Businesses at a crossroads as economy shifts
By Ni Tao |
June 18, 2012, Monday
|
Print Edition
Print Edition
MORE than 10 years after China's entry into the WTO, its burgeoning manufacturing sector has earned the country the title of "the world's factory" and turned countless people into millionaires or even billionaires.
In an immense country the size of China, it's natural that corporate practices vary wildly from region to region, and even across the same industries. For instance, business people in Jiangsu and Zhejiang provinces have a distinct style of management and entrepreneurship not found elsewhere in the nation.
Shanghai Daily's special coverage of the Yangtze River Delta offers a kaleidoscope of businesses and the people who shape them. Through their stories, we see vital aspects of the Chinese and world economies.
The delta is a hub of private firms, numerous but often limited in size. They typically don't own world-famous brands or preside over large commercial empires. But in their own small way, they are successful and contribute to economic development.
These industry clusters have generally grown at the low-end of the value chain, but they contribute heavily to the well-being and stature of their communities.
An interesting question to ask is why so many of these small manufacturers have stuck to one or two products instead of diversifying into other, possibly more profitable realms.
The answer is complex. In some cases, these small entrepreneurs don't have the capital and expertise to go beyond what they know best. That has relegated many of them to outsource assembly work for big brand names. Without their own brands, they are stuck with paltry 5 percent or less profit margins.
Puppy economy
Management experts are constantly exhorting niche businesses to merge and consolidate. But many private firms in Zhejiang are skeptical that bigger may be better. Some are quite content to roll along as they always have, taking their lumps when economic conditions sour.
Zhong Pengrong has an explanation for this phenomenon. The Beijing-based economist famously called Zhejiang a "puppy economy" in 2002. Zhong doesn't use the term pejoratively.
He found that the modern corporate system hasn't taken root in Zhejiang.
The people in Zhejiang, he said, believe that the bigger a company, the more vertical its structure, the looser its internal controls and the higher its management costs.
Zhejiang businessmen reckon that everyone would be better off if they remain separate, said Zhong. He compares these separate, small- or medium-sized businesses to "puppies." Together, they can kill a "zebra," he said, referring to business rivals that are behemoths but less flexible and vibrant.
The defects of the "puppy economy," however, are as obvious as the advantages. Smaller "puppies" without the benefit of brands and consumer recognition run the risk of drowning in the first wave of any economic tsunami that crashes ashore. Many are now struggling with plunging orders, rising labor costs and a stronger yuan.
Struggling hard
We've already seen coastal companies moving operations further inland to take advantage of lower labor costs. Some businesses are struggling hard to create their own brands and to readjust their focus to the domestic market from overseas.
Although Chinese consumers are notoriously fond of foreign-brands at any cost, there are plenty of less affluent people in third- and fourth-tier cities who would jump at quality domestic brands.
Private businesses in the Yangtze River Delta are at a crossroads. They started out making buttons, socks and T-shirts, and now they stand at an industrial frontier that demands new products in such advanced sectors as renewable energy and biotechnology. How are they going to catch up, retool and move up the value chain?
Business columnist Wu Xiaobo has pointed out one way. Zhejiang businesses should stay in niche manufacturing and move their sales online, he suggests. In 2010, online shopping sales totaled 3 trillion yuan (US$476 billion), almost a sixth of the country's entire retail revenue. Given the potential, some struggling merchants in Yiwu have opened online stores, as my colleague Yang Jian has reported.
With state policy support, private financing promises to become the next growth engine after manufacturing for Zhejiang and Jiangsu provinces. Perhaps the next time Shanghai Daily publishes a Yangtze River Delta special, it will tell the story of the "world's factory" morphed into a sophisticated financial power. The story begins in the delta.
In an immense country the size of China, it's natural that corporate practices vary wildly from region to region, and even across the same industries. For instance, business people in Jiangsu and Zhejiang provinces have a distinct style of management and entrepreneurship not found elsewhere in the nation.
Shanghai Daily's special coverage of the Yangtze River Delta offers a kaleidoscope of businesses and the people who shape them. Through their stories, we see vital aspects of the Chinese and world economies.
The delta is a hub of private firms, numerous but often limited in size. They typically don't own world-famous brands or preside over large commercial empires. But in their own small way, they are successful and contribute to economic development.
These industry clusters have generally grown at the low-end of the value chain, but they contribute heavily to the well-being and stature of their communities.
An interesting question to ask is why so many of these small manufacturers have stuck to one or two products instead of diversifying into other, possibly more profitable realms.
The answer is complex. In some cases, these small entrepreneurs don't have the capital and expertise to go beyond what they know best. That has relegated many of them to outsource assembly work for big brand names. Without their own brands, they are stuck with paltry 5 percent or less profit margins.
Puppy economy
Management experts are constantly exhorting niche businesses to merge and consolidate. But many private firms in Zhejiang are skeptical that bigger may be better. Some are quite content to roll along as they always have, taking their lumps when economic conditions sour.
Zhong Pengrong has an explanation for this phenomenon. The Beijing-based economist famously called Zhejiang a "puppy economy" in 2002. Zhong doesn't use the term pejoratively.
He found that the modern corporate system hasn't taken root in Zhejiang.
The people in Zhejiang, he said, believe that the bigger a company, the more vertical its structure, the looser its internal controls and the higher its management costs.
Zhejiang businessmen reckon that everyone would be better off if they remain separate, said Zhong. He compares these separate, small- or medium-sized businesses to "puppies." Together, they can kill a "zebra," he said, referring to business rivals that are behemoths but less flexible and vibrant.
The defects of the "puppy economy," however, are as obvious as the advantages. Smaller "puppies" without the benefit of brands and consumer recognition run the risk of drowning in the first wave of any economic tsunami that crashes ashore. Many are now struggling with plunging orders, rising labor costs and a stronger yuan.
Struggling hard
We've already seen coastal companies moving operations further inland to take advantage of lower labor costs. Some businesses are struggling hard to create their own brands and to readjust their focus to the domestic market from overseas.
Although Chinese consumers are notoriously fond of foreign-brands at any cost, there are plenty of less affluent people in third- and fourth-tier cities who would jump at quality domestic brands.
Private businesses in the Yangtze River Delta are at a crossroads. They started out making buttons, socks and T-shirts, and now they stand at an industrial frontier that demands new products in such advanced sectors as renewable energy and biotechnology. How are they going to catch up, retool and move up the value chain?
Business columnist Wu Xiaobo has pointed out one way. Zhejiang businesses should stay in niche manufacturing and move their sales online, he suggests. In 2010, online shopping sales totaled 3 trillion yuan (US$476 billion), almost a sixth of the country's entire retail revenue. Given the potential, some struggling merchants in Yiwu have opened online stores, as my colleague Yang Jian has reported.
With state policy support, private financing promises to become the next growth engine after manufacturing for Zhejiang and Jiangsu provinces. Perhaps the next time Shanghai Daily publishes a Yangtze River Delta special, it will tell the story of the "world's factory" morphed into a sophisticated financial power. The story begins in the delta.
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