Slowdown bites hard as firms struggle

By Yu Ran | China Daily | Updated: 2012-02-01 07:52

The city that was made famous by its appetite for private enterprise feels the pinch as demand dwindles

WENZHOU, Zhejiang - After reaching a peak of trading success in the early years of this century, export-based manufacturers in Wenzhou, the birthplace of China's private economy, are now struggling as the business environment worsens.

Walking on to the second floor of Ye Jianqing's factory, one sees only about 100 people working on the five production lines dispersed across the 500-square-meter space. Open packs of spectacles lie on the ground and the machinery provides a cacophony of background sounds.

"I've cut the number of production lines from 10 to five since the end of 2008 when the whole industry started to take a bad turn and began to see lower profits from exported goods," said Ye, who formed Wenzhou Zhenqing Glasses Co Ltd in the 1980s, making glasses for the domestic market initially, at a time when few people attempted to enter the private economy.

Back then, China was just starting to loosen the shackles of the planned economy and beginning to embrace the new model that later developed into a market-oriented economy.

Wenzhou, a secondary city in Zhejiang province - which has won national fame in recent years as a hotbed of enterprising merchants and the prime manufacturing base of tangible goods - was the first Chinese city to set up individual and private enterprises, in addition to a cooperative shareholder economy.

"I soon noticed that I could make more money selling the glasses overseas, rather than only focusing on the domestic market," said Ye.

Following in his footsteps, other Wenzhou producers began making and exporting goods such as cigarette lighters and turning the city into a base for light manufacturing.

At its peak in the 1990s, Wenzhou accounted for about 80 percent of the global market for lighters, provided by more than 3,000 manufacturers.

"We used to produce about 2,500 pairs of spectacles a day 10 years ago, resulting in annual profit of 500,000 yuan ($79,000) which was quite a lot for a privately owned business," said Ye.

However, China's increased export volume, based on manufacturing low-price products with relatively low profits, has led to trade frictions with other countries. Since the beginning of this century a series of trade measures such as anti-dumping and anti-subsidy levies imposed by European and US trading partners have posed a serious threat to Chinese manufacturers.

"Our low prices have not been an advantage since 2008 when the financial crisis occurred and brought a dramatic decline in overseas demand, coupled with the increasing costs of labor and materials in China as a whole," said Ye.

Currently, Ye's company has an annual profit margin of less than 5 percent, earned by manufacturing about 10,000 pairs of glasses a day. However, he's earning almost the same amount annually as he did 10 years ago.

"The number of orders has dropped dramatically in the past three years due to cheaper labor and lower material costs in countries such as India and Vietnam," said Ye.

Li Zhongjian, the manager of Zhejiang Tung Fong Lighter Industrial Co Ltd, is experiencing the same problems as Ye, struggling with declining overseas demand and the rising costs of the materials required for the production of lighters.

"Orders from Europe have decreased by 20 to 30 percent this year, compared with two to three years ago, and they keep declining," said Li.

He added that if the business environment remains unfavorable, he will probably consider selling his factory and look for other opportunities to turn a profit.

Last year, more than 2,000 enterprises in the city closed down, with more than half of them involved in manufacturing.

"I'd been in the shoe-export business for a dozen years, but I was forced to quit the industry due to a lack of operating capital," said Lin Hai, the owner of Wenzhou Zuoyou Shoe Co Ltd, who closed his factory earlier this year.

Making lower profits after paying his overhead - salaries, materials and the bills for day-to-day operations -Lin's company started losing money in 2009 and he eventually gave up after a two-year struggle.

"Fewer businessmen are willing to take the risk of entering or staying in the manufacturing-based industry anymore because business is fading faster than we anticipated," he said.

China Daily