By Shen Xing (申兴) and Yang Xingyun (杨兴云)
Economic Observer Online
Oct 10, 2011
Translated by Laura Lin
Original Article: [Chinese] 

A report published last week found that 72 percent of small and medium-sized Chinese enterprises said the rising cost of raw materials is the greatest difficulty they currently face. In comparison with the same period last year, the prices of raw materials have gone up by between 20 and 50 percent, causing a decline in small business profits by as much as 40 percent.

Without a brand to shield them, the already modest profits of smaller businesses can quickly evaporate if production costs rise. Many small business owners tell researchers that they are using their savings from the two previous good years in order to survive.

The survey was conducted jointly by the National Development Research Institute of Peking University (北京大学国家发展研究院) and Alibaba Group Research Center  (China) Co. Ltd.

In Sep of this year, researchers visited 95 small businesses, 11 professional markets and 15 local banks in the the Pearl River Delta region of southern China. They also sent out 2,889 questionnaires via the Internet to small enterprises also located in the Pearl River Delta.

In face of rising production costs, small businesses lack the ability to fatten their profits via brand-building or by upgrading their core technology. The garment industry serves as a good example: though fabric prices have risen by between 30 percent and 80 percent, as most factories are at the end of the industrial production chain, it's impossible for them to pass on the additional costs as the prices of the products have already been fixed, which forces them to sacrifice profits instead.

In addition, increasing labor costs are squeezing the profits of small enterprises. Compared to 2010, wages have gone up by between 20 and 30 percent. Certain high-skilled workers' wages have even doubled. Even so, worker turnover is high, while recruitment is difficult. According to the study, more than half of the managers of small enterprises interviewed regard rising labor costs as one of the three major difficulties that they face.

Shrinking orders, both foreign and domestic, and exchange rate fluctuations also undermine company profits.

The tightening of bank loans to medium-sized enterprises combinded with the shrinking of the purchasing power of foreign customers, have put huge pressure on small businesses as they struggle to afford raw materials.

Meanwhile, the payment period for delivered products has been extended, putting extra pressure on these small firms' finances and highlighting the lack of funding channels.

Zhou Qiren (周其仁), the Director of the National Development Research Institute, pointed out that the government needs to speed up interest rate reform in order to ease the availability of loans for small businesses.

On the other hand, Chinese firms also have to control their costs, as well as to develop competitive products for the domestic market.

News in English via World Crunch (link)

Links and Sources
National Development Research Institute of Peking University: Full Report
Alibaba Group: Alternate link