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Facing problems of toying with industry

By Zhang Haizhou (China Daily)
Updated: 2008-11-04 07:35

But contrary to his expectations, Smart Union suffered a huge loss after investing up to 400 million yuan in silver reserves in Fujian province in January.

According to the Guangzhou Daily, it's "highly possible" that the investments were made through the toy factories' corporate account. Jiang agrees with it. "After paying workers' salaries, the bosses normally left nothing for the factories' maintenance," Jiang says. The failed investments are to blame for Smart Union's cash-flow problems.

The company got listed on the Hong Kong stock exchange, a territory few labor-intensive firms ventured into then, reportedly to accumulate more capital in 2006. It performed poorly on the bourse, with its shares dropping from more than HK$1 each to about HK$0.08 before it folded up.

The company's cash-flow problem aggravated after floods hit the factory in June, causing a loss of more than $8.6 million, according to its half-year report. That was not all, Smart Union owed about 200 million yuan to distributors, media reports said.

"The bosses have the money to pay the debts," Jiang says. Wang Zhonghua, spokesman for

Zhangmutou's local government, corroborates Jiang, saying the toy maker used the financial crisis for a "premeditated escape".

"Smart Union's bankruptcy has nothing to do with the financial crisis," Wang says. The real reason why it shut down is mismanagement and failed investments. The trend of foreign investors jumping ship is becoming common in Dongguan, especially for firms with little investments in fixed assets.

There are more than 400 overseas firms in Zhangmutou, over 60 percent of which are from Hong Kong, Wang says. Most of the foreign investors rent their warehouses, and only a "few build their own factories. Without fixed investment, jumping ship is easy And those who do so always owe factory rent and workers' wages."

Smart Union was one such factory. It had rented most of its 10,000-sq-m factory, except for two small warehouses, Jiang says. Dongguan has more than 15,000 overseas firms, including many from Hong Kong and Taiwan. According to the city's bureau of foreign trade and economic cooperation, most of these groups have rented factories. The owners of three Taiwan firms in Dongguan jumped ship last June, according to media reports.

The phenomenon is not confined to Smart Union or Dongguan. It is being seen in other parts of the country, too. In Qingdao, Shandong province, 87 South Korean entrepreneurs escaped late last year, Xinhua said.

Yu Chin-wu, deputy secretary of the association of Taiwan enterprises in Dongguan's Shilong township, says many overseas investors came to the city only to make a "fast buck". Yu started his PC monitor factory in Shilong in 1992. And though he began with a rented factory, he spent more than 50 million yuan to build his own 84,000-sq-m factory in 1999.

But few other overseas investors would do so, he says. "More than 80 percent of Hong Kong firms carry on business in rented premises, with about two-thirds from Taiwan following similar arrangements ... They come here to earn fast money and leave once they feel the market is getting bad."

Toy makers in Dongguan have seen their orders drop by 20 percent for the last quarter of this year. And their manufacturing cost has risen more than 35 percent, according to the city's foreign investment enterprises' association.

But despite everything, Yu is surprised by Smart Union's sudden closure because such big firms should be able to cope with such crisis through other means, including laying off some staff.

Yu has cut the number of workers in his PC monitor factory from more than 2,400 last year to about 1,300. "Sudden 'escapes' are rarely seen in big firms' cases." If firms as big as Smart Union start jumping ship, it can pose a social problem, too, with thousands of migrant workers becoming jobless.

Apart from paying the Smart Union's laid-off workers their arrear salaries, the Dongguan government has also set up a 1-billion-yuan fund to help local firms tackle problems.

Moreover, the city is trying to devise measures to prevent firms from closing down suddenly, says Fang Shaoming, a director in the general office of Dongguan's bureau of foreign trade and economic cooperation. "The government is thinking of how better to support local firms especially legally, under which new measures would state clearly the responsibility of the firms."

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