As export markets skid, companies and leaders in Shanghai and nearby provinces are being forced to make necessary changes.
Zhao Hejuan, Caijing 1 February 2009
What initially appeared to be a passing thunderstorm for businesses in the Yangtze River Delta has expanded into an economic eruption of volcanic proportions.
Just six months ago, many business leaders said they were optimistic about the future of small- and medium-sized enterprises in Jiangsu and Zhejiang provinces, despite the weakening economy. They opened up umbrellas.
But the crisis grew worse, and soon it was clear that the delta was being pelted, not by raindrops, but by lava. Today, even the city of Shanghai and major enterprises in Zhejiang, China’s most developed private sector, are in the danger zone.
A recession overseas has been blamed for the mounting crisis in the delta, a key national economic engine and China’s biggest beneficiary of foreign investment and international trade since the country joined the World Trade Organization.
But industrial stagnation, heavy reliance on exports, and other largely self-made circumstances also have been cited as reasons for the region’s current eruption.
Production levels have been slashed and operations suspended. Companies have run out of cash, prompting some to seek gray-area loans or government bailouts.
Indebted bosses who didn’t get away fast enough were arrested, or committed suicide. Local governments and banks in southern Jiangsu, home to many foreign enterprises, went to great lengths to prevent Taiwanese and Korean company managers from fleeing before paying workers and repaying loans.
And the shake-up may only have begun.
No Relief Yet
Reliance on exports obviously exposed the region to the worldwide economic downturn, affecting companies of all sizes in a broad range of sectors.
Foreign investment in the Yangtze Delta accounted for 24.7 percent of the total in China in 1997. That figure jumped to 47.8 percent in 2007. Over the same period, the region’s exports increased to 39.6 percent of China’s total, from 21.9 percent.
Many major private companies including Zhejiang Nanwang Information Industry Co. Ltd., Zhejiang Jianglong Holding Group, Zhejiang Zengheng Group and Zhejiang Hualian Sunshine Petrochemical Co. Ltd., started running out of cash in the second half of 2008. Local government intervention calmed the storm, but only temporarily.
Economic statistics from major cities in the delta show growth has slowed since last summer, and some cities have fallen into a recession.
An economic operations report for Zhejiang covering the first three quarters of 2008, published by the provincial statistics bureau in November, showed the value-added growth rate among all state-owned enterprises and private enterprises with annual sales volumes of more than 5 million yuan was 11.6 percent for the first three quarters compared to 13.5 percent in the first quarter. Profit growth rates for the same periods were 4.8 percent and 18 percent, respectively.
Jiangsu’s latest indicators were better, but the province’s future business prospects have been just as pessimistic as those in Zhejiang.
The Shanghai Statistics Bureau’s publication Major Economic Indicators of Yangtze Delta Cities said profit growth rates among selected large, industrial enterprises in Ningbo, Nanjing and Shanghai fell a respective 31 percent, 44 percent and 7.8 percent between January and September 2008.
Other statistics show Shanghai exports have decreased since December, and revenues have fallen since November, marking the first major retraction in the country’s largest city since its Pudong urban development began in 1990. More pain is likely on the way.
“The darkest time has yet to come,” said a participant at a joint meeting of delta city government leaders in December. “2009 will be tougher.”
The mayor of Shanghai, Han Zheng, was among the dire forecasters.
“We have been facing a downturn since last September, into the first quarter of this year,” Han said in January. “The downturn has not reached bottom yet. So far, the problems are not being resolved.”
Transition Time
Han said Shanghai’s predicament is not only tied to the global financial tsunami, but also to the city’s growth pattern and industrial structure. Now, after 18 years of rapid expansion, the city has been backed into a corner and forced into a transition phase.
“The transition could have been achieved over an extended period,” the mayor said. “But the American credit crunch triggered an economic transition crisis.”
Shanghai’s circumstances are mirrored throughout the delta. Cai Zhangsheng, director of the Small- and Medium-Sized Enterprises Office for Zhejiang, told Caijing that private enterprises took previous overseas downturns in stride thanks to their strong capacity for risk aversion. This time, enterprises were not as strong.
“It is high time to realize that we are in an economic transition,” Cai said. “An economic transition has been proposed for several years, but only a few companies made it a reality.
“Now, it is really difficult.”
But difficult is not impossible. Already, a framework for transition is in place with emphasis on the value-added upgrading of delta industries, a shift to domestic markets from exports, and improvements in corporate culture and operations.
“Economic transition: What a demanding task!” said Zhen Yonggang, board chairman for clothing manufacturer Shanshan Group, an industry leader with assets of more than 10 billion yuan.
Zhen, whose company makes clothes for major brands, thinks labour advantages are and will continue to be at the core of competitiveness for Chinese enterprises for a long time. But companies should move up the value ladder – a step Shanshan has already taken.
“Now we can choose the brands we want to serve and we have started our own design team as a result of industrial upgrading,” Zhen said.
A second aspect of the transition is expected to involve reducing the regional economy’s dependence on exports. For many companies, that’s a tall order.
A manager at Zhejiang Hengfeng Holding Group, an exporter of fishing tackle, toys and outdoor furniture, told Caijing the firm has been exploring ways to switch to domestic sales from foreign markets. But his confidence is low. Such a move would be tough for a company whose products were designed exclusively for western consumers.
Another hurdle is that many of the region’s companies are owned by foreign investors, mainly from Japan or South Korea, that received local government support and restricted opportunities for private, Chinese companies. Moreover, most of their factories are labour-intensive.
Du Wenzhong, director of information for Suzhou’s economic and trade commission, said local governments granted foreign enterprises too many preferential policies and hurt private companies. Now, his city’s private sector of textile, steel and machinery companies is facing high risks.
Last but not least, the transition is expected to require improvements in the region’s corporate culture.
Private enterprises in the delta have carved special market niches, sometimes using unique technology. However, many lack a sense of brand development and a commitment to business integrity. Their relationships with governments could be fine-tuned as well.
Regional Integration
The current crisis is pressuring delta companies as well as regional entities to embrace transition as well as integration. And the pace of change is speeding up.
The State Council in August approved guidelines for the delta’s economic transition. It was the first opinion on regional development planning ever released by China’s cabinet.
Ten tasks were proposed, including a priority call “to hasten industrial upgrading to form an industrial structure in which a modern services industry is the pillar.”
Yu Qing, director of the Yangtze Delta Development Research Center at the Shanghai Academy of Social Sciences, thinks a transition from global manufacturing center to the services industry would not only help the regional economy move forward, but also bring interior and western regions of China more opportunities to develop manufacturing and services.
The delta’s integration actually began in 1997 at an economic coordination meeting of mayors from 16 cities. And since 2001, vice governors from Shanghai, Jiangsu and Zhejiang have held annual economic cooperation and development meetings. Communist Party and other government leaders from the three regions also have met periodically since 2004.
Progress has been made in the fields of tourism and transportation. However, deeper problems are still waiting to be resolved due to conflicting economic and political interests among various jurisdictions.
Yu Hongsheng, a member of the Yangtze Delta Comprehensive Planning Group of the National Development and Reform Commission, said the economic crisis will highlight the benefits of regional integration.
Yu told Cajing that, with a slowdown in the momentum of local economic development, regional cities must adopt mutually complementary and beneficial strategies. They must think regionally, he said, and new policies are needed to facilitate the flow and production of goods, with efficiency and industrial upgrading in mind.
More detailed guidelines for regional planning in the delta are expected to be issued later this year. Still, companies across the region cannot escape the rumbling volcano.
“According to our observations, enterprises eliminated in this round of market adjustment are low-level and inefficient,” said Ma Jinlong, president of the Wenzhou Economic Association. “Time waits for no man. Enterprises have to face industrial upgrading.”
Shanghai’s Han said the services industry must become a leading force for the necessary changes. But it won’t be easy.
“It’s hard to reach the long-term target,” Han said. “Enterprises lack incentives for innovation and creativity.”
But the mayor added, “We will make historic mistakes if we are short-sighted.”
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Yangtze Delta: Begins its Tough Transition
As export markets skid, companies and leaders in Shanghai and nearby provinces are being forced to make necessary changes.
Zhao Hejuan, Caijing
1 February 2009
What initially appeared to be a passing thunderstorm for businesses in the Yangtze River Delta has expanded into an economic eruption of volcanic proportions.
Just six months ago, many business leaders said they were optimistic about the future of small- and medium-sized enterprises in Jiangsu and Zhejiang provinces, despite the weakening economy. They opened up umbrellas.
But the crisis grew worse, and soon it was clear that the delta was being pelted, not by raindrops, but by lava. Today, even the city of Shanghai and major enterprises in Zhejiang, China’s most developed private sector, are in the danger zone.
A recession overseas has been blamed for the mounting crisis in the delta, a key national economic engine and China’s biggest beneficiary of foreign investment and international trade since the country joined the World Trade Organization.
But industrial stagnation, heavy reliance on exports, and other largely self-made circumstances also have been cited as reasons for the region’s current eruption.
Production levels have been slashed and operations suspended. Companies have run out of cash, prompting some to seek gray-area loans or government bailouts.
Indebted bosses who didn’t get away fast enough were arrested, or committed suicide. Local governments and banks in southern Jiangsu, home to many foreign enterprises, went to great lengths to prevent Taiwanese and Korean company managers from fleeing before paying workers and repaying loans.
And the shake-up may only have begun.
No Relief Yet
Reliance on exports obviously exposed the region to the worldwide economic downturn, affecting companies of all sizes in a broad range of sectors.
Foreign investment in the Yangtze Delta accounted for 24.7 percent of the total in China in 1997. That figure jumped to 47.8 percent in 2007. Over the same period, the region’s exports increased to 39.6 percent of China’s total, from 21.9 percent.
Many major private companies including Zhejiang Nanwang Information Industry Co. Ltd., Zhejiang Jianglong Holding Group, Zhejiang Zengheng Group and Zhejiang Hualian Sunshine Petrochemical Co. Ltd., started running out of cash in the second half of 2008. Local government intervention calmed the storm, but only temporarily.
Economic statistics from major cities in the delta show growth has slowed since last summer, and some cities have fallen into a recession.
An economic operations report for Zhejiang covering the first three quarters of 2008, published by the provincial statistics bureau in November, showed the value-added growth rate among all state-owned enterprises and private enterprises with annual sales volumes of more than 5 million yuan was 11.6 percent for the first three quarters compared to 13.5 percent in the first quarter. Profit growth rates for the same periods were 4.8 percent and 18 percent, respectively.
Jiangsu’s latest indicators were better, but the province’s future business prospects have been just as pessimistic as those in Zhejiang.
The Shanghai Statistics Bureau’s publication Major Economic Indicators of Yangtze Delta Cities said profit growth rates among selected large, industrial enterprises in Ningbo, Nanjing and Shanghai fell a respective 31 percent, 44 percent and 7.8 percent between January and September 2008.
Other statistics show Shanghai exports have decreased since December, and revenues have fallen since November, marking the first major retraction in the country’s largest city since its Pudong urban development began in 1990. More pain is likely on the way.
“The darkest time has yet to come,” said a participant at a joint meeting of delta city government leaders in December. “2009 will be tougher.”
The mayor of Shanghai, Han Zheng, was among the dire forecasters.
“We have been facing a downturn since last September, into the first quarter of this year,” Han said in January. “The downturn has not reached bottom yet. So far, the problems are not being resolved.”
Transition Time
Han said Shanghai’s predicament is not only tied to the global financial tsunami, but also to the city’s growth pattern and industrial structure. Now, after 18 years of rapid expansion, the city has been backed into a corner and forced into a transition phase.
“The transition could have been achieved over an extended period,” the mayor said. “But the American credit crunch triggered an economic transition crisis.”
Shanghai’s circumstances are mirrored throughout the delta. Cai Zhangsheng, director of the Small- and Medium-Sized Enterprises Office for Zhejiang, told Caijing that private enterprises took previous overseas downturns in stride thanks to their strong capacity for risk aversion. This time, enterprises were not as strong.
“It is high time to realize that we are in an economic transition,” Cai said. “An economic transition has been proposed for several years, but only a few companies made it a reality.
“Now, it is really difficult.”
But difficult is not impossible. Already, a framework for transition is in place with emphasis on the value-added upgrading of delta industries, a shift to domestic markets from exports, and improvements in corporate culture and operations.
“Economic transition: What a demanding task!” said Zhen Yonggang, board chairman for clothing manufacturer Shanshan Group, an industry leader with assets of more than 10 billion yuan.
Zhen, whose company makes clothes for major brands, thinks labour advantages are and will continue to be at the core of competitiveness for Chinese enterprises for a long time. But companies should move up the value ladder – a step Shanshan has already taken.
“Now we can choose the brands we want to serve and we have started our own design team as a result of industrial upgrading,” Zhen said.
A second aspect of the transition is expected to involve reducing the regional economy’s dependence on exports. For many companies, that’s a tall order.
A manager at Zhejiang Hengfeng Holding Group, an exporter of fishing tackle, toys and outdoor furniture, told Caijing the firm has been exploring ways to switch to domestic sales from foreign markets. But his confidence is low. Such a move would be tough for a company whose products were designed exclusively for western consumers.
Another hurdle is that many of the region’s companies are owned by foreign investors, mainly from Japan or South Korea, that received local government support and restricted opportunities for private, Chinese companies. Moreover, most of their factories are labour-intensive.
Du Wenzhong, director of information for Suzhou’s economic and trade commission, said local governments granted foreign enterprises too many preferential policies and hurt private companies. Now, his city’s private sector of textile, steel and machinery companies is facing high risks.
Last but not least, the transition is expected to require improvements in the region’s corporate culture.
Private enterprises in the delta have carved special market niches, sometimes using unique technology. However, many lack a sense of brand development and a commitment to business integrity. Their relationships with governments could be fine-tuned as well.
Regional Integration
The current crisis is pressuring delta companies as well as regional entities to embrace transition as well as integration. And the pace of change is speeding up.
The State Council in August approved guidelines for the delta’s economic transition. It was the first opinion on regional development planning ever released by China’s cabinet.
Ten tasks were proposed, including a priority call “to hasten industrial upgrading to form an industrial structure in which a modern services industry is the pillar.”
Yu Qing, director of the Yangtze Delta Development Research Center at the Shanghai Academy of Social Sciences, thinks a transition from global manufacturing center to the services industry would not only help the regional economy move forward, but also bring interior and western regions of China more opportunities to develop manufacturing and services.
The delta’s integration actually began in 1997 at an economic coordination meeting of mayors from 16 cities. And since 2001, vice governors from Shanghai, Jiangsu and Zhejiang have held annual economic cooperation and development meetings. Communist Party and other government leaders from the three regions also have met periodically since 2004.
Progress has been made in the fields of tourism and transportation. However, deeper problems are still waiting to be resolved due to conflicting economic and political interests among various jurisdictions.
Yu Hongsheng, a member of the Yangtze Delta Comprehensive Planning Group of the National Development and Reform Commission, said the economic crisis will highlight the benefits of regional integration.
Yu told Cajing that, with a slowdown in the momentum of local economic development, regional cities must adopt mutually complementary and beneficial strategies. They must think regionally, he said, and new policies are needed to facilitate the flow and production of goods, with efficiency and industrial upgrading in mind.
More detailed guidelines for regional planning in the delta are expected to be issued later this year. Still, companies across the region cannot escape the rumbling volcano.
“According to our observations, enterprises eliminated in this round of market adjustment are low-level and inefficient,” said Ma Jinlong, president of the Wenzhou Economic Association. “Time waits for no man. Enterprises have to face industrial upgrading.”
Shanghai’s Han said the services industry must become a leading force for the necessary changes. But it won’t be easy.
“It’s hard to reach the long-term target,” Han said. “Enterprises lack incentives for innovation and creativity.”
But the mayor added, “We will make historic mistakes if we are short-sighted.”
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