Move up or out
By WANG LAN (China Daily)
2008-09-01
Slowing exports in China is pushing many low-cost manufacturers out of business and forcing others to either merge or restructure.
Although the process may seem painful, especially at a time of tightening bank credit, economists and industry experts say it can help the economy achieve a more balanced, and therefore, more sustainable growth in the longer term.
“The slowdown in export growth may mount pressure on the industrial sector to expedite its restructuring, with more emphasis on quality and marketing,” says Mei Xinyu, a researcher at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce. This, he says, would represent a slow but significant shift in focus of China’s massive industrial machine from exports to domestic sales.
“Of course, China could move toward a balanced economic growth without a slowdown in exports as well, but the process could take much longer,” Mei adds.
Growth of merchandise exports in the first six months of this year dropped by 5.7 percentage points from a year earlier to 21.9 percent, latest trade figures show. Total imports of goods in the first half, by contrast, jumped 30.6 percent, up 12.4 percentage points from a year earlier, narrowing the nation’s trade surplus by 11.8 percent to $111.9 billion.
Despite moderate export growth, China’s GDP growth is still largely driven by overseas shipment. Economists and experts say an excessively heavy reliance on exports to fuel economic growth is unsustainable because a rapidly expanding trade surplus could not only increase trade frictions with importing countries but also requires constant government intervention to moderate the expansion of domestic money supply and, more importantly, bank credit.
Mei and other economists say it is high time the domestic industry upgraded and moved up the value chain to high-profit segments. This, they say, can only be accomplished by developing an internal market large enough for domestic enterprises to establish a track record of quality in design and manufacturing.
Economists say that after many years of persistent increase in exports, the prospect of the overseas marketplace expanding even further is seriously constricted, especially at a time of declining global demand. Instead of increasing export volume, Chinese enterprises should make greater efforts to narrow the gap between the prices of exports from China and retail prices in the global markets by adding more value to the traditionally low-cost goods, experts say.
“For a long time, we have achieved export growth by increasing volume rather than value,” says Mei. “But the real way to sustain exporters’ growth is to improve production efficiency and profit margins, which will, in turn, add greater value to the products.”
Mei suggests exporters establish their own brands and develop high-value-added products to gain international competitiveness and increase their capabilities to withstand risks resulting from uncertainties in international markets. “Export enterprises need to move up the value chain by establishing their own brands, marketing, research and development capacity and distribution networks.”
Economists and industry analysts say a more convenient way for Chinese exporters to climb the value chain is through acquisition of assets from established global brands. Because of the renminbi’s appreciation against the dollar and many other major world currencies in the past two years, foreign assets have become a lot cheaper and hence easier for Chinese businesses to pick them up.
The experts also say the government should make it easier and provide more incentives for domestic companies to expand overseas. Hard times are testing the will and capability of Chinese enterprises to wean themselves from the comfort of being “the factory of the world” to become one of the major innovators, economists say.
Since late last year, a combination of factors including falling overseas demand, renminbi appreciation and rising material and labor costs have squeezed profit margins of low-end manufacturers, many of whom have been forced out of business.
Take toy exporters for example. In the first seven months of 2008, toy exports totaled $4.18 billion, with the growth rate dropping 22.4 percentage points to 2.1 percent. In Guangdong province alone, toy exports during the same period totaled $2.91 billion, with the growth rate slowing 39 percentage points to 4.8 percent. An estimated 3,618 toy manufacturers in Guangdong were put out of business in these first seven months.
It’s the same story in Zhejiang province, home to many textile and garment exporters. In the first five months of 2008, there were 10,700 enterprises above a prescribed scale of operation running at a loss, accounting for 19.6 percent of the total.
Wang Jianying, general manager of a toy manufacturer in Yiwu city of Zhejiang, tells China Business Weekly: “More and more exporters find that without a better designed and highly innovated product range, it is difficult to survive the current situation, when the yuan’s rise against US dollar and other major currencies is eating into our revenue as labor and raw material costs are also increasing. In the past, like most toy exporters, our USP (unique selling proposition) was low price, but now we have to turn to high-value-added orders, which can generate much higher profit and sustain our business.”
In addition to the efforts of enterprises to restructure their products and improve profit margins, the central government and some local governments have also taken measures to address the problem of insufficient funding for enterprises hit by the credit curbs to combat inflation.
In early August, the National Development and Reform Commission said it was considering establishing a bank specializing in lending to SMEs to broaden their sources of finance. A week later, the People’s Bank of China, the central bank, increased the annual loan quota by 5 percent for national commercial banks and by 10 percent for local commercial banks, taking into consideration that SMEs make up the larger proportion of their clients. The increase in lending as a result of the increase in loan quota is expected to go to SMEs, which have a stronger demand for loans than the large State-owned enterprises, economists say.
Some local governments have also encouraged the establishment of microcredit firms to provide more loans to local enterprises. The first batch of such microcredit lenders, mainly in Zhejiang, will start providing loans from this month after getting the go-ahead. Other provinces such as Guangdong, Jiangsu, Anhui and Inner Mongolia are also preparing for the launch of microcredit lenders.
