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Slowdown hits Wenzhou firms

(China Daily/Agencies)
Updated: 2008-09-03 10:56

Tight margins

Zhu Changling, vice-president of the China National Furniture Association, said US importers were cutting orders as America's housing crisis deepened, while Chinese factories were reluctant to accept the currency risk entailed by long-term orders because of the steadily rising yuan.

Manufacturers are also having to absorb surging input costs, especially high oil and metal prices.

Cheng Zhe, a director at Zhejiang Haozhonghao Health Product Co Ltd, said raw material and labor costs had risen 20 percent and 10 percent respectively so far this year, squeezing the plump 30 percent profit margin the firm used to enjoy.

His firm, which sells a range of orthopaedic chairs, sofas and beds, exports about 80 percent of its production to the United States, the Middle East and neighboring Asian nations.

"We companies are undertaking bigger risks while our profit margin is shrinking," Cheng grumbled.

The gravity of the sector's ills are hard to judge from official figures.

Furniture exports in the first six months of 2008 were still up 28.5 percent in dollar terms from a year earlier, almost as strong as the 29.3 percent gain in all of 2007.

But a report to the cabinet by the Ministry of Commerce said the average profit margin of firms it surveys fell to only 1.1 percent in the first five months from 3.2 percent in the same period last year, a source told Reuters.

The ministry recommended slowing the yuan's pace of appreciation and increasing rebates of value added tax (VAT) to exporters to prevent a sharp drop in overseas shipments.

Chinese furniture makers are still very cautious about trying to pass on fast-rising costs to their customers.

"We are in dilemma," said Adwin's Liu. "If we raise prices, our clients will leave. But if we don't, we are going to suffer."

While his firm still hesitates, many others have already increased their prices. Some are losing export orders as a result and are having to focus more on the domestic market.

But Wenzhou is nothing if not resilient. The free-wheeling city is a cradle of capitalism and its traders are often in the vanguard when China carves out new markets in tough parts of the world.

As well as cutting staff, companies are trying to use energy and raw materials more efficiently, and seeking out alternative, lower-cost suppliers.

"We're confident that things will get better in the second half," Liu said, adding he was counting on October's Canton Fair and other trade shows to win fresh orders.

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