No horsing around

Human beings aren't the only ones being affected by the world financial turmoil. "Peter", a Yili horse, has found himself shuttled through several different stables recently.

Once the property of an owner in the Xinjiang Uygur autonomous region, Peter was sold to Zhou Qiang, boss of a mold company that services the machine tool industry in Taizhou, in East China's Zhejiang province, for more than 20,000 yuan four years ago. But Zhou was forced to sell the steed to a securities manager recently due to his mold company's bleak business. Then Peter was once again sold to a local equestrian club.

"Surviving is much more urgent than playing with horses," says Zhou, whose company's profits have shrunk sharply due to the soaring prices of raw materials and labor, plus increasing management and logistics expenses. The money put into inventing new products added more pressure to his funding chain.

The machine tool industry is the pillar industry for equipment manufacturing. Taizhou is the powerhouse of China's machine tool industry, with an industry cluster home to more than 2,000 companies.

Pan Xiuren, boss of a valve company in Taizhou, also feels the pinch. Despite this year's increase in his company's export volume, the profit margin has been squeezed, he says. The profit made by selling $12 million worth of valves last year has to be earned by selling $15 million worth now.

"We can't make products without making money. A company here just turned down orders from Shanghai GM because there is no profit," says a secretary-general of an industry association in Taizhou. He added that the downturn the auto industry is experiencing will have an impact upstream due to the auto accessories industry's ties to the machine tool industry.

Industry observers estimate that the sales of major machine tool companies were down 30 to 40 percent compared with the same period last year. The figure could hit 50 percent for some. Given a number of negative factors, such as the rising fixed-asset investment prices and production costs, as well as cash-flow difficulties, Taizhou's machine tool industry could continue to slide more than another 10 percent.

Taizhou's situation is typical of the pinch machinery and equipment manufacturing firms in China are feeling and the electrical appliance and products sector is no better.

Elec-Tech, a home appliance maker, is a good example. The Q3 reports of the company showed a dividend of 0.10 yuan per share, and a 50 percent increase in net profits. But executives are worried.

"The future is rife with uncertainties. The third quarter was good, but what about the whole year? What about the next year? We are not sure," Deng Fei, secretary-president of Elec-Tech, was quoted by 21st Business Herald as saying.

Elec-Tech, a Zhuhai-based small- and medium-sized enterprise (SME) is not familiar to most Chinese, but is well known in the international home appliance industry. More than half of the bread machines in the United States and Canada are produced by it. As an Original Equipment Manufacturer (OEM) and Original Design Manufacturer (ODM), it is the world's second largest small home appliance maker.

"OEM companies can neither control the sales channel nor the upstream resources, making it hard to shift pressure from cost hikes," Han Jinhua, an expert in home appliance industry was quoted as saying. "Besides, the fluctuation in overseas orders affects them greatly."

Unfortunately, exports account for 95 percent of Elec-Tech's sales.

As early as last year, a lot of OEM companies such as Elec-Tech began to demand a higher price from their customers in order to cope with price hikes. In 2006, retail giant Wal-Mart had 100 small home appliance suppliers but the number dropped to 11 in 2007.

"The number of suppliers declined and Wal-Mart also realized the price hikes were a necessity, otherwise the supply chain would collapse," says a deputy manager of Elec-Tech.

However, Elec-Tech grabbed a fairly good order at the 104th Canton Fair held this fall, which could be the envy of its peers in Zhuhai which saw an overall 3.1 percent decrease in export orders from the Fair.

A staff of one of Zhuhai's plasma TV producers says the number of visitors to his company's booth was down due to the world financial dive.

Overall statistics from the Fair were not encouraging. Export deals for machinery and electronic products declined to $13.92 billion, from $16 billion compared to the last session in April.

The chill from Canton Fair was not only felt by SMEs, but also by large companies.

Figures show that over 70 percent of the firms participating, from all over China, saw a decline in overseas orders. Statistics show that 174,562 overseas buyers attended the fair, and the total trade volume was $31.55 billion, a slump of 9.08 percent and 17.5 percent respectively, from the last Canton Fair. The declining demand was led by the global financial turmoil as well as a change in exchange rates. And Chinese enterprises are unable to transfer growing domestic manufacturing costs to overseas buyers.

"Exhibitors used to ease financial pressure by raising prices, but now the problem is that purchasers have no money to place orders," says He Xiaohua, vice general manager of the International Business Division of Konka Group, one of the leading home appliance manufacturers. "When we accept orders, we not only evaluate the purchasers' funding chain, but also take their countries' economic risks into account."

Another giant Haier faced a gloomy situation too. Its exports of refrigerators and washing machines decreased about 10 percent in the first three quarters of this year, causing the first deficit in China's home appliance sector in recent years, according to a department manager in charge of the products. He added that Haier has begun to abandon orders that are likely to lose money.

Haier is not alone. A couple of major home appliance makers in Pearl River Delta region, Gree, Midea and TCL, say the slump in home appliance exports was likely to accelerate.

"Some of the home appliance companies are expected to see their profits decline from 5 percent to 1.5 percent," says Liu Meikun, vice president of the China Chamber of Commerce for Import and Export of Machinery and Electronic Products.

Electric appliance and electronic products account for one third of China's export of machinery and electronic products, according to the latest statistics from Customs.

Customs statistics also showed the growth rate of machinery and electronic products in the first three quarters slowed to 24 percent, down 4 percentage points compared with last year.

Liu predicted that though the whole year's export rate will maintain 20 percent growth, the increase in the fourth quarter will be lower than previously forecast, and the next year will be even tougher.

Machinery and electronic products have been on the national export heap for years, with a proportion of over 50 percent.

"Both buyers and sellers are cautious now," says Liu, "uncertainty is the biggest potential danger ahead."

The US, Middle East and Europe used to be the most important markets for machinery and electronic products from Chinese companies. However, number of buyers from the US and Europe has fallen significantly.

"The shrinkage in the US and European markets is not surprising. Now we put our hope in emerging markets, especially the Middle East, which is not that sensitive to the economic fluctuation. At least, there is a delayed effect," says Liu.

CBW News

(China Daily 11/17/2008 page10)