Ningbo, China Chen Lifeng's dress-making company survived the global financial crisis yet may fall victim to today's milder economic slowdown, one that China deems necessary to secure its future growth.
His company, Ningbo Tengsheng Garments Co. is grappling with slackening overseas sales, rapid wage rises and higher raw material costs that erode already thin profit margins.
"The situation is grimmer than 2008-09. New orders are falling, but wages are rising. Many firms are doing even worse and some have gone bankrupt," said Chen, whose factory in the eastern province of Zhejiang churns out $4 million (Dh14.68 million) to $5 million worth of dresses each year.
"We are doing our best, but frankly I don't know how long we can maintain our business."
He points to the empty sewing machines on the factory floor — a third of the capacity. Firms like Chen's face extinction if they can't evolve to keep up with China's next phase of growth.
Beijing is making good on long-standing promises to redirect its economy toward domestic growth instead of exports. That will involve embracing a painful core principle of capitalism: creative destruction. Companies that cannot adapt will fail.
Beijing seems prepared to accept that. Economic growth is slowing, and figures due on Friday are expected to show first-quarter output expanded at the slowest pace since 2009, at the tail end of the global financial crisis.
Unlike in 2009, when it embarked on a massive government spending spree to prop up growth, China has done little to prevent the economy from slowing and has even adopted a lower economic growth target, acknowledging that three decades of 10 per cent average annual GDP expansion are over.
Ningbo thrived under the old growth model, powered by labour-intensive exports of goods assembled by China's seemingly endless supply of low-skilled, low-paid workers. But the city has been investing heavily to build a high-tech zone.
In the city centre, away from the industrial belt, shopping centres packed with affluent consumers hungry for fashion brands provide a glimpse of what Beijing hopes will come next: a consumer-driven economy. A Raffles City mall is due to open this year in Ningbo, a city of six million, plus another four million migrant workers, which sits about 250km south of Shanghai.
Margin squeeze
Top officials have insisted that the country cannot delay reforms to rebalance its economy. Boosting wages is part of the equation, and China's latest five-year economic plan calls for an average annual increase of 15 per cent. But that can push small businesses to the brink.
New export orders for Chen's business have fallen 30 to 40 per cent so far this year from a year earlier. Average monthly wages for workers, on the other hand, have climbed 10 to 20 per cent, on top of last year's 40 to 50 per cent surge.
In addition to the 3,000 yuan (Dh1,762) monthly salary, the privately run firm has to contribute another 250 yuan to each worker's social security funds — medical care and pensions — and provide accommodation for its 130 workers, Chen added.
That leaves little money for the firm to automate production lines, let alone develop brands to rival the likes of "Shanshan" and "Youngor" — leading national brands that are symbols of Ningbo's thriving clothing industry.
Countries such as Vietnam, Cambodia and Bangladesh have begun undercutting the China price on labour-intensive goods such as clothing, which means that moving up the value chain is essential to survival. Official data showed textile exports grew by just 1.4 per cent year on year in the first quarter, versus overall export growth of 7.6 per cent. Exports of higher value-added machinery and electronic products grew twice as fast.
Forecast
You Zhongguang, deputy manager of Ningbo Xingwei Plastic Products Co, one of China's biggest exporters of cutters and knives, forecast sales of 180 million yuan ($28.5 million) this year, up from 163 million yuan in 2011, but sees rising wages as his biggest challenge.
"The scope for making profits gets smaller and smaller, our gross profit margin is only 10 per cent. Considering the rise in wages and raw materials, the margin is very small," he said. To boost productivity, the company plans to spend as much as 5 million yuan this year to automate production lines, he said.
Moving inland, where wage costs are typically at least a third lower than on the coast, can help buy time to climb the value chain, upgrade technology and boost productivity.
Haitong Food Group, one of the leading food processors in China, relocated its main production base from Ningbo to Hubei and Jiangsu and moved its sales headquarters to Shanghai, said general manager Zhou Lequn. "It's not entirely driven by labour costs. We also want to get closer to the source of raw materials," he said.
Ningbo city government has unveiled new initiatives to cope with the export downturn, including organising domestic and overseas trade fairs and helping factories to shift production facilities.