Big shoes to fill in frayed supply chain
In one broad sweep, the global financial crisis has effectively crippled China's manufacturing sector and put many of its suppliers in the value chain out of business.
As the depth and breadth of economic uncertainty persist, mainland companies, although financially strong players, are forced to re-examine their strategies to stay efficient as they learn to live with less.
Such is the story of Fujian-based Anta Sports Products, whose brand name on the mainland is probably second only to Li Ning when it comes to sports goods.
Last year's Beijing Olympics was projected to fuel the industry, but local sportswear and apparel producers, along with their foreign rivals, now face domestic consumers who are increasingly apprehensive about spending much on anything beyond the basics as unemployment grows.
'China has two types of consumers: one group goes for basic necessities; the other can do with or without products like ours,' said Anta chairman Ding Shizhong in a recent interview.
'In this financial crisis, some companies will do even better, but some might not ... For instance, a consumer who normally buys two pairs of shoes a year may now buy just one.'
The sluggish consumption is filtering through the supply chain. With manufacturers short of export orders from markets in the United States and Europe, suppliers are also left high and dry.
In its latest survey released last month, the Federation of Hong Kong Industries found that nearly 90 per cent of its 146 respondent members - manufacturers based in the Pearl River Delta - have seen their order volumes shrink an average of 36 per cent since last autumn.
Half of these manufacturers have suffered payment defaults or delays on about 20 per cent of their turnovers. The situation is compounded by banks cutting credit lines in these uncertain times while raising financing costs.
To cope, many factories in China's southern manufacturing hub, most of which produce for international and local labels, have reduced capacity and laid off thousands of migrant workers while aggressively seeking orders in new markets.
'We can only try our best to put up [with the crisis],' says the manager of a Fujian-based fabric supplier who only gave his surname as Lin.
'For this year, despite the tough climate, we should be able to survive with the orders for higher-end products for European markets.'
But manufacturers bargain for more competitive prices and better quality at a time when only the fittest survive, he adds.
Mr Lin laments that orders have been halved since late last year, and warns that it will take two to three years before the export market recovers, and that, too, will happen only if governments around the world work together towards that end.
Beijing has already rolled out a series of supporting measures, such as tax rebates, and suspended the mandatory minimum wage increase to help companies ride out the crisis. But there is only so much these measures can do, as closure of labour-intensive factories producing textiles, apparels, toys and electrical appliances continues unabated.
With global demand shrinking drastically, giants are halting production, including Nike, which has mothballed three mainland plants, with the possibility of suspending output at more factories. And as more manufacturers vie for the same pie, competition would lead to a consolidation among suppliers.
'Look at this year, we have already overhauled a batch of suppliers and there's still room for a further shake-up,' says Mr Ding, whose Anta brand targets the domestic market. 'Those that used to produce for international brands are now looking to us.'
For individual companies, the adverse impact of the downturn is inevitable but it can be buffered by the strength of their brands, Mr Ding says.
He believes the rising value of the Anta brand makes it viable to outsource a greater portion of its products.
'If the self-produced portion still constitutes the bigger part even as a brand's value rises, it means you are not market-oriented and are uncompetitive.'
In the next three years, Anta aims to reduce self-production of components for its sports shoes and apparels to 40 per cent from 60 per cent. For this year, the target is 50 per cent.
Mr Ding explains the goal is to ensure a reasonable margin is earned based on a selling price that takes into account production and marketing costs as well as profits of suppliers.
'This is a product's allocation model ... at which stage should our most competitive advantage be,' he says. 'And this requires periodic strategic evaluation.'
Anta is working with McKinsey & Co to reassess its strategy to raise management efficiency, which Mr Ding sees as part of an ongoing broader programme to internationalise, a notion to go beyond simply acquiring foreign assets and expanding in overseas markets.
'Chinese enterprises often talk about internationalising, but I often can't clearly understand [their views]. I believe a Chinese enterprise's internationalisation should be [in the form of] streamlining its management and development, this is most critical ... to be able to compete with international companies. That's my understanding about the issue of competitiveness.'
Based on this interpretation, Anta stresses its focus remains on the domestic market, although it adds that it has made efforts to establish an overseas presence, however minimal.
Not unscathed by the global downturn, the mainland's economic growth continues to outperform many other economies that are now in recession, with its first-quarter gross domestic product growth at 6.1 per cent. Retail sales rose 14.8 per cent year on year to 934.3 billion yuan (HK$1.06 trillion) in April. But the domestic market has the potential to grow and opportunities abound.
As a further boost, the State Council has approved in principle a plan for further economic restructuring that aims to quicken the pace of reallocation of resources, including a better distribution of wealth to narrow the income disparities between rural and urban dwellers and among the agricultural, industrial and service sectors, according to the National Development and Reform Commission.
In addition, the NDRC has issued a guideline to open up key and sensitive sectors such as petroleum, railways, electricity, telecommunications and public utilities to private investments. This liberalisation is an attempt to revive growth with the help of the vast private sector, which has been underused because of various restrictions.
The mainland's private sector comprising mainly small and medium-sized enterprises contributes an estimated 60 per cent of industrial output and 75 per cent of urban employment. But SMEs have been hit the hardest as banks have begun withdrawing credit lines. Not that they were easy to come by in the first place; even in pre-crisis times, the priority had always been the state sector.
Li Zibin, the president of the NDRC's China Association of Small and Medium Enterprises, admits that credit to small and medium-sized enterprises is at around 15 per cent of total outstanding loans, a level unchanged since 2007, when Beijing held a tighter monetary policy.
'SMEs' portion of the total credit, [based on] data from Shandong, Jiangsu and Hunan provinces that I have seen, there hasn't been any obvious increase,' Mr Li, who also heads the NDRC's office responsible for opening the backward western regions, reportedly told news portal Sina.com last month.
'The amount of credit may have risen, but not the weighting for SMEs.'
Mr Li's observation points to the fact that despite the central authorities' repeated pledge to support SMEs so they can in turn help economic expansion, implementation and funds are slow to come.
Because of its background, Anta, which used to be an SME, is sympathetic to the plight of these firms though it thinks realistically 'this year many will collapse'.
To illustrate, Mr Ding cites the case of his Chendai hometown, where there are about 2,000 subcontractor shoemakers. Last year, 80 per cent of these factories were producing but now only half are in operation.
'Those with a competitive edge will survive; the government can't save all of them,' Mr Ding says.
He says there are two types of small and medium-sized enterprises on the mainland: those with the technical knowhow and management capability and those on the lower rungs in the value chain.
Having grown into a substantial player in its field, Anta is aware of the rapidity of change in the domestic consumer market, and its long-term challenge to maintain its competitiveness in the industry, which has an estimated 3,000 sports, apparel and shoe producers, the very manufacturers also hit hard by this crisis. Mr Ding believes about 200 may be sufficient.
For the industry, the Beijing Olympics was not merely a natural sales booster but a turning point in urban lifestyle, raising Chinese consumers' health consciousness and promoting sports as a fashionable concept that in turn fuelled demand for sportswear products.
According to the State General Administration of Sports, about 340 million people exercised regularly last year, with 250 million of the group spending an average 593 yuan a year on sports-related activities.
Anta says it has established its presence in first- to fourth-tier cities, but it is the second- and third-tier ones where its exposure is highest.
Another rival, Xtep International Holdings, is aiming to increase its presence in these smaller cities.
Beijing is hopeful that increased investment and a shift of resources to the secondary and smaller cities - thousands in the inland provinces - will boost their development and move some wealth to the poorer regions.
And by default, with the economic slowdown so severe, there are early indicators that the central government's long-term goal of regional economic restructuring could gain traction.
Inland provinces have posted first-quarter growth that surpassed the national level, even if they had been driven to a large extent by Beijing's pump-priming efforts. The bottom line, however, is the contraction of foreign economies has compelled both domestic and foreign companies to look further inward into the vast mainland market where competition is fast stiffening.
Mr Ding stresses that he is undaunted by the growing competition and says his industry, on the average rising at least 20 per cent in value every year, is in its infancy.
'We believe the China market is still very huge and [we could] do better,' Mr Ding says.
He adds that projected sales this year are likely to hold at levels last year.
'If you haven't built the foundation, how can you go out?' Mr Ding says, while conceding the company has not entirely ruled out a foreign acquisition.
'Many Chinese enterprises that expanded abroad have failed.'
- 4.3 million small and medium-sized enterprises are registered on the mainland, more than 95 per cent of them privately held
- They account for 60 per cent of gross domestic product, 50 per cent of tax revenue, 68 per cent of exports and 75 per cent of urban jobs
- 67,000 SMEs with annual sales of at least 5 million yuan shut down in the first half of last year, with 20 million jobs lost
Measures to help SMEs
- Increased bank credit
- Tax rebates for exporters
- China Association of Small and Medium Enterprises' 3 billion yuan investment fund, corporate bond with Liaoning government and an SME bank
SOURCE: CHINA ASSOCIATION OF SMALL AND MEDIUM ENTERPRISES