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SME Labor-Capital Relations:Changes and Adjustment in Economic Downturn

2009-07-27

——Case Studies on SMEs in Ningbo and Wenzhou Cities

By Gong Sen & Wang Liejun, Research Department of Social Development of DRC

Research Report No 020, 2009

From November 7 to 10 and from November 28 to December 1, 2008, we conducted, through various channels, some surveys and made case studies on the operations, adjustments and labor law enforcement of some small and medium enterprises (SMEs) in the two cities of Ningbo and Wenzhou, Zhejiang Province over the past year when social and economic conditions experienced major changes. In Ningbo, we made surveys on five SMEs in a county-level city (see table 1 for detailed information about their production and operation). The five SMEs were distributed in the sectors of home supplies, plastic products, auto parts, safety equipment, motors and steel structures. Their annual business turnover ranged between 10~30 million yuan and their employment between a dozen to about 200 people. Two of these enterprises were labor-intensive, and four were export-oriented. In Wenzhou, we made surveys on six SMEs (see table 2 for detailed information about their production and operation) and held discussions with over 10 other enterprises. The six enterprises were distributed in the sectors of spectacles, footwear, clothes, parts for motorcycles and electric bicycles, and electrics. Their annual business turnover ranged between 10~70 million yuan and their employment between over 60 to 800 people. While five of them were labor-intensive, two were export-oriented. The following are our main findings and policy suggestions.

I. Most Enterprises Experienced Operational Downturn But Maintained Self-Rescue Ability and Methods

1. Most enterprises and especially export-oriented ones reported visible year-on-year slide in production and operation

Compared with the previous year, four of the five enterprises in Ningbo saw their sales or orders dropping visibly in 2008. The fall ranged between 20%~50%. While one enterprise producing export-oriented home supplies suffered a fall of over 50%, a workshop-type enterprise saw its toy orders being completely cancelled. In terms of employment, three enterprises cut by 20%~60%, and the other two reported no significant changes.

Table 1 Production and Operations of Surveyed Enterprises in Ningbo

Enterprise1

Enterprise2

Enterprise3

Enterprise4

Enterprise5

Products & markets

Mosquito nets & cushions: Europe & America; energy-saving lights: beginning in 2007 and for domestic market

Toys & small construction tools: foreign market; road dividers: domestic market

Auto parts: 90% for foreign market; safe deposit boxes: 70% for foreign market

Construction steel structures: domestic market

Roller blinds & tube-shaped motors: Europe & America

Sales in 2008 (in 10,000 yuan)

1000~2000

About 500

10000

Over 3000

1000

Gross profit rate in 2008

About 8%

Tools: 8%

Road dividers: 20%

30%~50%

10%

40%

Employees

About 65

13

About 220

Over 20

Over 30

Monthly wage (yuan)

1200~1300

1200~1300

1200~1300

1200~1300

920~1400

Ratio of labor cost

20%~30%

About 20%

8%

5%~6%

5%

Changes of sales or orders

Over -50%

Toys: cancelled; Others: increased

Auto parts: -40%

Safe deposit boxes: drastically increased

No significant change

-20%

Changes of gross profit rate

-50%

-20%

No significant change

No significant change

-20%

Changes of employment

-60%

-20%

-30%

No significant change

No significant change

Note: Changes to orders, gross profit rate and employment are relative to their 2007 figures.

None of the six enterprises in Wenzhou expected a fall in their 2008 sales. But their performance in November 2008 indicates that half of these enterprises reported a 10% drop in their orders and none of them reported significant changes or increase. Three of them expected a slight drop in their annual gross profit rate, ranging between 2~4 percentage points. Three enterprises saw their employment decreased by 10~20%, with the other three reporting no changes.

Of the 11 surveyed enterprises in the two places, six were export-oriented. Compared with 2007, two saw their profit rates dropping by about 10 percentage points and two reported a 2~4 percentage point dip. Besides, these four enterprises also saw their orders being affected, though in different degrees.

Table 2 Production & Operations of Surveyed Enterprises in Wenzhou

Enterprise6

Enterprise7

Enterprise8

Enterprise9

Enterprise10

Enterprise11

Products & markets

Spectacles: 50% for Europe,America&Japan; 30% for emerging markets; 20% for domestic market

Footwear: Europe,America& emerging markets

Direct, chain-based operation of private brand clothes: domestic market

Parts for motorcycles and electric bicycles: 30% for foreign market indirectly and 70% for domestic market

ACfrequency converterfor industrial equipment: domestic market

Private-

brand

women’s shoes: domestic market

Sales in 2008 (in 10,000 yuan)

About 7000

NA

NA

3000

3000

1000

Gross profit rate in 2008

Close to 10%

5%~8%

20%~30%

About 20%

20%~30%

Under 20%

Employees

Over 800

Over 100

5000~6000

200

Over 60

200~300

Monthly wage (yuan)

About 1200, plus welfare benefit

1300~1400

About 1400

1500~1600

About 2500, plus bonus

About 1500, plus bonus

Ratio of labor cost

20%~30%

20%

About 20%

About 15%

Not high

About 20%

Changes of sales or orders

Up 10% for whole year

No significant change

Slightly increased for whole year, but dropping since September

No significant change for whole year

Up 35% for whole year, but dropping since October

(Newly-built factory)

Changes of gross profit rate

-30%

-30%

Slightly dipped

Slightly increased

No significant change

To promote brand and control profit

Changes of employment

-12%

-20%

No significant change

No significant change

About -10%

No layoff for the year

Note: Changes to orders, gross profit rate and employment are relative to their 2007 figures, while NA means data are not available.

The conditions of the five domestic-oriented enterprises were fairly good. Enterprise 9 and Enterprise 11 reported increase in their production and operations, with the former posting a slight profit growth and being prepared to expand production and the latter posting a profit of over 10% since it began operation in the same year. Besides, Enterprise 4 saw its operation in the first 10 months being largely at the same level with the previous year. Although Enterprise 10 saw its sales beginning to be affected in October 2008 and declining 30% in November, its sales and profit by the end of November exceeded the levels of the previous year. Of the domestic-oriented enterprises, Enterprise 8 was the most-affected, with its sales beginning to drop in September 2008 and its gross profit rate being slightly lower than in the previous year. Of the 10 plus enterprises participating in discussions, one coal trading company failed to sell a single ton of coal in three months from September to November and the owner of one steel structure company was prepared to hide himself from the dunners at the end of the year.

2. Most enterprises are fully confident while some make complaints

Enterprise 9 was the most confident one. Its owner believed that at present, both the central authorities and the regional governments were paying high attention to the issue of economic downturn and that once attention was focused on some relevant issues, solutions were bound to be found and solutions would outnumber difficulties. He predicted that the auto parts sector would recover between March and June 2009. Similar to Enterprise 9, Enterprise 10 was also full of confidence. Its owner said one should consider why other people could make money, instead of complaining about the crisis. Enterprises 9 and 10 also showed their confidence with actions. Not long ago, they all bought new machines and equipment. Besides, Enterprise 9 also took advantage of the crisis and recruited lots of technical experts. Enterprise 6 also employed some key technical personnel from bankrupt enterprises.

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