Rising costs, financing trouble, excess capacity lead firms to shut down

Updated 2016-12-28 10:05:42 Global Times

Many companies in the Yangtze River Delta and Pearl River Delta have been struggling with rising labor and raw material costs, as well as difficulties obtaining financing. An estimated 48,000 domestic small and medium-sized enterprises (SMEs) reported losses at the end of 2015, according to one official report. The losses amounted to 461 billion yuan (.34 billion). Experts predicted that more labor-reliant manufacturing SMEs will shut down due to policies aimed at reducing excess capacity. Still, China's manufacturing sector is not recessing. The State Council released guidelines in December that stressed the development of strategic emerging sectors including high-end manufacturing, information technology and new energy.

A 45-year-old woman surnamed Shen was doing her work as usual on October 25, 2015, when rumors began to swirl that her boss had absconded, leaving behind 70 unpaid coworkers at their company in Yancheng, East China's Jiangsu Province.

Shen said the company, which specializes in manufacturing clearing equipment for large plants, had done decent business after it started up in 2011, but orders had dwindled in recent years.

"We hadn't been paid in 10 months after the manager ran off," she told the Global Times on Monday.

Shen's story epitomizes the struggles in China's traditional manufacturing sector.

In Wuxi, East China's Jiangsu Province, many companies have shut down as high costs have pushed many past the point of profitability, said a local businessman surnamed Cao.

Cao started making paper tubes for textile mills in 2010.

"There was a large demand for paper tubes in Wuxi because of the city's booming textile industry. So, I decided to manufacture this product, which used to have a profit margin as high as 15 percent," he told the Global Times Sunday.

But the margin had disappeared approaching the end of this year. "For one thing, our sales have fallen by nearly 20 percent due to sluggish demand in December. At the same time, our raw material costs have continued to rise in 2016," he said. "For example, the price of body paper has surged more than 30 percent this month."

Despite the losses, Cao and his peers are maintaining production so they can hold on to their customers until the market improves.

Over the last two years, many domestic small and medium-sized enterprises (SMEs) have closed down, especially the Pearl River Delta in South China and the Yangtze River Delta in East China.

Struggling SMEs

Domestic paper maker Guangxi Nanning Phoenix Pulp & Paper Co in South China's Guangxi Zhuang Autonomous Region stopped production due to losses and is in the state of "being shut down," local newspaper the Nanguo Morning Post reported on Thursday.

These companies are going bankrupt due to high costs for raw materials, environment regulation compliance and labor, as well as excess production capacity, experts noted.

"With rising labor costs, low-end labor-oriented manufacturing industries in coastal areas have to transform or move to the central-west regions or Southeast Asia, where costs are lower," said Zhao Xiao, a professor at the University of Sciences and Technology in Beijing.

China's minimum wage rose 22 percent in 2011, 20.2 percent in 2012, 17 percent in 2013 and 14.1 percent in 2014, according to a report in May on SME operation on lwzb.cn, a website affiliated with the National Bureau of Statistics (NBS).

In 2015, 28 regions in China raised their minimum wages by about 14 percent, far higher than the 3.5 percent growth rate of SME revenue, the report said. In addition, the rising costs of land, capital, logistics and environment protection compliance have also added to operation costs.

Of the 50 key means of production surveyed in 24 provinces, the price of more than 30 materials rose from December 11 to December 20, compared with the previous 10-day period, NBS data showed on Monday.

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