Many companies in the Yangtze River Delta and Pearl River Delta have been struggling with rising labor and raw material costs, as well as difficulties obtaining financing. An estimated 48,000 domestic small and medium-sized enterprises (SMEs) reported losses at the end of 2015, according to one official report. The losses amounted to 461 billion yuan ($66.34 billion). Experts predicted that more labor-reliant manufacturing SMEs will shut down due to policies aimed at reducing excess capacity. Still, China's manufacturing sector is not recessing. The State Council released guidelines in December that stressed the development of strategic emerging sectors including high-end manufacturing, information technology and new energy.
A 45-year-old woman surnamed Shen was doing her work as usual on October 25, 2015, when rumors began to swirl that her boss had absconded, leaving behind 70 unpaid coworkers at their company in Yancheng, East China's Jiangsu Province.
Shen said the company, which specializes in manufacturing clearing equipment for large plants, had done decent business after it started up in 2011, but orders had dwindled in recent years.
"We hadn't been paid in 10 months after the manager ran off," she told the Global Times on Monday.
Shen's story epitomizes the struggles in China's traditional manufacturing sector.
In Wuxi, East China's Jiangsu Province, many companies have shut down as high costs have pushed many past the point of profitability, said a local businessman surnamed Cao.
Cao started making paper tubes for textile mills in 2010.
"There was a large demand for paper tubes in Wuxi because of the city's booming textile industry. So, I decided to manufacture this product, which used to have a profit margin as high as 15 percent," he told the Global Times Sunday.
But the margin had disappeared approaching the end of this year. "For one thing, our sales have fallen by nearly 20 percent due to sluggish demand in December. At the same time, our raw material costs have continued to rise in 2016," he said. "For example, the price of body paper has surged more than 30 percent this month."
Despite the losses, Cao and his peers are maintaining production so they can hold on to their customers until the market improves.
Over the last two years, many domestic small and medium-sized enterprises (SMEs) have closed down, especially the Pearl River Delta in South China and the Yangtze River Delta in East China.
Struggling SMEs
Domestic paper maker Guangxi Nanning Phoenix Pulp & Paper Co in South China's Guangxi Zhuang Autonomous Region stopped production due to losses and is in the state of "being shut down," local newspaper the Nanguo Morning Post reported on Thursday.
These companies are going bankrupt due to high costs for raw materials, environment regulation compliance and labor, as well as excess production capacity, experts noted.
"With rising labor costs, low-end labor-oriented manufacturing industries in coastal areas have to transform or move to the central-west regions or Southeast Asia, where costs are lower," said Zhao Xiao, a professor at the University of Sciences and Technology in Beijing.
China's minimum wage rose 22 percent in 2011, 20.2 percent in 2012, 17 percent in 2013 and 14.1 percent in 2014, according to a report in May on SME operation on lwzb.cn, a website affiliated with the National Bureau of Statistics (NBS).
In 2015, 28 regions in China raised their minimum wages by about 14 percent, far higher than the 3.5 percent growth rate of SME revenue, the report said. In addition, the rising costs of land, capital, logistics and environment protection compliance have also added to operation costs.
Of the 50 key means of production surveyed in 24 provinces, the price of more than 30 materials rose from December 11 to December 20, compared with the previous 10-day period, NBS data showed on Monday.
The Bohai-Rim Steam-Coal Price Index, an official gauge of the spot price for coal in northern China's major ports, had jumped 60 percent this year to a record 607 yuan ($87.35) per ton on November 2, following 18 straight weeks of increases.
But the problems of SME operations cannot be ignored. Domestic SMEs are under pressure from a lack of talent, a shortage of capital and core technologies, said Zhang Yuanda, secretary-general of the organization committee of China Mass Entrepreneurship & Innovation Summit.
"There are strict loan requirements for SMEs that consume a lot of energy and produce a lot of pollution," said a bank employee surnamed Liu at the Agricultural Bank of China's Bengbu branch in East China's Anhui Province.
"To get loans, small companies have to put up assets such as mills, construction land and products as collateral," Liu noted.
Most SMEs are family-run companies with somewhat irregular management structures, making it hard for them to get loans, Zhang told the Global Times on Sunday.
What's worse, a shortage of cash at companies can lead to a vicious circle that can damage the entire manufacturing sector.
"Small firms tend to default on payments for goods, directly exacerbating suppliers' cash liquidity, which might damage the whole industry," Cao said.
At the end of 2015, an estimated 48,000 domestic SMEs reported losses, which were worth a combined 461 billion yuan, up 18.8 percent year-on-year, according to the SME operation report.
Industry reshuffle
Zhao predicted that a greater number of SMEs will close down in the next few years because of government policies to reduce excess capacity, which will lead to a restructuring of the domestic manufacturing industry.
"Some industries that don't fit with China's market conditions will have to withdraw or transform by adopting new technologies. For example, labor-oriented industries should move to Southeast Asia or India," he told the Global Times.
However, SME closures don't mean China's traditional manufacturing sector is in recession, Zhao said.
"Some industries may be decaying because their cycle has passed, but some companies may shut down due to improper operation," he said.
On December 19, the State Council, China's cabinet, rolled out guidelines on strategic emerging industries. The guidelines aimed to boost development of high-end manufacturing, information technology, new energy, and the digital and creative industries.
The guidelines also stressed that China should build a strong manufacturing industry, develop a modern services sector and upgrade low-end industries to middle and high-end industries by developing new technologies, new products, new businesses and new business models.
To survive, SMEs must strengthen innovation and guarantee their cash flow, Zhang said.
