Due to the fluctuating in- ternational markets and increasingly tightening domestic economic environment, China’s foreign trade enterprises are severely hit by a new round of survival crisis. Transformation and upgrading of these enterprises are also heading towards the most “critical stage” to adapt to the current economic climate.
As their long-practiced profit model is facing an unprecedented challenge in this period of economic transition, manufacturing-based small and medium-sized enterprises (SMEs) have no choice but strive to develop independently and create their own brands. However, such forced transformation has actually become an unbearable burden to many SMEs.
At present, a large proportion of domestic SMEs remain at the low-end of traditional industry value chain, with weak technological innovation ability, an extensive growth pattern, poor equipment and a lack of professionals and self-owned intellectual properties and brands. These enterprises participate in market competition with the strategy of low cost, low price and low profit and thus are vulnerable to the influence of surging business cost.
Besides, most SMEs in China are currently labor-intensive and exportoriented businesses, usually with family ownership. The management and growth pattern are relatively ineffective and backward.
He Zuoxian, deputy director of the Small and Medium Enterprise Bureau of Guangdong Province, said SMEs lack sufficient capital, technologies and human resources, which are all essential factors for the transformation and upgrading of enterprises. Therefore, it is more difficult for these enterprises to be transformed and upgraded. Some enterprises say that they are reluctant to provide additional investment, especially on new equipment, because profit cannot be guaranteed in near future. This concern is more prominent in some industries where there are relatively short product life cycles. At the end of July this year, delegates from dozens of trade associations in Guangdong and Hong Kong gathered in Dongguan City, Guangdong Province, to discuss about the restructuring problems faced by SMEs. Ding Tiexiang, from the Hong Kong Chamber of Small and Medium Business Ltd., said Hong Kong companies based in Guangdong do realize that to survive the fierce competition, they have to explore domestic markets and increase the added value of their products, instead of simply relying on processing trade and foreign orders. However, this is no easy task. Most Hong Kong SMEs are generally inexperienced in exploring domestic markets. Besides, a large amount of investment is needed for branding and value-added products developing and the investment usually has a payback period over one or several years, which will be an unbearable burden for those financially strained companies.
According to the research, despite the fact that all the SMEs have realized the importance of restructuring and upgrading their business models, they don’t have the initiative to follow the trend. In their opinion, restructuring is currently out of their agenda and their first concern is to survive on the competitive market. It is also noticed that many companies are facing increasing pressure from both suppliers and customers. Even though they run 24 hours a day, 7 days a week, they can hardly make ends meet. In addition, serious labor shortage and surging labor cost in recent years are also wearing down the confidence and will of those business owners gradually, making them uncertain about the future of their companies.
Cheng Jianshan, director of the Center for Studies of Pearl River Delta, also pointed out the survival crisis for many Guangdong-based SMEs. According to Cheng, basically, SMEs in the Pearl River Delta region have only three options: the first is to file for bankruptcy (means close down the business); the second is to relocate the business out of this region (about 10% companies); the third is to get out of the manufacturing industry (one third of the bankrupted companies).
Wang Lizong, the SecretaryGeneral of Guangdong Hi-tech Industrial Chamber of Commerce, said, at present, the operating, investment and legal environment for SMEs is far from satisfactory. Many export-oriented companies shifted to home market have great difficulty in fitting into domestic marketing games in which they have to face various “hidden rules” from biding, evaluation to selling. Besides, there is too much red tape and procedures involved in dealing with government, greatly affecting the efficiency. On the other hand, due to the deficient legal system, innovations are widely copied. However, as there is no channel for complaint and the cost for safeguarding their legal rights is unbearably high, it has become a headache for those innovation-based enterprises in the process of restructuring and upgrading.
In analyzing these problems, Huang Zhiyun, president of the Guangdong Chamber of Commerce of Private Enterprises, said that there are three factors blocking the restructuring and upgrading process of Guangdong SMEs: first, the entrepreneurship is on the wane and entrepreneurs are less motivated to expand their businesses; second, due to the unstable property rights structure and industrial policies, some business owners are not confident about the future of the industry and thus are unwilling to maintain business of a long-term standing; third, supply of public services is insufficient, which causes an unfair environment for competition.
As the traditional production model proves to be unsustainable, how to blaze a new road for foreign trade enterprises? Yao Jingyuan believes that these enterprises should actively adjust their development strategies, increase value added in products and foster new growth for export. Yao said, “In the past, export enterprises were dependent on low labor cost and low prices. The value added of the exports was extremely low and many enterprises have no innovation ability and no self-owned brands. Today, China’s export industry still faces a lot of problems. Take the clothing and shoes export for example. Each year, China exports a large amount of clothing, shoes and hats to people around the world. The export volume is equivalent to three and half pieces of clothes and two pairs of shoes for each of the 5.2 billion foreign people. Despite of such a remarkably large number, we are simply original equipment manufacturers, with little profit. Besides, we have sacrificed our environment and resources. Therefore, this is also an unsustainable production mode. What the exportoriented enterprises need to do now is increase the value added of their products by accelerating their restructuring and upgrading processes. This is the only road.
According to the analysis of Yao, in addition to the internal factors, there are also external factors that are restricting the development of foreign trade enterprises, including unstable foreign demand, prevailing trade protection, difficult financing, and labor and power shortage. To solve these problems, the government should provide policy support for these enterprises.
At the same time, SMEs need to take their own situation into consideration and be realistic in restructuring. Zhu Weiping, head of the Institute of Industrial Economics of Jinan University, noted that not all enterprises in all industries are at the right time for restructuring and upgrading. As most SMEs are still struggling to survive, only a small proportion of them may successfully finish the task of restructuring and upgrading while more than half of these enterprises will be confronted with severe problems in the process. He said, “We must be aware of the fact that in the process of restructuring and upgrading, enterprises which can explore new markets and take the direction of market development will eventually achieve good results, while those with backward management and technologies and poor implementation will be gradually knocked out.” In the opinion of Dr. Lin Jiang, dean of the Department of Public Finance and Taxation at Lingnan College, Sun Yat-Sun University, among the struggling SMEs, some are actually sunset industries and should seek new opportunities in other industries. Some emerging enterprises, though supported by government, have poor management and nonexclusive technologies. They must reevaluate their ability in carrying out technological upgrading.
Zhang Junsheng, an expert from the University of International Business and Economics, said that one realistic way for China to transform its export pattern is to assign the R&D and marketing work to large and medium-sized enterprises while leave the SMEs in charge of producing standardized products and at the same paying the fees for the use of technologies. These enterprises will form a global industrial chain led by leading companies. This will be a good start for the transformation of China’s export pattern.
Dr. Cheng Jiansan also told the reporters that based on his recent research of the global markets and domestic industrial climate, the world’s economy faces the risk of a double dip, which will last as long as three to five years. This will definitely aggravate the already-serious situation of Chinese SMEs. Seen from this new round of economic crisis, as China’s manufacturing industry is reaching its highest point, new manufacturing markets are emerging and East Europe, Mexico and U.S. are reinvigorating their domestic manufacturing industries, the world’s industrial structure will be significantly readjusted in the near future. Under such circumstances, it is necessary for domestic manufacturers to increase the value added of their products and extend their businesses to middle and high-end markets, so that they can achieve further development.
Cheng also warned that product upgrading is not a cure-all. As the products enter middle and high-end markets, they have to face the competition from Japanese and Korean products. The pressure on the markets still remains great.
In view of the difficulties bothering export enterprises, relevant departments are taking measures to guide enterprises to speed up transformation. According to Shen Danyang, spokesman of the Ministry of Commerce, recently, an official document titled“Guidance on the construction of a national demonstration area of processing trade transformation in the Pearl River Delta Region” has been issued jointly by the Ministry of Commerce, the Ministry of Human Resources and Social Security and the General Administration of Customs. The government strives to transform the processing trade in the demonstration area to a high-end

and technology-based industry with presence on both global and domestic markets within three years.
Lu Ping, marketing manager of Shanghai UFIDA Technology Consulting Co., Ltd, who has been doing business with a lot of foreign trade enterprises, told reporters that in order to maintain their market share, some enterprises start to explore the domestic market and some are developing selfowned brands and collect information about opening sales channels.
Business owners who have successfully transformed their businesses and created their own brands told reporters that now it is a critical moment for enterprises to readjust themselves to meet challenges and boost their core competencies. “Enterprises should start with mid—market oriented brands and develop culturally symbolic and hightech products,” said Lin Lanfang, president of the Silkroad Co., Ltd.
Ma Kaishuo, dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore, suggested in the interview that in order to “go out” and gain presence on global markets, Chinese enterprises need to provide better and cheaper products of higher quality standards than the U.S. and European countries.
Shen Danyang also noted that as Dongguan is a typical city for processing trade, the Ministry of Commerce has listed Dongguan as the key and pilot place for processing trade restructuring and updating. This year, 13 measures, covering 8 aspects, were taken to further promote this cause and these measures will prove to be effective. According to the statistics, the top300 export enterprises in Dongguan have basically developed a design-and production-based operating model and the restructuring of those processing trade enterprises is also speeding up. In 2010, about 1,250 unincorporated processing trade enterprises were transformed to corporate enterprises, 1.4 times of the total number of previous years.
Experts say that the top priority for most SMEs in this period should be to find their accurate positions on the market and take a pragmatic attitude towards development. They can develop lateral association with each other and form industrial clusters. Leading companies should take the responsibility to integrate the whole industry with their advantages. With the ability to resist risks strengthened, SMEs can upgrade themselves and build their own brands. “All the facts have proved that, those enterprises, which possess their own brands, successfully survived the financial crisis and find opportunities for further development,” said Zhou Dewen, chairman of the Small and Medium-sized Enterprises Association of Wen Zhou.