November 24, 2011
An interesting article from WSJ asserts that a significant source of Wenzhou’s current problems is not just the fall in exports sales and too much gray debt, but also the fact that a good number of Wenzhou’s manufacturers have tried to escape the squeeze in their profits by moving up the value chain to produce more value added products, often in areas unrelated to their core competencies. The article gives an example of a spring manufacturer that tried to go into iron ore mining- and did not find much iron ore. They borrowed money for this, could not pay this back, etc. In other cases they may use their own funds, but the results are the same.
And this also provokes further questions that cannot be answered here, but are still interesting to contemplate:
1. Why are so many companies in Wenzhou (or other export-focused and low-tech product focused centers such as Ningbo or Yiwu) being squeezed on margins? Is this mainly due to higher labor costs and raw material costs? What is the impact of lower export volumes, or finance costs? And can we infer that many of these companies are largely unable to pass on their rising cost inputs to their customers? And for those that can, how are they differentiated? By higher product quality, superior international channels, or other factors?
2. How widespread is this trend? This has not been systematically documented, and is unlikely to be, though getting a deeper understanding of how these companies are trying to move up the value chain- in terms of new products or investments- would be very interesting. This is mainly through developing new products, or making investments in other companies? And is the pressure to invest in new products/areas mainly coming from the companies themselves, or outside sources such as creditors?
Moving up the value chain is one of the larger economic themes in China, much discussed at the national level, with specific policies enacted by the State Council and down. To a degree this can be orchestrated or directed from above, especially where this would also serve the domestic market- such as commercial aircraft, high-speed rail, power generation. All of these industries have a significant government imprint: the main players are large SOEs, customers are often government controlled, and with a large domestic market the government has real leverage in arranging access to foreign technology.
But n the case of the most Wenzhou manufacturers, the situation is different: they are private companies that rely on exports, and do not deal in very high technology products. They are very efficient in manufacturing of specific products (like springs, or pens, or toys, tools, etc- modern versions of Adam Smith’s pin factories), and at the same time have developed international channels for their goods- sometimes branded, and often not. Design competency is typically limited. So in this case how does one move up the value chain? It should be possible for companies that have strong existing management and manufacturing competencies, though at the same time there must be limits. A company that produces springs or pens cannot the next day start to make televisions, but there should be something they could apply their competencies to. Maybe some of the smarter Wenzhou or Ningbo companies will start to show the way forward in making feasible value added products, and really moving up the value chain. It could be happening already. Another topic for possible investigation.
It reminds me of another piece of news from Asia business in the 1990s: The CP Group, one of Thailand’s largest and oldest companies, announced that it was taking a serious look at manufacturing semi-conductors. This never happened, but apparently they were taking real steps in this direction before pulling the plug. Their core product? Animal feed.
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GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.