Christmas Chill

NOT SO JOLLY: The waning consumer sentiment in Western countries has put a freeze on Christmas orders from many Chinese exporters (MA KA) 
 
Wandering through his toy factory in Shenzhen, Guangdong Province, Lin Zhanpeng barks orders as a few workers move around machines and clean up the dusty workshop—not for production but for a half-year rent-out.

During the past three months, supposedly the busiest season of the year, the workshop has remained idle with assembly lines accumulating dust. Only two years ago, this would have been unimaginable, as outpouring export orders kept all of Lin's machines humming for extra hours to fill store shelves in the run-up to Christmas.

"This year the festive orders are coming in, but at least 30 to 40 percent fewer than last year," said Lin, founder and owner of Shenzhen Huida Toy Factory. "It's getting even worse these days and our profit margin has continued to narrow."

The factory, he added, has halved employment to barely 70 workers and has resorted to leasing out one third of its workshops to plug holes in the battered balance sheet.

Despite a grim prospect ahead, Lin said he will do whatever it takes to hold up the family business that has been in production since as early as 1997.

Lin's experience is not a singular occurrence but a vivid picture of what is happening in south China's Pearl River Delta, the established hotbed of the mainland manufacturing industry that makes a staggering array of products, from garments and watches to toys and plastics.

In past years, the export-dependent growth model has encountered numerous obstacles that threatened to damage the "world's workshop," including the 1997 Asian financial crisis, appreciation of the renminbi, safety concerns and intractable trade disputes. But never before has the crisis escalated to such an extent that it causes massive factory closures and painful layoffs.

The vibrant demand for cheaply-priced Chinese goods has shriveled as the economic crisis discourages U.S. consumers from spending. A looming recession in Europe and Japan also makes switching exports to other high-income markets a remote option. The export woes quickly filtered through investments and employment, which spiraled downward to dampen the situation on the trade front.

By handing out generous tax rebates and subsidy assistance, the government tried to staunch the pain, but with foreign buyers tightening their belts, exporters were left wringing their hands and despairing over the shrinking possibilities for a quick upturn in their fortunes.

Exports nationwide from January to June nosedived 21.8 percent year on year to $521.5 billion, according to the General Administration of Customs.

Christmas will surely be very tough for exporters this year as demand from overseas markets remains lackluster, said Guo Tianyong, a senior economist with the Central University of Finance and Economics. Since pessimism still hangs over the U.S. economy, it may still take a while for American consumers to begin reaching for their wallets once again, he added.

Zuo Xiaolei, Chief Economist with China Galaxy Securities Co. Ltd., agreed. "Whether the export machine can be restarted in the coming months will depend to a large extent on how well the Western economies fare," she said.

On the defense

With the dismal sales outlook on everyone's mind, exporters are trying innovative strategies to draw customers in during the most competitive time of the year. Taking to the Internet, some exporters have started offering online promotions with which to approach foreign buyers while others seek to explore emerging markets in Africa and South America that were not previously considered profitable markets.

The most commonly used countermeasure was to slash prices to woo foreign customers. Many small suppliers have been offering 50-percent discounts to trigger a pre-Christmas purchasing rush, an understandable tactic since late client payments and strained cash flows have already pushed them to the brink of bankruptcy.

The Shenzhen International Greeting Co. Ltd., a medium-sized gift manufacturer that employs roughly 1,700 workers, took financial measures to protect market shares at the expense of margins.

While most of its domestic competitors reeled from a bleak Christmas scenario, the company has preserved its orders from Europe and the United States intact—by cutting its prices by a dizzying 20 percent.

"We have no other choice in the face of worsening financial distress and a dark trade sentiment," said Xu Zhaoren, General Manager of the company. "Nowadays foreign traders place orders for Christmas more hesitantly and intend to hunt for cheap bargains."

"The consequence was that our profit margin dipped to nearly zero," he said. "This will be an extremely chilly, if not the worst Christmas ever."

Despite the collective downsizing of demand, not all exporters will get buried in snow this Christmas season. Some larger companies are benefiting from the failures of smaller rivals and most importantly, unmatched prowess of quality improvement and client loyalty.

The success story of Guangdong-headquartered Jetta (China) Industries Co. Ltd., an export processing company of toys, is a case in point.

"Our Christmas orders have rebounded 10 percent in recent months from a bottom seen earlier this year, when the overall export sector succumbed to the full force of the global economic turmoil," said Wang Yuanlu, a public relations manager of the company.

Though still well below the peak level a few years ago, it was an encouraging sign and the best reward for Jetta's commitment to product qualities, Wang added.

Unlike some smaller processors focused on shoddy manufacturing for quick returns, Jetta has spent millions of dollars on upgrading technologies to ensure quality and safety of all links, from raw materials to packaging. It even set up several well-equipped labs for pre- and post-production testing.

These efforts, however, did not give the company an edge over competitors until 2007 when the U.S. company Mattel Inc. recalled massive China-made toys for lead contamination. Though the defect later proved to be caused by the U.S. design flaws rather than Chinese manufacturing, it shed light on the importance of product safety, paving the way for Jetta to stand out.

Wang told Beijing Review that the company has held layoffs at bay, though the quality controls had already added to their costs. "It is part of our efforts to prevent labor shortages once the trade mood warms up," he said.

Restructuring on the way

The processing business of Jetta may be surviving rather than thriving, but it does provide a preview to the onset of a more positive trend on a broader scale. After years of exponential growth, many Chinese exporters are at a crossroads as the financial gloom takes the shine off their once-gleaming labor-intensive and low added-value model. A switch into high added-value manufacturing and technological innovation would require heavier investments and a stretch on short-term capital gains, but given its far-reaching implications, it is well worth the effort.

In an interview with Beijing Review, Guo Tianyong said now is the best time for manufacturers to upgrade industrial structure, innovate in manufacturing techniques, as well as put more effort into branding. That way they can position themselves for future growth when orders come roaring back, he said.

In east coastal Zhejiang Province, the vanguard and beating heart of China's dynamic private economy, some market-savvy players are already riding the wave.

Zhao Senlin, Vice President of Ningbo Chi Mei Optoelectronics Corp., told Beijing Review that their orders for Christmas this year have staged a more than 20-percent run-up from one year earlier thanks to cutting-edge technologies that appealed to foreign buyers.

The Taiwan-invested company is the world's fourth largest supplier of advanced TFT-LCD (thin film transistor liquid crystal display) for a number of mobile phone and appliance makers including Haier and TCL.

"In spite of the growth, trade with the United States and Japan still remains quiet as Western consumers have adopted a frugal mind-set," he said. "But the vibrant domestic demands provided an effective cushion."

"We are working around the clock to develop new products to recover lost ground overseas," he added.