In an underwear and garment factory in Dongguan City, Guangdong Province, due to the “labor shortage”, only a few workers are working in the factory.
Cost and policy pressures make enterprises survive with “small profits” and “zero profits”
If the financial crisis is an unbearable “severe winter” for foreign trade companies in the Pearl River Delta, then spring still seems a bit far away for them now. The substantial increase in raw material costs, increase in labor costs, adjustments to exchange rates and export tax rebate policies… the combination of multiple pressures has caught many foreign trade companies off guard. How to deal with this situation? Relocation, transformation and upgrading, or switching to domestic sales? Every road seems difficult.
“Now everyone is saying that the economy is picking up and China has taken the lead in recovery. In fact, we are very confused.” Lin Xiaoning, deputy general manager of Jiashun Knitting Factory, told reporters with a look of helplessness, “We feel that 2008 and 2009 will be the best years. . It was very cheap to buy raw materials at that time, our orders were not affected, and the workers were relatively stable. However, the situation in 2010 was more difficult and serious than when we faced the financial crisis.”
The real story seems to be somewhat inconsistent with people’s imagination. Sitting in an office building, it seems easy to make a judgment based on information from all directions: as the economy picks up, the situation of foreign trade companies will also improve accordingly. However, the reporter’s more intuitive feeling during the investigation in the Pearl River Delta area is that a large number of idle factories are still vacant, and it is relatively rare for companies to expand their production scale.
The substantial increase in raw material costs, increase in labor costs, adjustments to exchange rates and export tax rebate policies… the combination of multiple pressures has caught many foreign trade companies off guard. “During the financial crisis, we took a response measure – capacity expansion. Because the cost of raw materials was declining at that time, we could reduce the cost by expanding capacity, which was easier to deal with. But now there are many problems, and we don’t know what to do.” Lin Xiaoning said.
Don’t dare to accept orders
“Considering the economic situation in 2010, the sharp rise in labor costs, and the fluctuations in external market factors, we dare not accept orders without restrictions.” ——Chen Ming, Director of Operations of Jiashun Knitting Factory
Orders determine the operating status of an enterprise in the future. However, the embarrassing situation faced by many foreign trade companies is that in the face of many uncertain factors, companies often dare not take orders even if they have orders. Taking orders conservatively has become a consistent move among companies.
Jiashun Knitting Factory is an enterprise that exports 100% of its products to Europe and the United States, of which 65% are exported to Europe, 25% to the United States, and 10% to Japan and Australia. Chen Ming told reporters that current orders have increased by about 35% compared with the same period last year, but in 2010 they did not strive to get orders in advance. “The same is true for peers. Some orders will result in losses.”
Export companies generally have a cycle of several months from receiving an order to final delivery. Within these months, cost fluctuations can bring unexpected risks to the business. Take Jiashun Knitting Factory as an example. It takes 6 or 7 months from pattern making to export, and there will be many uncertain factors in the process. Often orders that appear to be profitable when signed are no longer profitable by the time of final delivery. Lin Xiaoning said that at the beginning of 2010, the company was originally very optimistic, but suddenly found that it was difficult to recruit workers and wages were rising sharply. However, many orders have been confirmed early, and only the company can bear the losses in the process. In order to have a more comprehensive understanding of the situation, the reporter selected some typical export-oriented enterprises for investigation in the Pearl River Delta area according to the major export categories such as mechanical and electrical, textiles, light industrial handicrafts, etc. Judging from the survey results, there is more than one company that has a stronger sense of crisis in the post-crisis era.
Raw material and labor costs both increased
As the person in charge of a knitting factory, Lin Xiaoning is very sensitive to changes in cotton prices. Since last year, affected by the reduction in cotton production and the suspension of exports by major exporting countries, cotton prices have been rising. Since 2010, cotton prices have continuously set new historical highs in the past decade. Data show that the domestic cotton spot price was around 14,000 yuan/ton at the beginning of the year. By July, it had climbed to 18,000 yuan/ton.
Lin Xiaoning said that the prices of raw materials were rising in 2010, and the increase in cotton prices led to an increase in the prices of main raw materials for clothing such as cotton yarn and cotton cloth. While the source of corporate income has not changed much, the expenditure has increased a lot, and corporate profits have been severely squeezed.
Political pressure stacked up
Since its clothing is mainly exported to Europe and the United States, Chen Ming said that Jiashun Knitting Factory prices its products in US dollars and euros, so exchange rate changes have a great impact on the company. In addition, in addition to concerns about the impact of RMB appreciation on profit margins, the most difficult thing in practice is how to accurately predict exchange rate changes in the short term.
Enterprises survive with small profits
The survey found that for many foreign trade companies, their profit margins are difficult to exceed 5%, regardless of whether their orders are stable or not. Especially under the pressure of rising costs,�The profit margin has dropped to 1%, 2%, and some even have zero profit. Chen Ming introduced that the profit margin of the home textile and apparel industry represented by Jiashun is about 5-6%. “Since wages increased by 35% in 2010, the gross profit margin became less than 4%. If the appreciation of the RMB is also taken into account, the profit margin will drop to less than 2%.” Chen Ming said, “In 2009, we The export volume is about 500 million, which is similar to what was expected in 2010, but the sales profit margin is low. This is a common situation faced by the industry in 2010, so the industry sentiment is very pessimistic.”
