China

China's small factories struggle | The Australian

THE global downturn is taking a severe toll on China's dynamic small businesses, forcing them to adopt innovative, and sometimes desperate, strategies to survive.
Ye Jianqing, like many other Chinese entrepreneurs, has seen a sharp decline in orders from the US and Europe, which account for most of his business.

Last year, sales of the sunglasses his company, Wenzhou Zhenqing Glasses, makes dropped 80 per cent to less than $300,000 ($AUD 470,000) from $1.5 million in 2007.

Fearing his eight-year-old business might not survive another year, Mr Ye is switching gradually into new products, such as key rings and prescription eyewear. "If you're not innovative and you don't change yourself, you're just waiting to die," he says.

The fate of small businesses like Mr Ye's will help determine how the world's third-largest economy rides out the current downturn, China's worst since the Asian financial crisis a decade ago.

According to rough official estimates, the private sector, which is primarily small businesses, accounts for close to 60 per cent of China's economic output, and employs three-quarters of the urban work force. That's a big turnaround from just a decade ago, when stodgy and poorly run state enterprises dominated the economy.

Entrepreneurial activity hasn't ground to a halt. In Guangdong province, a manufacturing and trade hub, 62,400 companies shut down in 2008, according to government records. But 100,600 companies were started, resulting in a net increase of 38,200 companies.

Arthur Kroeber, managing director of Dragonomics Research & Advisory in Beijing says there are many benefits to the rise of small business, "The Chinese economy is a lot more flexible today than in the 1990s.

"Private firms can shift from unprofitable to profitable lines of business, and adjust their wage and other costs, much more quickly,’ he said.

But many small companies survive on the business of just a few clients, or sell very low-margin products; they could be forced to close if a big client suddenly delays orders, or when they don't plan ahead for currency fluctuations. Bigger businesses are more cushioned from such effects.
As global demand for almost everything weakens, small companies' legendary flexibility is no guarantee they'll survive.

Many companies have already closed, putting millions of people in China out of jobs. Small-business owners who are still in business are willing to try almost anything. Sometimes there are manufacturing synergies to such changes, but other companies take a gamble on products they have no experience with, or which have no proven market.

Chongqing Linsheng Industry & Trade, which has made motorcycle parts for 13 years, is considering launching a line of mechanical self-shuffling mah-jongg tables.

In Wenzhou, shoe-factory employees are now churning out light-emitting diodes, and in Shenzhen, a maker of plastic signs shut down briefly and then reopened as a maker of decorative holiday decals.

Eric Wu, general manager of manufacturer and exporter Duolilong Industrial said "In Chinese we have a saying that 'it's easier for small boats to turn around,'" says Eric.

Until recently a booming manufacturing hub in China's south. The 11-year-old company has already completely switched products once before. Earlier this decade, as the market for fans shrank, it changed to making battery chargers. Now, executives are about to do it again, with plans to release a new line of energy-saving power tools this year. "If we don't change, then we have no hope," Mr Wu says.

The economic importance of China's small businesses is getting some recognition from the government. Officials have instructed banks since the fall to lend more to smaller companies.

But it isn't yet clear how much of the rebound in bank lending in the final months of 2008 - it rose 18.8 per cent year-to-year in December - went to small business. Many analysts suspect the big state firms that banks have long favoured were still the main beneficiaries.

Small businesses' attempts to survive can come at the expense of workers, who have little bargaining power with bosses. Though new labour legislation that came into force last year was intended to strengthen worker protections, it remains easy for private companies to hire and fire in China. Chinese officials have been trying to prevent such layoffs recently, but some factory owners are simply walking away as things get bad, leaving workers without pay.

In one case, the owner of a clothing company in Shenzhen disappeared, leaving 212 workers with 1.14 million yuan ($AUD264,000) in unpaid wages, according to state-run media. In October, the manager of Hong Kong-listed toy company Smart Union Group Holdings, whose clients included Mattel , fled after Smart Union filed for bankruptcy, leaving 7,000 workers at the company's two factories in Dongguan without jobs and owed back pay totalling more than 24 million Yuan.

The flexibility to fire workers could well be accelerating China's downturn now -- but it may mean managers can move equally quickly to ramp up again in a recovery. "In a very cold-blooded economists' way of talking, it means the labor market has maximum flexibility," says Qu Hongbin, an economist with HSBC in Hong Kong. "When it comes to surviving the downturn, those things are a plus, though they are negative from a moral perspective."

Executives make no apologies about doing what they think is necessary to get through the downturn. Constant reinvention has always been a way of life for some Chinese companies.

"It's a game of waiting to die, or doing what you need to do to try and survive," says Huang Huigu, chief executive of computer-bag and -accessory maker Guangzhou Kingsons Leather Products, which is releasing lower-price versions of its most popular products.

Mr Huang is reading a Chinese business book released in October called "Rebirth through Switching.