 200 employees each, might close down or move out of the region," Ding said.

However, the researcher also pointed out that the larger firms will survive and will not easily give up their China operations.

Hard to quit

It is also unlikely that the current difficulties faced by the SMEs will last anything up to five years without the government stepping in.

"It is a difficult time, to be sure," Ding said.

"But it won't be easy for investors to just tear themselves away from the delta region's excellent infrastructure, convenient traffic, well-developed industrial chain of processes and logistics system."

Luo Bin, deputy director of the municipal economy and trade bureau of Dongguan, said the city can still afford to have a few thousand companies close down and relocate in one year.

Some of the city's companies also relocate part of their operations elsewhere and not many have moved out completely, Luo said.

For the city' administrators, the reason for the shutdowns and relocations is what matters most, he said.

"If these companies leave and complain downright about our worsening investment climate, then it would really spell trouble for the local economy," Ding said.

Citing government statistics, the official said 909 companies closed down last year, while 88 relocated. Both figures combined to account for 6 percent of Dongguan's total number of companies providing cross-border outsourcing services.

The number of relocations and closures is likely to increase from last year by, at most, 20 percent, he said.

Li Xinchun, a management professor with the Guangzhou-based Sun Yat-sen University, said in his analysis that when more closures take place, the government will have to be alert to their negative social impact and to issues such as unemployment compensation and training for re-employment.

Tough times

Of all the SMEs in China, export-oriented textile companies are usually thought to be the ones that suffer most.

Such is the case of the Weibang Airflow Spinning in the Xiaoshan district of Hangzhou city, Zhejiang province - as illustrated by the huge piles of cloth stacked up at the entrance to its factory.

"It's all our unsold stock," said He Suwei, Weibang's proprietor.

"There is still a lot more in our warehouses."

Like many other textile manufacturers in the Yangtze River Delta, Weibang is taking a big hit from dwindling export sales, thinning profit margins and ballooning stock.

"Our sales revenue is likely to suffer a 25 percent slump this year. And the profit margin probably will shrink to 2 percent from last year's 4 percent," He said.

He said his company, which made a profit of 80 million yuan ($11.7 million) last year, is facing its leanest time since it was established in 2001.

Although the cost of labor and raw materials rose 15 percent as of June from one year ago, He is fighting a price war with other local manufactures in a bid to grab the dwindling buying orders from the overseas buyers.

Within the district, about 70 percent of airflow spinning (a textile operation) companies had already shut down, he said.

Xiaoshan district is also known as one of the world's largest production centers of synthetic fiber.

Local textile operations reported a total output of 128 billion yuan last year, a growth of more than 20 percent over the previous year. Its production of synthetic fiber was more than 4 million tons, accounting for more than 15 percent of the nation's total.

However, huge "to-let" banners now hang out of many buildings in the main streets of what was once a boomtown.

The district's small textile companies have suspended almost 60 percent of its product lines this year, the Xiaoshan Textile and Printing/Dyeing Association said.

Even fairly large companies are feeling the pinch.

Zhejiang Huangmin Keer Textile Co., which covers an area of more than 120 hectares and saw a sales revenue of more than 700 million yuan last year, is also saddled with unsold stock stuffed in its all warehouses.

Huang Guogang, a senior executive of the company, told China Daily: "Our 16,000-sq-m warehouse was emptied of stock two years ago, but now its filled to the brim with 4,000 tons of unsold products."

The company admitted that its production lines and workers are working under capacity.

A source familiar with the industry said that a number of Xiaoshan textile workers had already been told not to go back to work, with each paid 25 yuan as daily compensation.

The latest report compiled by the Zhejiang provincial economy and trade commission said that 10,700 companies, or nearly 20 percent of the relatively large enterprises in the affluent province, reported losses during the January-May period, with energy and raw material prices spiking 11.4 percent, higher than the national average by 0.8 percentage points.

As a result, the light industry and textile industry, two cornerstones of Zhejiang's economy, suffered a total loss of 1.55 billion yuan in the first five months.

The future seems bleak for companies like Huang's.

"It's going to be the first time that our sales revenue is expected to see zero growth this year since our company was established in 2002," he said.

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