“I was almost frightened to death by a customer recently,” says Yu Tou, recalling an incident in which a Venezuelan client took away two containers of goods worth about US$200,000 without notifying her. Fortunately, 10 days later, she has just received payment from the client.
Yu Tou works with a Wenzhou-based foreign trade company that specializes in footwear products. She has three years of industry experience. Having dealt with small and medium-sized manufacturers and overseas buyers on a daily basis during this time, she now proclaims herself to be an industry veteran. Although the memory of the Venezuelan container experience still brings tears to her eyes, she says she can understand the client’s actions of collaborating with a broker to get an early release for the bills of lading. The price of crude oil - the lifeline of the Venezuelan economy - has slumped to US$50 a barrel on the international market, from a high of above US$140 in July. Venezuela has the world’s fifth largest oil reserves, and the largest in the Western Hemisphere. Therefore it was already a blessing that Yu’s client eventually got the cash and delivered payment as per original quotations. By the end of October, 2008 when the client took away the goods, it was the high season for stocking up for Christmas retail sales. Wholesalers were scrambling to distribute goods to retailers. However, given the deteriorating market conditions, there’s a risk that retailers may reject goods or refuse to deliver down payments, thus affecting wholesalers significantly.
By the end of November, most overseas dealers had reached the conclusion that “Christmas is over”. The year’s biggest sales season had ended before it was due to even start. It’s no surprise that market players are extraordinarily nervous and jittery.
Disappearing Customers
Many dealers do not have Yu Tou’s luck. In October, she started to hear all kinds of bad news from the marketplace. For instance, a manufacturer’s client had agreed to buy three containers of goods, but ended up canceling the order before production started. In other cases, production was already well underway when orders were cancelled abruptly, albeit with some compensation for the costs incurred. However, one of the most frightening scenarios is when the production of ordered goods has already been half completed by the time the supplier realizes the client has vanished. Such clients are no longer available via telephone, fax or e-mail. The manufacturers are left with loads of customized goods and materials, awaiting payment from foreign traders.
Such scenarios give rise to a vicious circle. Since the outbreak of the financial crisis in the US and Europe, financial institutions have been reluctant to lend, resulting in a credit crunch. Some clients have to give up orders or even “vanish”. This is because they rely on credit for procurement or are worried that shrinking consumer spending could lead to sluggish sales. Chinese foreign traders who fail to get the funds to pay for ordered goods may have to end up going into bankruptcy or forced liquidation, which will in turn quickly affect upstream manufacturers, dragging them into troubles.
A well-known case is that of Zhejiang-based Far East Leather Industrial Co., which received an order for goods valued at US$1 million from a Polish client. After receiving US$300,000 as a down payment, production began. However, one month later, as production was just about to finish, the bank with which the client had opened the account went bankrupt, and all leads to the client failed. Fortunately, Far East is the world’s largest pig leather manufacturing and marketing conglomerate, with annual output value of nearly RMB1 billion (US$146.1 million). After suffering this blow, the company had no option but to find ways to recover the loss slowly and offload the Polish order by discount sales. Yu Tou now also has a batch of goods worth US$770,000 in her hands, which was supposed to be delivered in September. Although the client still maintains contact with her company, the goods haven’t been picked up by the client so far.
All these events have dampened industry sentiment, as the vast majority of foreign traders and manufacturers are rather limited in their overall strength. As a matter of fact, for foreign traders like Yu Tou, their upstream producers are mostly small and medium-sized companies with about 200 to 500 employees and no more than three production lines. These producers suffer from shortcomings when it comes to marketing and sales, but are strong in terms of manufacturing competence. That’s why they need foreign traders like Yu Tou to help find clients and sell their products on overseas markets. But both manufacturers and foreign traders are now facing the risk of substantial drops in orders and the disappearance of customers. Cash flow could collapse at any time. In Quanzhou city in Fujian province, foreign traders have been offering production plants worth RMB10 million (US$1.5 million) for sale at the price of RMB5 million (US$730,565) because they fear that, if their cash flow dried up, the banks would take over their plants at a much lower price.
At the end of a year marked by the demise of Lehman Brothers, the outlook is particularly bad for the city of Wenzhou, a huge player in China’s shoe export business. In the past, the Wenzhou shoe industry accounted for 70% of the European wholesale market. However, this year’s orders have dropped 30% on average; in some cases they’re down as much as 50%. In one extreme case, an overseas Chinese who mainly targets the African-American shoe market in the US saw sales volume drop from 100 to 10 containers in the past year.
The mood at Wenzhou Lucheng Development Zone, a hub gathering small and medium-sized foreign footwear traders, is particularly subdued. As a reflection of industry woes, the zone has seen a sharp fall in electricity consumption over the last two months, which is supposed to be the busiest season in a year. The supermarkets and food stalls operated by migrant workers rarely see a customer. All the hustle and bustle normally associated with this area has disappeared. Even if someone occasionally comes around, then it’s to top up a phone card or buy a large plastic woven bag - the kind that migrant workers use to pack up blankets when they head back to their hometown. “Our plant only has one production line still running, with the rest all idle, and this last production line is likely to close after finishing the current order,” said one worker.
These foreign traders and manufacturers are the first local enterprises to be affected by the financial crisis. In fact, last year’s US sub-prime crisis didn’t affect China’s manufacturing sector. Considering the lead time involved in the manufacturing sector, orders for the year-end Christmas peak season are usually placed in June and July. For a month or so afterwards, manufacturers and clients would engage in discussions as samples are produced and appraised. Following this, it generally takes three months to complete production, transportation and customs clearance. By early November, most of the products hit retail shelves and payment for the goods is received. While orders from the US were not coming so easily this year, foreign traders were not necessarily looking at a doomsday scenario, as orders from South America, the Middle East and Africa were still arriving.