Small And Medium-Sized Enterprises In The Pearl River Delta Fall Into The Ice Cave

In the past two or three months, a large number of small and medium-sized export enterprises in the Pearl River Delta have been closed down. At the same time, many enterprises are in a state of recessive bankruptcy.

What factors cause these enterprises to face such difficulties?

How should the export oriented SMEs cope with the current predicament?

In the Pearl River Delta, a large number of export-oriented small and medium-sized enterprises have survived. The difficult PRD region was once the bridgehead of China's opening up, and processing trade accounted for 40% of the country.

The total amount of foreign trade and import and export in Guangdong accounts for 1/3 of the whole country, and the dependence on foreign trade is as high as 160.4%. Since the reform and opening up, the region has enjoyed rapid development in terms of preferential policies and cheap labor.

The Pearl River Delta is the economic center of a large province. A large number of small and medium-sized processing enterprises mainly rely on foreign production and international market.

In the Pearl River Delta region of Guangdong, processing trade accounts for over 40% of the whole country.

In the first three quarters of 2007, about 20% of Guangdong's industrial added value came from toys, textiles, building materials and other traditional industries.

Although Shenzhen and Dongguan have produced a large number of IT products, only 3% of them own independent intellectual property rights, and the product sales and service networks are mainly controlled by foreign businessmen.

But at present, the export oriented enterprises in this area are in a dilemma of survival.

In the past five years, the export growth rate of the region has slowed down and the outward oriented development is facing a bottleneck.

In 2006, Guangdong's export growth rate was 26.8%, ranking twentieth in the country, or even lower than the national growth rate of 27.2%.

In recent months, a large number of small and medium-sized export enterprises have been closed down or moved out one after another.

It is estimated that nearly 1000 of the 6000 shoe factories in Guangdong have been closed.

75% of shoe factories began to set up factories in mainland China or Vietnam and Burma.

Small and medium-sized export enterprises are facing pressure from five aspects: the appreciation of the renminbi relative to the US dollar has caused great losses to the export enterprises.

In January 2, 2008, the central parity of US dollar to RMB exchange rate was 7.2996 yuan, so the cumulative increase of RMB has reached 11.1% since the reform.

Because exports are mostly denominated in US dollars, the appreciation of the renminbi severely compresses exporters' profits.

Take the clothing industry as an example, the RMB appreciation is 1%, and the clothing industry profit is reduced by 4%, while the average profit of the entire textile and garment industry is only 3.3%-4%.

Morgan, Stanley, Citibank, Deutsche Bank, Swiss bank and other institutions all expect the RMB will continue to appreciate rapidly in 2008, and expect the export-oriented SMEs to face more pressure to survive.

In 2007, the adjustment of export tax rebate and restricted list of processing trade directly reduced the profit of small and medium-sized export enterprises.

In June 18, 2007, the Ministry of Finance and the State Administration of Taxation issued the circular on lowering the export tax rebate rate for some commodities, which stipulates that the export tax rebate policy for 2831 commodities should be adjusted from July 1, 2007 onwards.

To cancel or lower the export tax rebate rate is the main policy objective to alleviate the surplus of foreign trade.

Many small and medium-sized enterprises have very low profit margins, and the reduction or cancellation of the export tax rebate rate directly leads to their losses. More seriously, no pitional period has been set up, which has left many enterprises unprepared.

In July 23, 2007, the Ministry of Commerce and the General Administration of Customs jointly issued the "Document No. 44" (the list of processing trade restrictive commodities), and the export of 1853 processing trade, such as textiles and furniture, was limited.

In December 21, 2007, a new batch of banned catalogue of processing and trade of 589 new products was released, mainly involving "two high and one capital" products with high energy consumption, high pollution and resource type.

They include animal products, plant products, animal and vegetable fats and oils, foodstuffs, beverages, mineral products, chemical products, plastics and their products, iron and steel products, and aluminum products.

Some products containing endangered animals and plants are also prohibited, including leather products, animal hair and their fabrics, footwear, jewelry, spectacles, watches and clocks, miscellaneous products, etc.

Labor costs continue to rise, the implementation of the new labor law has increased the cost of small and medium-sized export enterprises.

Since 2004, labor shortage has broken out in Guangdong. Labor shortage has pushed up wages and increased production costs.

The small and medium-sized enterprises in the Pearl River Delta are mainly labor-intensive enterprises, which rely heavily on labor input, and the profits of enterprises are extremely sensitive to wage costs.

In January 1, 2008, the labor contract law of the People's Republic of China, which was adopted in June 29, 2007, was formally implemented, and the labor cost of enterprises increased further.

The provisions of the new labor law on contract signing, contract rescission, overtime and other issues directly cause labor costs to rise, which is particularly serious for small and medium-sized export enterprises which rely on low cost advantages.

Rising prices of raw materials, utilities and factory rents are also important reasons for the current predicament.

Due to various reasons, the prices of raw materials such as oil and metals have risen sharply, and the processing enterprises in the Pearl River Delta have been hit hard.

In 2008, international oil price broke through 100 US dollars per barrel for the first time, reaching a record high. The trend of oil price rise is not expected to change.

In November 1, 2007, domestic oil price rose by 8%, and it is expected to further increase in the future.

Some areas also erupted "oil shortage", and the cost of enterprises increased significantly.

In 2007, Guangdong's real estate prices rose sharply, and some areas rose by 100%. Land prices and rental prices also rose.

Product quality problems and the impact of the US subprime lending crisis are also revealed.

In 2007, China's continuous export of quality products to the United States damaged the credibility of "made in China".

Although the survey shows that the quality problem is mainly caused by unreasonable design of American manufacturers, it has already affected the reputation of Chinese manufacturers, and some products have been recalled.

The US subprime mortgage crisis will make the US economy slide in 2008, and the further slowdown in US consumer demand will directly affect China's exports.

In 2008, the US economy was faced with double pressures of inflation and slowdown. The inflation rate may exceed 4%, and the growth rate is expected to be below 2% or even decline.

According to the Ministry of Commerce statistics, since the outbreak of the subprime mortgage crisis, China's exports to the US in the third quarter of last year have dropped considerably, and it is estimated that the fourth quarter also showed a downward trend.