Ｔｈｅ Ｄｏｎｇｇｕａｎ Ｅｐｉｔｏｍｅ ｏｆ Ｃｒｉｓｉｓ－Ｈｉｔ Ｍａｎｕｆａｃｔｕｒｉｎｇ

Ｂｙ　ｓｔａｆｆ　ｒｅｐｏｒｔｅｒ　ＬＩＵ　ＱＩＯＮＧ

THE Zhangmutou Township government of Dongguan City, Guangdong Province announced on October 16, 2008 in a notice pinned to the Hejun Toy Factory gate that the company had gone into liquidation. The notification was accompanied by a few wanted ads for workers at other local enterprises.

The Hong Kong-invested toy factory of more than 6,000 employees had been declared bankrupt a few days earlier. News of the factorys closure sent ripples of foreboding through the many other enterprises in Dongguan, a city synonymous with manufacturing.

The Hejun Harbinger

Two months later on December 9, Lan Jiezhou, special assistant to the director of the Longchang Toy Factory a few kilometers away in Dongguans Changping Town, had few comments to make on the collapse.

The media had earlier described the Hejun event as the “first case of bankruptcy in Chinas tangible economy as a result of the American financial crisis,” implying that it was harbinger of future bankruptcies due to plummeting orders and shrinking assets.

“Even though the Hejun bankruptcy is in some ways attributable to the international financial crisis and rising costs, the actual culprit was ruptured fund chains as a consequence of erroneous investment decisions and general mismanagement,” Lan Jiezhou said.

The investment decision Lan referred to was Hejuns RMB 269 million purchase in October 2007 of a 45.51-percent share in the Fujian Tiancheng Mining Industry, with a view to engage in silver mining. The plan was to obtain a mining license in April 2008 and open production in 2009. Hejun, however, failed to complete all the necessary formalities, and its mining license application was rejected. The company was unable to recover its investment, and hence the break in the fund chain.

Rumors of a bankruptcy tide sweeping across Dongguan had in fact been circulating since the beginning of 2008. But data for up to late 2008 collected by the Dongguan Municipal Economic and Trade Bureau showed that the number of bankruptcy cases was within a normal rate of organic birth-death processes in the business world.

In its manufacturing facilities next door to Lan Jiezhous office building, Longchang Toys several thousand workers still worked their daily shifts on the production line as usual. Lan Jiezhous boss Liang Lin became involved in toy manufacturing 44 years ago while living in Hong Kong. He and his brother went back to their hometown of Dongguan in 1980 to set up the Longchang Toy Factory, which was listed on Hong Kong stock market in 1997. The Liang brothers purchased the US Kid Galaxy Inc toy company in 2004, making the Bindos label a Longchang brand. The same year, the Longchang Group built a new factory and established a design center in Changping.

More than 3,000 other factories produced, along with Hejun and Longchang, Barbie dolls, remote-control toy planes and robots, generating one third of the worlds toys.

“But the problem is that once established, many enterprises begin investing in other fields, such as finance and mining, which often breaks their fund chains,” CEO of Dongguan Yingqi Co., Ltd. Zeng Tianren said.

The Yingqi Co., Ltd. in Dalang Town is a big woolen textile enterprise that employes 6,000 or more workers. The companys Dalang International Woolen Textiles Trade Center stands opposite the plant area. Yingqi has experienced investment temptations similar to those of the Hejun Toy Factory.

Between 2006 and 2007, certain enterprises and real estate developers urged Yingqi to invest in the local real estate market. After making field investigations and analyses, Zeng Tianren reached the conclusion that the local real estate market did not merit investment. “It seemed to me that high risks were hidden behind high profits,” Zeng Tianren said, “and Ive turned out to be correct. Different trades are often worlds apart. We, unlike Hejun, prefer to stick to what we know, which is woolen textiles. Thats the only sure way of preserving our fund chain.”

Panic over Diminishing Orders

Although the Hejun Toy Factory collapse is definitely not the “first case of bankruptcy in Chinas tangible economy as a result of the American financial crisis,” the crunch has nonetheless caused a drop in orders and, as such, is the “straw that breaks the camels back,” planning manager of the Dongguan Huakang Computer Technology Company Tang Mo said.

“Rising costs during the first half of 2008 brought lower profits and greater financial pressure,” Tang said, citing the appreciation of the RMB, price rises in raw materials such as steel, and higher labor costs as a result of the promulgation of the new Labor Law. “But although profits were lower, we at least had orders. Matters are considerably worse now that orders have fallen off,” Tang said. Huakang computer components are mainly exported to Germany, the ROK, the Middle East and South Africa.Since November 2008, export orders have dropped 20 percent.

Huakang Computer Technology Company is one of 100 or more businesses in the Sanjiang Industrial Park in Dongguans Hengli Town. When this reporter visited the park, some of its factories were obviously empty, and it also contained some half-built plants whose construction had been abandoned.

But a new Huakang plant was under construction, at a cost of RMB 10 million. The company has grown from a small workshop producing computer cases in 1998 to a computer manufacturing firm of considerable scale, whose scope of manufacture now includes CPU coolers, mobile hard disc cases, laptop coolers and monitors.

Su Mingying is a young woman from Henan Province who came to work in Dongguan after graduating from junior middle school. She works on Huakangs computer casing production line. A few years ago when the factory was doing good business she earned RMB 2,000 a month, and was the envy of her fellow villagers when she went home at Spring Festival. But as business these days is slack she earns only half that amount.

The falling demand for Chinese products since the US financial crisis has seriously affected Chinas export-oriented enterprises. “Even big companies like Huakang are feeling the pinch, so you can imagine how difficult it is for small companies to stay afloat,” Tang Mo said.

The Yingqi Industrial Company in Dalang Town nearby Huakang has met similar problems. Yingqi had orders worth RMB six million in the first half of 2008, but, “The market is shrinking, and the number of orders has fallen,” according to Yingqi CEO Zeng Tianren. Shrinking credit has prompted consumers to cut back on consumption which has, in turn, slowed market demand and sent it into a spin, Zeng said. Mistrust among enterprises has created loss of confidence in the market and consequently the new expense of insurance on goods. Since the middle of 2008, therefore, the more orders an enterprise receives, the more it may lose.

Self Salvage

“Now excellent enterprises make meager profits, well-run enterprises keep their sheet balanced, and the rest operate at a loss,” says Zeng Tianren of Dongguans manufacturing status quo.

In answer to the question Wang Yang, secretary of the CPC Guangdong provincial committee, raised on how to evaluate the impact of the present crisis on industry, Zeng Tianren reckoned that around 30 percent of enterprises would be affected. Wang Yang commented that this seemed to him a conservative estimate. Zeng Tianrens opinion is based on the volume of textile and garment industry workers laid off in 2008 from factories in the surrounding areas that have stopped production. “All we can do is try to avoid losses and hope we can get through this difficult period,” Zeng concluded.

The Yingqi Company is the Chinese mainland headquarters of the Hong Kong Maorong Group. Prior to the world financial crisis, it produced 13 million knitted garments annually, 60 percent of which were exported to Europe, 25 percent to the United States and the remainder to Canada.

In the face of lower export orders, Yingqi has turned its focus on the domestic market. The woolen textile garments bearing the W&K-brand on display in the company exhibition room are especially designed for the domestic market, Zeng Tianren said. Export-oriented enterprises are generally looking for similar solutions since the decline of overseas orders. Most enterprises in Dongguan formerly specialized in exports because they generate higher profits. “Prices of exported products are 10 to 20 percent higher than those destined for the domestic market, even without taking into account export tax refunds,” Tang Mo said. Among Chinas commodity exports during the first 11 months of 2008, those of mechanical and electrical products were valued at US $761.32 billion, making up 57.8 percent of Chinas total exports over the period, according to customs statistics.

Tang Mo oversees Huakangs brand management and marketing. The companys domestic/export sales ratio is 3:7. “Export clients pay for goods in advance of delivery, but domestic companies such as those in the Zhongguancun market dont pay up till months after taking delivery. This is bad for company cash flow,” Tang said.

“The slump on the international market has encouraged us to diversify,” he continued, explaining that the company has taken two measures. The first is developing the Middle Eastern market with the help of established clients. The Middle East, a market largely overlooked by enterprises in Dongguan, now makes up 50 to 60 percent of Huakang exports.

The other measure is to develop the domestic market. The company plans to close its branch companies so that the agents and distributors can make more profits. Exported goods are generally in OEM (Original Equipment Manufacturing) form, whereby they are manufactured under other company brand names. A company that chooses to develop its domestic market needs its own brand for greater added value. Huakang is considering this possibility.

Key to Bigger Profit Margin

The latest Chinese Customs data show that yarns, fabrics and garments were valued at US $60.41 billion among exported commodities in the first 11 months of 2008, which represents an increase of 18.1 percent over the same period last year – the most rapid among traditional bulk exported commodities.

But growth in exports does not necessarily mean high profits for the enterprises that manufacture them. “Profits are small and risks are high,” Zeng Tianren said, adding with reference to the withdrawal of certain foreign-funded enterprises, “Enterprises that rent plant buildings in Dongguan whose fixed assets are not large tend to withdraw.”

Zeng Tianren holds that profits, not the market, constitute industrys biggest problem. The textile and garment industries meet basic human needs and are hence strongly supported. The key is how to maximize this advantage. Yingqi moved into its newly built factory building in 2007 and installed more than 500 computerized knitting machines imported from Germany and Japan at a cost in excess of RMB 300,000 each.

The scope of Yingqi products before 2004 was confined by the limited scope of its hand-operated flat knitting machines. Even so, profits from low- to middle-grade goods the company produced in the late 1990s and first two years of the 21st century reached 15 to 30 percent. The market today is far less stable and profit margins are inexorably sinking, which is why Yingqi CEO Zeng Tianren has invested RMB 200 million in top-line computerized knitting machines.

“These days 80 percent of our products are high-grade, which pushes the unit price of sweaters from US $3 to US $5,” Zeng Tianren said, adding that 90 percent of the functions of the new machines are beyond the scope of the old hand-operated machines, and that they are ten times more efficient in producing quality goods.

Zeng explained that Yingqi makes a higher profit when its clients choose a design from the company catalogue rather than giving him a sample to follow. This is why his company now has 40-50 designers, some of whom are from Hong Kong.

That independent designs increase profit margins is an opinion shared by Lan Jiezhou of the Longchang Toy Factory, who said that only five percent of his orders had been affected by the financial crisis. Longchang sets great store by independent design. The company owns more than 300 toy patents, has a 300-member R & D team and invests RMB 30 million each year in product R & D.

Lan Jiezhou proudly displayed the robot designed by one of the companys designers. It is 16.5 cm tall, weighs 350 grams, and sells for HK $2,000 apiece. The toy will go into full production soon.

Lan Jiezhou, 32, from Sichuan Province, has a different background from others of his age working on production lines. He used to work at a foreign trade website called “global resources.” Soon after coming to Dongguan he had his own 10-square-meter private office in this Hong Kong-funded company.

Lan is fully conversant with the development of Guangdongs toy industry. “The progression from OEM (Original Equipment Manufacturer) to ODM (Original Design Manufacturer) to OBM (Original Brand Manufacturer) epitomizes Guangdongs toy industry, and the three steps of Longchangs successful transition,” Lan Jiezhou said.

“OEM does not require large investment, but profit margins are small (5-8 percent in gross profit). ODM and OBM are basically the same. Owning original designs gives us the capability to choose clients and negotiate with them, and hence a sharper competitive edge. We now have a profit margin of between 10 percent and 25 percent, sometimes higher.”

OEM, ODM and OBM co-exist within Longchangs present structure, but OEM makes up at least 65 percent of production. Lan Jiezhous company plans to increase its ODM and OBM proportion to 50 percent within the next five years.