Small firms in Zhejiang confront 'life or death' struggle to survive
By Hu Xiaocen |
July 10, 2012, Tuesday
|
Print Edition
Print Edition
WITH export markets in the grips of a global slowdown, domestic wages rising and bank financing hard to come by, China's smaller, mostly privately-owned businesses are struggling to survive.
Nowhere is that more evident than in Zhejiang Province southwest of Shanghai, one of the nation's cradles of small enterprise.
The province is home to an estimated 3 million small and medium-sized businesses, which are generally defined as companies with under 300 employees.
"It's not just a bottleneck we're facing; it's a matter of life or death," said Andy Jin, the second generation of what started as family-owned textile business in Tonglu County.
Jin said the business once ranked among China's top 500 small and medium-size enterprises (SMEs), making apparel for global brands such as Burberry and Guess. In 2006, his father, sensing that such manufacturing was going to hit tougher times, sold the clothing factory and the family became garment industry middlemen.
"Trading with our European customers continued," Jin explained. "We take orders from overseas and look for the right companies to fill them. We became a reseller instead of a manufacturer, and it was a good decision because making clothes for big brands is no longer very profitable. I know factories out there that are barely surviving."
Boost productivity
The Jins' transition into the service industry may not be the norm for the troubled smaller firms in Zhejiang.
Becoming a wholesale agent is not all that expensive because investment in heavy equipment isn't necessary. But exiting manufacturing can be problematical because there are few takers for factory sales nowadays.
So what's left for small manufacturers with their backs against the wall?
Li Yang, deputy dean of the Chinese Academy of Social Sciences, said one solution would be to improve the productivity of factories and help them move up the value chain.
"People think 'transformation' only means shifting to the services industry, but that's an outdated idea," Li wrote in a commentary published two weeks ago. "I think 'transformation' means improvement in production efficiency."
"Latin American countries have service-intensive economies, but they still have fallen into the middle-income trap, stuck in no longer competitive export markets due to rising wages. They are still behind advanced economies that produce high-value goods because they rushed into the services industries with low efficiency," he added.
Li suggests that the business climate would be greatly improved in China if the government moved to the back seat and let markets do the driving.
"Let the market decide," he wrote. "No preferential policies from the government. We have learned lessons from the government making decisions instead of the market."
Li gave one example.
"In the 1980s the government decided to restrain the development of the leather industry due to possible oversupply," he wrote. "But people were still pulled into the industry by the lure of considerable profits. Then the profits were gradually diluted by competition, and through the process, the leather industry has become a major industry."
But attaining efficiency and higher productivity can be costly. Small manufactures need to hire more skilled workers and buy advanced machinery. Where is the money?
OEM plants suffer
"The original equipment manufacturing (OEM) factories in China have thin profits, and they are starving for cash to pay their workers and rents," Jin said. "They have very limited resources to undergo transformation. If you don't have a guarantee for a bank loan, you go to peers who are willing to use their assets to guarantee your repayments to the banks. But even a good buddy won't do it free for you. So you also cover for him when he's in trouble."
A network of mutual guarantees between companies has become commonplace in Zhejiang, often with bitter results.
Huang Jian, chairman of a famous leather producer in Zhejiang, fled with more than 1 billion yuan (US$158 million) in debts in May. The Industrial and Commercial Bank of China had lent his company 50 million yuan, with two other companies in Hangzhou providing a joint loan guarantee.
Lenders regard small businesses with great skepticism. Webs of companies covering loans for one another have pushed up bad loans. Risk aversion among banks has resulted.
Yang Xiaoping, former director of the Zhejiang office of the China Banking Regulatory Commission, has urged the government to take a page from the experience of other countries.
"Small business financing is an international challenge," Yang wrote in a commentary published two weeks ago. "It's a common practice around the world for governments to establish credit guarantee systems for small businesses to assist them with getting bank loans."
Beyond financing, smaller businesses often need advice on how to manage their businesses more effectively.
At the China International Consumer Goods Fair in Ningbo in June, an annual event sponsored by the Ministry of Commerce and the Zhejiang provincial government, special booths were set to draw smaller companies and lenders together.
"The business owners had direct communication with financial institutions and received free consultation about sustainable development and healthy capital flow," said a fair spokesman.
Jin remains skeptical. He said many of his customers are shifting orders to cheaper markets like Vietnam and Pakistan.
"Good decision-making is important for businesses," he said, "but all too often it comes from hard-learned lessons."
Nowhere is that more evident than in Zhejiang Province southwest of Shanghai, one of the nation's cradles of small enterprise.
The province is home to an estimated 3 million small and medium-sized businesses, which are generally defined as companies with under 300 employees.
"It's not just a bottleneck we're facing; it's a matter of life or death," said Andy Jin, the second generation of what started as family-owned textile business in Tonglu County.
Jin said the business once ranked among China's top 500 small and medium-size enterprises (SMEs), making apparel for global brands such as Burberry and Guess. In 2006, his father, sensing that such manufacturing was going to hit tougher times, sold the clothing factory and the family became garment industry middlemen.
"Trading with our European customers continued," Jin explained. "We take orders from overseas and look for the right companies to fill them. We became a reseller instead of a manufacturer, and it was a good decision because making clothes for big brands is no longer very profitable. I know factories out there that are barely surviving."
Boost productivity
The Jins' transition into the service industry may not be the norm for the troubled smaller firms in Zhejiang.
Becoming a wholesale agent is not all that expensive because investment in heavy equipment isn't necessary. But exiting manufacturing can be problematical because there are few takers for factory sales nowadays.
So what's left for small manufacturers with their backs against the wall?
Li Yang, deputy dean of the Chinese Academy of Social Sciences, said one solution would be to improve the productivity of factories and help them move up the value chain.
"People think 'transformation' only means shifting to the services industry, but that's an outdated idea," Li wrote in a commentary published two weeks ago. "I think 'transformation' means improvement in production efficiency."
"Latin American countries have service-intensive economies, but they still have fallen into the middle-income trap, stuck in no longer competitive export markets due to rising wages. They are still behind advanced economies that produce high-value goods because they rushed into the services industries with low efficiency," he added.
Li suggests that the business climate would be greatly improved in China if the government moved to the back seat and let markets do the driving.
"Let the market decide," he wrote. "No preferential policies from the government. We have learned lessons from the government making decisions instead of the market."
Li gave one example.
"In the 1980s the government decided to restrain the development of the leather industry due to possible oversupply," he wrote. "But people were still pulled into the industry by the lure of considerable profits. Then the profits were gradually diluted by competition, and through the process, the leather industry has become a major industry."
But attaining efficiency and higher productivity can be costly. Small manufactures need to hire more skilled workers and buy advanced machinery. Where is the money?
OEM plants suffer
"The original equipment manufacturing (OEM) factories in China have thin profits, and they are starving for cash to pay their workers and rents," Jin said. "They have very limited resources to undergo transformation. If you don't have a guarantee for a bank loan, you go to peers who are willing to use their assets to guarantee your repayments to the banks. But even a good buddy won't do it free for you. So you also cover for him when he's in trouble."
A network of mutual guarantees between companies has become commonplace in Zhejiang, often with bitter results.
Huang Jian, chairman of a famous leather producer in Zhejiang, fled with more than 1 billion yuan (US$158 million) in debts in May. The Industrial and Commercial Bank of China had lent his company 50 million yuan, with two other companies in Hangzhou providing a joint loan guarantee.
Lenders regard small businesses with great skepticism. Webs of companies covering loans for one another have pushed up bad loans. Risk aversion among banks has resulted.
Yang Xiaoping, former director of the Zhejiang office of the China Banking Regulatory Commission, has urged the government to take a page from the experience of other countries.
"Small business financing is an international challenge," Yang wrote in a commentary published two weeks ago. "It's a common practice around the world for governments to establish credit guarantee systems for small businesses to assist them with getting bank loans."
Beyond financing, smaller businesses often need advice on how to manage their businesses more effectively.
At the China International Consumer Goods Fair in Ningbo in June, an annual event sponsored by the Ministry of Commerce and the Zhejiang provincial government, special booths were set to draw smaller companies and lenders together.
"The business owners had direct communication with financial institutions and received free consultation about sustainable development and healthy capital flow," said a fair spokesman.
Jin remains skeptical. He said many of his customers are shifting orders to cheaper markets like Vietnam and Pakistan.
"Good decision-making is important for businesses," he said, "but all too often it comes from hard-learned lessons."
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