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Series II: SMEs under pressure of rising production costs

08-16-2011 16:38 BJT

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Soaring price levels are squeezing profits made by China's enterprises, especially smaller businesses. In today's special series about China's small and medium size enterprises, our reporter Guan Xin takes a closer look at the impact of rising production costs, and how some companies are adapting.

It's been a tough year for Zhongsheng Group, a private-owned, medium size enterprise producing cooking oil in the eastern coastal province of Fujian. Due to rising costs, the company has experienced big losses for the first time in its 18 years of operation. And in such conditions, they don't know how long they can hold on.

Chen Yingxiang, Dep. GM of Zhangsheng Oil & Grain Group said, “The official sale price for cooking oil is 9,500 yuan per ton. However, first grade soybean oil costs around 10,200 yuan per ton. We are losing several hundreds of yuan for every ton of cooking oil we produced.”

The current environment is tough for many manufacturers. As China’s annual inflation soared to 6.5 percent in July, finding ways to contain runaway prices has become a top concern for policy makers.

The National Development and Reform Commission, the country’s top economic planner, has required cooking oil producers to guarantee supply and keep prices stable. To compensate for their losses, the NDRC has tapped into national reserves and distributed soy beans to several large enterprises in the industry. But Zhongsheng Group, as a medium sized company, does not benefit from the move.

Chen said, “I think the central or local governments should treat fairly all enterprises. They should give us the same support or subsidies. Otherwise, at the speed we are losing money we won’t be able to hold on much longer.”

This is a common challenge that most of China's small and medium size enterprises face. Compared to large enterprises, smaller businesses usually have less external support and have to bear the effects of rising costs themselves.

According to a survey of 232 enterprises mostly in Zhejiang, Guangdong, and Fujian provinces, improving production efficiency is the main way they are dealing with rising costs. Switching produce for more expensive and high-end items only ranks fourth.

These result are echoed by Mr. Fang, who runs a car seat factory. His company is facing rising steel and oil prices.

Fang Zhequn, GM of Xiamen Golden Dragon Auto Seat Co., Ltd. said, “Our way to deal with rising costs is to improve our manufacturing methods, boost efficiency, and optimize procedures. By doing so, we can manage to absorb the impact of rising costs.”

But still, many enterprises are struggling. Some call this a form of 'natural selection'. China's Producer Price Index, which measures the change in the price of goods purchased and sold by producers, jumped to 7.5% in July from 7.1% the previous month. And labor costs increased some 20 to 30 percent in China’s manufacturing hubs. All these are eating away at profits. With small profit margins, China's SMEs are struggling to adapt to this new reality.

Editor:Li Wanran |Source: CNTV.CN

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