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SMEs scouting for ways to remain in business

By Zhou Yan (China Daily)
Updated: 2008-12-01 07:47

Li Yuanxu, professor at Fudan University in Shanghai, says by recognizing the problem early and making moderate cuts, SMEs can manage to survive the grim winter. Removing redundancies and keeping businesses well-controlled are undoubtedly good options, Li points out.

And apparently, this strategy has been widely adopted by most of the country's faltering enterprises.

Statistics show that over 20 million factory workers have lost jobs in China from January to June, mainly in the East Coast region which hosts a majority of the small firms. The redundancy numbers are likely to climb further in the second half if global economy slips further into recession.

According to the talent market figures from Shenzhen, a main city for export-oriented companies situated in Pearl River Delta, the number of recruiting companies in the talent market dropped by 30 percent in the third-quarter compared with the earlier quarter, while the number of job-seekers rose to 40 percent in the last four months.

Many local governments in China have now started taking actions to solve the emerging and acute social problem resulting from the job losses.

Shenzhen has opened a "green channel" for laid off workers to deal with "labor and capital" issues, according to media reports.

The local government of Dongguan has pledged to get approval from central authorities to ease the execution of the new labor law on manufacturers, and also to curb growth of minimum wages, says China Economic Net reports quoting Deputy Mayor Jiang.

There seems to be no silver lining. At the 104th Chinese Import and Export Fair held in Guangzhou from late October to early November, trade deals clinched by private-owned enterprises fell 18 percent over last year to $8.56 billion.

"The lost Christmas orders will not come back even after the importers get letters of credit now," says Gong, adding that exports would remain "subdued in the next couple of months."

Redundancy factor apart, there is also a great need for many of the small firms to adopt more cost-cutting techniques to thwart stagnant sales.

Feeling Pinched

Of the 30 percent rise in costs necessitated by dwindling global demand, appreciation of the yuan, and higher operating costs, only 10 percent could be passed on to suppliers, while the rest had to be absorbed by the enterprises, says Wen Zhongliang, deputy director-general of foreign trade department, ministry of commerce, at a press briefing.

Although the central bank has eased the credit woes through a series of stimulus packages in a bid to mitigate the capital shortage faced by SMEs, tightening belts remains essential for small enterprises to chart a steady path.

It is not realistic to borrow money from large commercial banks given the rigid approval conditions and lengthy examination procedure, Luo says, citing that his neighboring firm did not get a bank loan even after six months by which time most of its capital was wiped off.

"Cash in hand is always more secure. That is why we dropped the plan to move into a 12,000-sq-m factory building next June, and chose to stay in the 5,000-sq-m building instead," Luo says.

By actively adopting more serious, even minor, internal changes, businesses can avoid more cuts later on, and therefore are more likely to be left intact and stronger when the financial turmoil ebbs, financial experts say.

Han Bin, a 31-year-old deputy general manager and co-founder of auto show organizer Hangzhou JR Exhibition Co, Limited, agrees.

Han says he decided to control overheads ever since his start-up began operations in 2005. He decided to outsource most of the non-core businesses like human resources, finance to translation services and software development to independent professional companies.

"Outsourcing service improves our efficiency and effectively reduces labor cost and is handy to practice in troubled times. The exhibition industry is as sensitive as the stock market. We have to keep our team small and easy to manage so that we can safely exit unprofitable businesses to avoid huge losses," Han says.

Though the company is expected to see its sales growth fall to 50 percent from last year's 100 percent due to lower auto part orders, Han remains upbeat on the future. "Under such circumstances, we will have more time to train our staff and explore more product lines. I believe we can recover once the financial crisis ends."

"It is a useful strategy for small firms to maintain sustainable growth," says Sun Xiuchun, general secretary of China Association of SMEs, adding that enterprises can upgrade their overall service qualities from outsourcing their sub-businesses, and in turn put more emphasis on developing their core business.

Other services like travel expense management may also help in curtailing expenditures, industry insiders say.

Travel expenses, the second largest manageable costs, can be cut at least by 20 percent if firms take steps to control them, says Zhang Qiang, chief operation officer of Intohotel, a domestic online business to business travel management company.

"As a start-up, we're fortunately living in a warm winter as more companies turn to us for managing their travel plans," Zhang says.

With most of the airlines resorting to capacity cuts, companies like American Express Business Travel feel that teleconferencing and social networking sites will gain popularity as cost-effective ways to supplement meetings for SMEs.

AMI-Partner, a consulting firm specializing in IT and business services market, estimates that China's SME market will spend $42 billion on information technology this year, up 12 percent over last year, to improve office efficiency.

Undoubtedly, when the economy falters, every little change could become a turning point for smaller firms.

"Only companies that are cautious on each step forward, whether it be on spending money or on expansion, will be able to survive the bleak winter. That's also where Darwin's theory of evolution works," Luo says.

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