Chinese Suppliers: Orders Become Burden

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In 2011, orders coming in flock could not upbeat exporting enterprises.

Journalist of Half Month Talk found in an investigation that this year many companies showed hesitation and choosy when taking orders. They prefer short term order to long term one, and small-scale to big purchase. Even if purchasers provide higher offer, they would not like to take.

Why did orders that used to be their favorites become hot potatoes? Experts believe that China’s small and medium sized foreign trade companies are suffering from impacts of increasing cost of raw material and human resource, difficulty for financing, exchange rate risks as well as stringent of power shortage. Being influenced, the competitive advantage of China Made and China Price are losing, which calls for the acceleration of upgrading, increasing of added value and enhancing of bargain ability, so as to strengthen the discourse power for foreign trade. As the same time, related government departments should also consider from policy aspect on how to alleviate burdens and taxes on small and medium companies and to improve services to strengthen enterprises’ competitive power.

“Commodity Price” Push up Cost of Raw Materials and HR

“Price of silk is 200 thousand yuan per ton last year, while till May this year, it has risen to 400 thousand yuan. The increasing cost pressed greatly on the traditional industries with thin profit”, Cai Gaosheng, Chief of Board of Guangdong Silk-Textile Group said.

Since the second half of 2010, a bunch of commodities entered a new round of price rising period internationally. Major industrial materials such as crude oil, iron ore and non-ferrous metal all had a 20%-80% growth. Data from Guangdong Department of Foreign Trade and Economic Cooperation shows that as the increasing of price of raw materials and human resources, 95% enterprises foresee a rising of 10%-20% of export cost. Meanwhile, approaching 45% enterprises predict their profit to shrink. The proportion increases by 8.3% than last year.

Mo Tao, General Manager of Guangxi Liuzhou LMZ Co told journalist that materials being used to manufacture toothpicks including essence, humectants and genuine soap were all raised their price by 20%. Yet the company dares not to raise its price by the same rate in the quotation, because they may scare the purchasers away.

In addition, human resources are so hard to recruit this year, and the cost of labor increased so greatly, that they have to add two more automatic producing lines to reduce dependence on manpower. Though LMZ increased their quotation by 10%, such price could only break even, because the outcomes of dramatic growth of price is loss of export competitive power, and purchasers would turn to other brand for alternatives, even transfer their orders to other countries or regions with lower price.

“I feel annoying whenever talking about it. Facing the enormous pressure of cost, we don’t have comparatively strong bargain power, thus we have to keep market share even with no profit. Now we feel headache instead of happy when seeing orders.” Mo said.

Secretary General of Guangdong Council for the Development Promotion of Small and Medium Enterprises, Xie Hong claimed that many small and medium companies are still in the primary phase of upgrading. When impacted by commodity price, they should advance their innovative ability, extend product value chain and strengthen bargain ability of terminal products.

With “Financing Impact”, enterprises call for fair financing chance.

Journalist found in the interview that the reason for most enterprises declining big offers is that they don’t have enough capital used in advance expenditure to start the production. As the capital circulation is slowing down, and loan resource becoming limited, commercial banks work more strictly on choosing and investigating processes.

“Now the rate of loan is about to float up by 30%-50% from basic rate. Such high financing cost has been beyond enterprises’ bearing ability. If we take orders and produce, it will be like we are working for purchasers and banks with no return”, said Luo Jiehua, marketing manager from Guangdong Lisheng Textile Product Co., Ltd.



Chief Strategy Analyst of GF Securities, Cui Yong said, when dealing with financing project of companies with different scales, the fixed cost that commercial banks spend are usually similar, yet profits diverse greatly. Generally speaking the profit of a successfully operated big company loan project could be worth of that of dozens of small companies. And the financing risk of a big company is always lower than small and medium companies. Thus some commercial banks were not positive enough to financing demands of small and medium companies.

Many principals of small and medium foreign trade companies that gave interview have called for banks concern of their demands and suggested that banks’ financing support should be considerable. Not long ago, China Banking Regulatory Commission issued a Notice on Assisting Commercial Banks to Further Improve Their Financial Services to Small Enterprises, urging commercial banks to support the loan to small enterprises first on the basis of prudence.

Experts suggest, the acceleration of interest rate marketizing process could partially improve the financing environment for small and medium companies; meanwhile, government should expand capital source, lead social capital to equity financing and make full use of market mechanism, so as to establish a perfect financing service chain including venture capital, equity capital and debt capital for enterprises at different growth period.

“Exchange Rate” Squeezing Profit Margin

Exchange rate of RMB to USD broke through the line of 6.5 on April 29. During the sequential 19 trading days from Qing Ming Festival to the end of April, the rate of RMB to USD raised altogether by 574 points with a growing rate of 0.88% monthly. It is predicted around the market that the rate of RMB will keep growing and the exchange elasticity will be enhanced as well.

Huang Younong, Manager of Import & Export Department of Foshan Lighting Co made a calculation for journalist: for an order of 2 million US dollars, exclude 20% advance payment, the rest 80% i.e. 1.6 million USD are exposing to the risk of exchange rate. Suppose the rate raise by 1% three months later when receiving the rest money, the company will suffer a loss of 16 thousand USD i.e. about 100 thousand RMB.

“Every time when RMB appreciates by 1%, the profit will shrink by 5%”, Huang said.

Division Chief of Finance Department of MOC, Yuan Xiaoming expressed earlier that RMB is facing a huge pressure of appreciation. The average rate of profit of export enterprises in 2010 is 1.47%, lower than the one of industrial enterprises. From January to February 2011, it fell further to 1.44%.

Facing the fluctuation of RMB rate, insiders said, due to the fact that small and medium enterprises in China are still in a lower part of industrial pyramid, thus lack of bargain power and could only passively digest the loss from exchange rate. Zhong Shan, vice minister of MOC believes that the appreciation of RMB will be a long term challenge for enterprises, and they could only deal with it effectively through accelerating the establishment of independent brand, improving innovation ability and speeding up the industry upgrading process.

“Power Shortage” Appear Early Enterprises Want Unload

“Since the start of April, the blackout almost happened 2-3 days per week, sometimes not even noticed. Output has been reduced by 30%.” Chen Bo, boss of Tengfei Clothing Factory said.

Information from IICG says that Guangdong’s shortage has reached 1-2 million kilowatts. The largest gap in second season may reach 4 million KW. It is expected that not until October, as the peak time past, will the related measures will also be stopped.



Principal of Guangzhou Jiamei Clothing Factory, Liu Hui told journalist, power shortage this year came several months earlier than before. His enterprise has been forced to adjust manufacturing time. “The cost of labor and production has already been pretty high, and now we have to face the suspension from power shortage. The profit margin was further squeezed. We will stop taking orders for a while on the completion of this batch. We will see after pulling through this period.” Liu Hui said.

Many principals of small and medium enterprises reflected during interview that the production situation this year is more severe than any time before. And the power shortage that came earlier confused the producing rhythm which made the situation more difficult to cope with.

Insiders said that the series of pressure enterprises are facing also remind us that government should take more social responsibilities. Xie Hong said, all kinds of taxes enterprises are bearing, when added up, is such a huge burden that evasion of tax has become an inevitable choice to make a profit.

“The taxes proportion enterprises are bearing is pretty high, in which case, some enterprises may evade tax by power rent-seeking, which may bring some profit in a short term, but the bad record would probably influence future development of the enterprises.” Xie Hong said.

Experts including Xie Hong suggested, government should take more responsibilities in helping small and medium enterprises unload their burden. Measures include slimming down administrative approval process, revising enterprise related policies, alleviating burdens on them and reducing repeated evaluations and inspections as well as breaking the industry access barrier, especially that thoroughly checking out service charging items, and at the same time, reducing their sales tax, so as to make small and medium enterprises run with no worries.

 

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