BW Communities

The Losing Game

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Looking Down: As the western consumer pockets run dry, the Chinese export market looks grim (AP) With Santa Claus doling out bailout packages to fallen US financial giants, this Christmas he may not have much for China, the US’s biggest trading partner. The slowing down of the American economy has sledge-hammered Chinese manufacturing and exporting, especially in clothing and toys. “The winter has come,” says Joey Zhou, marketing manager at Wenzhou Hashun Garments, an export unit based in the Zhejiang province of southeast China. Zhou recently lost a large American order, after a month’s negotiations, to recession. Tens of thousands of clothing companies such as Zhou’s, located in the Yangtze Delta Economic Zone, are facing a similiar crisis. Despite a decade’s relationship building with US businesses, Wengzhou Hashun is now rethinking strategies to shift its focus from the US to Europe and Australia. “We barely gained much profit from America this year,” says Zhou. While the $700-billion (Rs 34.3 lakh crore) US bailout plan has inspired a trillion-euro (Rs 62 lakh crore) helping hand for Europe, the Chinese government has remained conspicuously silent through the ongoing global finance crisis. “Most companies are cutting off the industries with poor business in order to confront the current exporting challenge,” says Ning Xiangdong, professor of economics at Tstinghua University. For instance, the Shanghai Electric Group’s more than 100 enterprises and 200,000 employees have now been cut down to 82 companies and 115,000 workers; 282 low-profit enterprises have also been stripped away. Conversely, Hong Qingting, one of the largest shoe manufacturing and exporting companies, diversified into education and banking in 2004, but is now refocusing only on shoe production. Many large Chinese enterprises, such as the Shanghai Automobile Industry Cooperation Group and Jinjiang International, are also tightening their belts. Wear And Tear Post-1979, when Deng Xiaoping called for China to be opened up, even small, family-held enterprises acquired machinery and shipped products for American dollars. In recent years, companies such as Zhou’s, with around 100 employees, could earn in excess $50 million in annual revenues, crafting the legend of multi-billion dollar garment trade with the US. With the fall in demand from foreign markets, principally the US, that story has hit a disastrous pause. The national customs’ survey shows that garment exporting revenue has dropped by almost 10 per cent, and garment exports growth rate has fallen by over 20 per cent. Some exporters say that 30,000 Chinese workers lose their jobs for every 1 per cent decrease in garment exporting revenue. This spring, China’s garment export to the US reflected negative growth for the first time. “We no longer take American orders,” says Liu of Shenzhen Hongsheng. “(They are) too small to bother with.” The firm, with a staff of five and annual revenues in excess of a million dollars, now focuses on the Western European market. Unlike the US, Europe has already eased restrictions on Chinese garment exports, of which it is now the top importer, leaving the US to occupy the second place, followed by Japan. Between January and June 2008, Chinese clothing exports stood at $49.37 billion to the US, $46.34 billion to Japan, and $122.53 billion to the European Union nations. But the US alone has not caused the ongoing troubles. India and Bangladesh have competed fiercely, and the 5 per cent value appreciation of the yuan has made Chinese garment exports costlier. Domestic inflation and a 10 per cent hike in the consumer price index led to higher raw material and labour costs. Also, the Chinese authorities reduced the garment exporting rebate rate, which lowered export profits. The restrictions imposed by the Sino-US textile pact, signed by the two nations in 2006 after seven rounds of negotiations, is another deterrent. Bowing to intense political pressure that Chinese clothing was stealing jobs from Americans, the memorandum assures the US’s privilege to control the quantity and items of garments exported from China, till the end of this year. For example, import of Chinese underwear and cotton pants has been restricted by the US. Many topline garment exporting companies in the Yangtze Delta area are calling 2008 “catastrophic”. And new solutions are sought. The Hongdou Group, with an export network reaching 20 countries and annual revenues of over a billion dollars, has now invested in Cambodia, which is exempt from garment import restrictions imposed by most western countries. Hongdou expects to save 40 per cent in production costs with its Cambodian processing base. Toys Are Us China is also the world’s largest manufacturer of toys, and supplies three quarters of global demand, half of which is made in the city of Dongguan in the Guangdong province. Residents fondly call it the Global Toy City. About 4,000 toy factories dot Dongguan and drive its economy. But this year, the Dongguan City Toy Association forecast that half of its toy enterprises will disappear within the next two years. This week, one of the largest toy enterprises, the Hejun Group, shut two factories and laid off 6,500 workers after its deficit crossed $70 million in the first half of the year. Now, the local government has to pay its workers $3.5 million in arrears. Hejun’s bankruptcy was caused by mining investments, a recourse from sharply declining profits in traditional toy manufacture. Toy manufacturers reel under the same problems as garment exporters. The question the Chinese are asking is not if there will be another Hejun, but whom. Exporters helped create the crisis at least in part. Private entrepreneurs of the Yangtze Delta Economic Zone ‘garment kingdom’, for instance, made other ambitious investments. The Wenzhou Housing Investment Group is often cited as an example of this avarice. Hundreds of tycoons from Wenzhou city flung their fortunes into real estate — it is said that members of the group took bags of cash and bought scores of apartments and villas, pushing up realty prices in big cities such as Shanghai, Fuzhou and Beijing. But last year, the Wenzhou tycoons’ manufacturing profits plummeted, leaving them with little to spare for real estate. Indeed, the American crisis has only exacerbated matters. Meanwhile, the once reliable American clients have begun postponing payments. Dongguan toy exporters say that monies due in 30 days are now delayed by as much as six months. It is difficult to arrive at approximate values for the number of businesses that have made losses, their extent and that of their workforce — official sources do not provide any. In Shenzhen city, at heart of the Zhuhai Delta Economic Zone, Qiu, an employee of Zhaohua Exporting, says her company’s revenues fell by a third this year. Her work includes helping manufacturers, mostly toy factories, report their products to customs. “I clearly see there have been fewer orders from the US,” she says, explaining that the weeks before Christmas are usually the most demanding. “I am not sure if I will need to work that hard this year. I miss those busy days.” bweditor@abp.in (Businessworld Issue 4-10 November 2008)