Making the shoe fit
Currency appreciation, rising labor costs and tighter environmental rules have cut into Wenzhou shoe-making companies' profits and have forced them to change business strategies, focusing more on quality and brand building, Yu Ran reports.
Lee Fung Shan, a 33-year-old Hong Kong businesswoman, may never be able to get used to the dusty roads, honking horns, traffic and people speaking a dialect that's as alien to her as Swahili, in this boom town by the ocean in Zhejiang province.
But having worked in Wenzhou for nearly six years, she has never been bored. "Everything changes so fast here," Lee said. "I have a hard time catching up with it although I came from a city that's known for its fast pace," she added.
Indeed, the transformation from a sleepy, sea-side rural town to an industrial powerhouse in less than two decades has won Wenzhou the widely circulated accolade "haven for entrepreneurs," among many others, some of which aren't so complimentary. Now, the city's entrepreneurs, who have amassed fortunes in shoe manufacturing, clothing and special industries, are finding that daring, brawn and hard-work are no longer enough to make their fortunes grow.
A combination of factors, including currency appreciation, rising labor costs and tighter environmental rules, have cut into their profits. What's more, declining demand in overseas markets, particularly the United States and Europe, is choking their businesses.
The quick mind that was honed in the Hong Kong factory where she worked before coming to Wenzhou stands her in good stead now. As general manager of a German shoe importer, R&N GmbH, Lee finds that her main job now is to convince her Wenzhou suppliers to change and adapt. "They must realize that the good times are over and they will have to invest in design and innovation," she said. "The days of bulk manufacturing in the cheap are gone," she added.
In the past six years, Lee had spent most of the time discussing with local manufacturers how to raise the quality of their products.
"The key problem among the majority of the shoemakers in Wenzhou, is that their products are similar in style and quality but compete only in price, and that should be changed to place more focus on quality and brand building instead," said Lee.
She added that it is quite difficult to find a suitable manufacturer to produce high standard shoes in a short time, with reasonable prices, because quality monitoring in the factories is not stabile if there are too many orders being produced at the same time.
Talking about the local businessmen, Lee said she was quite delighted that she had the chance to make so many kind and generous friends among her business associates.
"I'm glad to find out that business partners also can be good friends in their daily life. to offer help from time to time during my stay in Wenzhou," said Lee.
Lee added that more Wenzhou businessmen are open-minded and accept Western style products to fit the European market, which is definitely a sign they are ready to move forward to the world stage.
In the past decade, Wenzhou, China's hotbed of private capital had attracted businessmen from different regions, who ordered cheap products manufactured by the factories because the labor and materials cost were comparatively low.
"I've been working in Wenzhou since 2000, when there was few companies from other regions setting up offices here," said Henry Yeh, the manager of Wenzhou branch, Novi Footwear Ltd, a Taiwan based company mainly selling women shoes.
Yeh added, that Wenzhou as a small city in which thousands of manufacturers have gathered, experienced a peak period before 2008, and then went down gradually, affected by the worsening global export industry at a time when the city could no longer maintain an advantage in low-priced merchandise.
As Yeh noted, certain successful family businesses that passed on to the second generation failed to maintain product quality, as they had done in the past.
"Wenzhou, in the near future probably will turn into a financial city instead of the manufacturing hub, as more businessmen transfer their focus, to make investments in all industries," said Yeh.
Yeh added, that most Wenzhou businessmen are quite confident about their companies, when in reality, their prospects are not very good.
He thinks of Wenzhou as his second hometown and for that reason, is quite worried about the slowdown he has observed there in the past five years.
"I haven't seen many changes among my business partners, or willingness to upgrade their products for higher prices with better quality but they are still struggling in the tough low price market, among other manufacturers," said Yeh.
Since last year, local factories and other companies in Wenzhou have been suffering from a series of severe financial problems.
During the credit crisis last year, about 100 Wenzhou businessmen were reported to have disappeared, declared bankruptcy, and some even committed suicide over debts in excess of 10 billion yuan.
The flight occurred after State-owned banks, suddenly tightened their lending policies for SMEs after September, 2011.
Wenzhou was selected for a pilot project at the end of March, covering 12 major areas. The city was urged to develop privately owned financial services, establish village banks and rural financial agencies, and to encourage State-owned banks to lend to smaller businesses. .
"Most of the companies in the city have suffered tough times in the past years, with few orders from overseas clients and nearly zero profit," said Yeh.
Yeh added that if those companies still don't make alternations to their products, fewer new companies will come to the city proposing cooperative ventures.
According to statistics provided by the Wenzhou Shoe and Leather Industry Association, over 800 of 2,761 shoe manufacturers in the city either shut down or stopped production in the past nine months, owing to a lack of orders.
"Most of those companies got into trouble because of lack of orders, almost zero profit because of the appreciation of renminbi (RMB)," said Xie Rongfang, secretary-general of the Wenzhou Shoe and Leather Industry Association.
Xie added that the profit margin for local SMEs is getting smaller, while the expenses for labor and materials kept growing, and the appreciation of RMB brought more and more impact.
In addition, experts suggested that SMEs need to focus more on the quality of their products at the moment.
"Applying the machine to replace workers or moving certain production lines overseas to save on labor costs, as a long-term plan is also a good option for the potential medium-sized enterprises," said Rui Meng, a professor of finance and accounting, at the China Europe International Business School in Shanghai.
From a long-term perspective, Rui advised that the SMEs had better enhance the quality of their products with more innovative techniques in order to stand out from tough competition with unique branded products.
SMEs in Wenzhou have already caught on that it is the time to solve the quality problems and deal with the high costs of labor by moving away from the traditional manufacturing style.
"Some of the SMEs in the association have bought machines from Italy, to replace hundreds of workers with 10 to 20 university graduates, to save the labor costs and manufacture high-end products with higher quality and price," said Xie from the Wenzhou Shoe and Leather Industry Association.
Xie added that mechanical shoe manufacturing with high standard items for famous brands, is the only solution for the shoemakers if they want to expand their profit margin and jump out of the traditional shoemaking industry.
But having worked in Wenzhou for nearly six years, she has never been bored. "Everything changes so fast here," Lee said. "I have a hard time catching up with it although I came from a city that's known for its fast pace," she added.
Indeed, the transformation from a sleepy, sea-side rural town to an industrial powerhouse in less than two decades has won Wenzhou the widely circulated accolade "haven for entrepreneurs," among many others, some of which aren't so complimentary. Now, the city's entrepreneurs, who have amassed fortunes in shoe manufacturing, clothing and special industries, are finding that daring, brawn and hard-work are no longer enough to make their fortunes grow.
A combination of factors, including currency appreciation, rising labor costs and tighter environmental rules, have cut into their profits. What's more, declining demand in overseas markets, particularly the United States and Europe, is choking their businesses.
The quick mind that was honed in the Hong Kong factory where she worked before coming to Wenzhou stands her in good stead now. As general manager of a German shoe importer, R&N GmbH, Lee finds that her main job now is to convince her Wenzhou suppliers to change and adapt. "They must realize that the good times are over and they will have to invest in design and innovation," she said. "The days of bulk manufacturing in the cheap are gone," she added.
In the past six years, Lee had spent most of the time discussing with local manufacturers how to raise the quality of their products.
"The key problem among the majority of the shoemakers in Wenzhou, is that their products are similar in style and quality but compete only in price, and that should be changed to place more focus on quality and brand building instead," said Lee.
She added that it is quite difficult to find a suitable manufacturer to produce high standard shoes in a short time, with reasonable prices, because quality monitoring in the factories is not stabile if there are too many orders being produced at the same time.
Talking about the local businessmen, Lee said she was quite delighted that she had the chance to make so many kind and generous friends among her business associates.
"I'm glad to find out that business partners also can be good friends in their daily life. to offer help from time to time during my stay in Wenzhou," said Lee.
Lee added that more Wenzhou businessmen are open-minded and accept Western style products to fit the European market, which is definitely a sign they are ready to move forward to the world stage.
In the past decade, Wenzhou, China's hotbed of private capital had attracted businessmen from different regions, who ordered cheap products manufactured by the factories because the labor and materials cost were comparatively low.
"I've been working in Wenzhou since 2000, when there was few companies from other regions setting up offices here," said Henry Yeh, the manager of Wenzhou branch, Novi Footwear Ltd, a Taiwan based company mainly selling women shoes.
Yeh added, that Wenzhou as a small city in which thousands of manufacturers have gathered, experienced a peak period before 2008, and then went down gradually, affected by the worsening global export industry at a time when the city could no longer maintain an advantage in low-priced merchandise.
As Yeh noted, certain successful family businesses that passed on to the second generation failed to maintain product quality, as they had done in the past.
"Wenzhou, in the near future probably will turn into a financial city instead of the manufacturing hub, as more businessmen transfer their focus, to make investments in all industries," said Yeh.
Yeh added, that most Wenzhou businessmen are quite confident about their companies, when in reality, their prospects are not very good.
He thinks of Wenzhou as his second hometown and for that reason, is quite worried about the slowdown he has observed there in the past five years.
"I haven't seen many changes among my business partners, or willingness to upgrade their products for higher prices with better quality but they are still struggling in the tough low price market, among other manufacturers," said Yeh.
Since last year, local factories and other companies in Wenzhou have been suffering from a series of severe financial problems.
During the credit crisis last year, about 100 Wenzhou businessmen were reported to have disappeared, declared bankruptcy, and some even committed suicide over debts in excess of 10 billion yuan.
The flight occurred after State-owned banks, suddenly tightened their lending policies for SMEs after September, 2011.
Wenzhou was selected for a pilot project at the end of March, covering 12 major areas. The city was urged to develop privately owned financial services, establish village banks and rural financial agencies, and to encourage State-owned banks to lend to smaller businesses. .
"Most of the companies in the city have suffered tough times in the past years, with few orders from overseas clients and nearly zero profit," said Yeh.
Yeh added that if those companies still don't make alternations to their products, fewer new companies will come to the city proposing cooperative ventures.
According to statistics provided by the Wenzhou Shoe and Leather Industry Association, over 800 of 2,761 shoe manufacturers in the city either shut down or stopped production in the past nine months, owing to a lack of orders.
"Most of those companies got into trouble because of lack of orders, almost zero profit because of the appreciation of renminbi (RMB)," said Xie Rongfang, secretary-general of the Wenzhou Shoe and Leather Industry Association.
Xie added that the profit margin for local SMEs is getting smaller, while the expenses for labor and materials kept growing, and the appreciation of RMB brought more and more impact.
In addition, experts suggested that SMEs need to focus more on the quality of their products at the moment.
"Applying the machine to replace workers or moving certain production lines overseas to save on labor costs, as a long-term plan is also a good option for the potential medium-sized enterprises," said Rui Meng, a professor of finance and accounting, at the China Europe International Business School in Shanghai.
From a long-term perspective, Rui advised that the SMEs had better enhance the quality of their products with more innovative techniques in order to stand out from tough competition with unique branded products.
SMEs in Wenzhou have already caught on that it is the time to solve the quality problems and deal with the high costs of labor by moving away from the traditional manufacturing style.
"Some of the SMEs in the association have bought machines from Italy, to replace hundreds of workers with 10 to 20 university graduates, to save the labor costs and manufacture high-end products with higher quality and price," said Xie from the Wenzhou Shoe and Leather Industry Association.
Xie added that mechanical shoe manufacturing with high standard items for famous brands, is the only solution for the shoemakers if they want to expand their profit margin and jump out of the traditional shoemaking industry.
