China's World Factory Model Has Come To An End

Southern China is in hot summer in late July. Dongguan City, which is known as the center of "World Factory", is also in hot weather, but merchants and factory owners living here are still facing cold winter. They have been working hard and enduring harsh external environments for years since the world financial crisis in 2008, but they still can't see any hope in the future.Just in one or two months, two factories with the scale of thousands of employees have been closed down in Dongguan City. There are even more unknown small businesses quietly closed down at the same time. People start to discuss that the tides of closure of enterprises are reproduced in Dongguan since 2008. The government is eager to refute the "rumors" and announce that there are no "tides of closure", but the government has to admit the current operating environment has become worse, many business operators are facing enormous pressure."Only external market deteriorated in the world financial crisis in 2008, now the external market is still in the doldrums, but the production costs have increased heavily in China, so we are facing a double blow." said a government official.The industrial type of Dongguan is export-oriented and the main force are small and medium enterprises, they are most sensitive to the changes in external environment. For business owners, they have very accustomed to operating on the ups and downs. Some of them think: "the environment may be better after this hard time." But they are really bottomless of how long to endure. Also some people chose to leave: "This can't be explained with the general economic adjustment period, it has a deeper reason, Dongguan's model is coming to an end."The low-end manufacturing industry represented by Dongguan has been forced into transition with no suspense. Businesses' struggle will be difficult to avoid, and business environment requires a radical change: "We need a proper environment for development rather than the development environment with Chinese characteristics."On the surface, the official data don't show the tremendous economic fluctuations. According to the data from Dongguan Bureau of Foreign Trade, the number of foreign-funded enterprises shut down is in its normal level, there were 266 enterprises closed down in the first half of this year, year on year decrease of 11. Thus they concluded that "didn't find so many companies are going bankrupt."This doesn't mean the survival state of enterprises in Dongguan is very optimistic. It has been three years since 2008, but to the opinion of local manufacturers, the financial crisis is not over: both foreign and domestic operating costs are rising, as the last straw pressing on them."My factory is going to close down. My customers went bankrupt and the loan in three months is unable to recover, but I still have to prepay money to the suppliers." said an executive of foreign trade electric company, and all the manufacturers interviewed by iFreeTouch.com including him pointed out that the direct cause of current difficulty is the deterioration in foreign market and the durative cost rising in China.Dongguan is an export-oriented economy center of China, more than two-thirds of its products are sold overseas. According to the data from the Bureau of Foreign Trade, the total exports of Dongguan is $22.6 billion from January to April, an increase of 19.5%.However, an official from the Bureau of Foreign Trade don't feel happy with the increasing data. The export data was with a certain lag, several leading indexes have deteriorated. Their survey shows that more than 30% of companies' orders were down since the second quarter, because many of European and American dealers are facing inventory backlog, they are digesting inventory and reducing the count of new orders.The external environment of Dongguan is more stable than in 2008, but there has a destabilizing factor in the back. The recovery of European and American economic has a long way to go, which causes that export enterprises can't receive orders. It may not be a good thing even if they can get new orders, because the price of the order is lower than before, and new orders are mainly three months short-term orders, long-term orders are greatly reduced.While operating costs continue to rise, the status of enterprises in Dongguan are getting worse and they even dare not to receive orders. Respondents generally noted that the labor costs and raw material costs have risen greatly, coupled with the change of exchange rates, the costs of doing business have generally risen about 30% this year. Especially, the raw material costs have risen 100% in oil or cotton related industries. The average manufacturing profit of enterprises in Dongguan is about 5%, most of them are zero profit or loss after the costs rose, they only have to barely survive even if they receive new orders.The capital return speed of enterprises generally slowed down at the same time. An executive of a local microfinance company said, "The payment cycle was generally three months in the past, but now is over six months. The payment was always cash in the past, but now is the note. The total period of payment is up to nine months in fact."The funds returned by the customers are used for recurrent expenditures. Because the profit is more modest and most of enterprises can't get bank credit, they essentially have no money to do new orders.In theory, enterprises can transfer the pressure of rising costs by rising the product prices. But the enterprises can't do this because of their traditional economic model, they fall deeper and deeper when they face the bad external environment.Most enterprises in Dongguan are processing-based. The control of raw materials price is in the hands of foreigners, they can easily rise the raw material prices. On the other hand, the control of market is also in the hands of foreigners, so they can easily lower the product prices. If you don't accept the low-price orders, other enterprises will do.A Taiwanese businessman, who operated in Dongguan for decades, was once one of the shareholders of an electronics factory, but he sold the shares at the end of last year and went to Shenzhen City to develop the tertiary industry. He said, "Our profit reduced from the first 30% to 15%, and then to 5% or zero. The product prices had lowered down every year."Dongguan is now faced with difficulties precisely because of its less competitive export processing, they are not only faced the rising of labor costs, but also faced the competition from low labor cost countries such as Vietnam, India, Cambodia, etc. These factors have oppressed the survival space of enterprises.When face these difficulties, the choices of enterprises are not the same. A more prominent view is that the development model of Dongguan is already obsolete, many companies hold the same view. "I can't predict that Dongguan will stay this decline, but its peak has past already." said the Taiwanese businessman who has chosen to leave. He also indicated, "I can do business for some time under zero profit, but now I have reached the bottom, so I must stop to prevent further losses." According to his disclosure, about 30% of Taiwanese businessmen had left, about half of them thought about leaving.But other enterprises think that although the model of Dongguan is difficult, but it still can keep up for a considerable period. "Our former way is still viable and will keep on developing." said the executive of foreign trade electric company. He adopted the practice of reducing costs, "I have to cut foreign employees, exchange for a more humble office, sell the cars and so on."A manager of a local company indicates that now all companies consider how to keep themselves alive. Some of them take risks to ensure the financial chain, that is to borrow usury. But if they can't get profit from new orders, they will lose money or even close down.The data from the Bureau of Foreign Trade shows that more than 90% of the companies wish to take root in Dongguan. Although some foreign-funded companies closed down in the first half of this year, but there were 846 new foreign-funded companies opened in Dongguan at the same time, an increase of 52%. An official from the Bureau of Foreign Trade said that the main reason of new investment is the impact of nuclear accident in Japan, some Japanese companies have transferred to China.Most respondents have pointed out that manufacturers are willing to stay in Dongguan, but this must be on one premise: they can get a proper environment for development, rather than the environment with Chinese characteristics. One vendor said, if we want to reverse the current situation, China's development environment must be improved.(You can check Global Product Category or Manufacturers and Suppliers in Dongguan for more information.)