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Series IV: Chinese exporters turn to domestic market

08-18-2011 17:19 BJT

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China has built up a major export-oriented economy over the past 30 years, with many small and medium sized enterprises engaged in selling their goods overseas. But, they now face a harsh environment as global demand weakens. In the last installment of our financial focus on China's SMEs, Guan Xin takes a look at the challenges they face, and why turning to the domestic market is no easy task.

Firefly, an LED lighting company, used to be export oriented. It's now making efforts to tap into the Chinese domestic market. It's an expensive move. David Chia, the company's president, says to sell your goods in China, you need first to promote your brand.

Chia said, "For domestic sales, you are supposed to have a good brand. But for export, you don't really need one, you mainly work on the OEM base. So one of the main investments in domestic sale is for advertisements, for promotion, I think it's a necessity. Otherwise in China market, you can only do very low end products."

The company is one of China's small and medium sized exporters, struggling to change its business model in the face of a worsening foreign trade environment. As the US and European countries see their debts rising, consumer confidence has taken a beating. Economists forecast that uncertainties in overseas demand will be a blow to China's export sector.

Zuo Xiaolei, Chief Economist of Galaxy Securities said, "The less the US people consume, the less China exports, not to mention they press China to raise the currency exchange rate for the Renminbi. Then there will be fewer Chinese companies as many of them will shut down, and it will harm employment in China. So the US debt will cause a painful situation for both China and the US."

Over time, China's export sector has built a mature industrial supply chain in coastal areas of the country. But turning to domestic market, it's a different system. You have to deal with different logistics and sales networks, and manage inventories, that can cost a lot of capital.

Chia said, "So all these challenges, you have to change your mind, you should have a new team, and in some way to change the culture of the company to adjust to the demand of the China market."

To achieve this, some stronger companies are able to make a successful transformation, but not everyone. The harsh environment is pushing many smaller export businesses to the edge. In 2010, the average profit in the export sector is 1.74%, much lower than the average level of 6.2%, due to falling overseas demand, and the appreciation of the yuan. And in 2011, it is expected to get even worse. With such a thin profit margin, some business owners simply shut down their export companies, and invest the capital in the equity market, or lend the money to earn interest. For them, exploring domestic demand, is just too costly, and risky a choice.

Editor:Li Wanran |Source: CNTV.CN

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