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"In the past, an outstanding balance of 250,000 yuan would just be left hanging, but now, this money has become a lifeline for the company." In order to pay the workers before the 15th, Chen Jingping (pseudonym) spent three days negotiating at a mall in Qingdao, but returned empty-handed.
Chen Jingping runs a garment processing company in Yantai, mainly focused on exports. Recently, affected by factors such as exchange rates, technical barriers, and labor costs, the business is struggling financially.
Workers' salaries have increased, and companies are facing layoffs.
"Salary payments for the workers are due soon, but this money is still nowhere to be found." How to solve the immediate living issues for 300 employees is causing great anxiety for Chen Jingping.
Since March 1st, Yantai has raised the minimum wage standard, increasing each person's monthly salary by 190 yuan. For 300 people, that’s 57,000 yuan per month, which amounts to 684,000 yuan annually—almost equaling the company's annual profit. With workers' salaries increasing this year, layoffs may also be necessary.
Chen Jingping admitted that after the 2008 financial crisis, the number of employees in his company dropped from 490 to 300. But according to the current development trend, further layoffs seem inevitable.
Chen Jingping explained that due to rising costs, many companies choose to raise prices to offset losses, but this also leads to the loss of China's low-price advantage in the international market for clothing. During a recent Canton Fair, he noticed that some European and American buyers prefer to purchase clothing from cheaper places like India, Vietnam, and Cambodia. In the low-end sector, China no longer holds the significant advantage it once did.
Currently, domestic labor shortages frequently occur, and the trend of continuously rising labor costs is difficult to reverse. In contrast, Cambodia's labor costs remain relatively stable, and tariffs for exporting garments from Cambodia to Europe and America are lower. Some capable competitors are planning to relocate their companies to Cambodia, producing there directly upon receiving orders, ultimately resulting in even lower costs than producing in China when freight charges are added.
Unable to understand exchange rate fluctuations, Chen abandoned over a dozen deals.
Chen Jingping's company primarily produces shirts, with orders mainly exported to Europe and the United States. The annual sales amount to approximately 8 million RMB. Recently, due to exchange rate changes, his company hesitated to accept large volumes of orders.
Chen Jingping mentioned that last month they received an order for 50,000 shirts, but the client insisted on pricing according to last year's rates. At that time, he calculated that if he accepted based on the then-current exchange rate, it would result in a loss of over 300,000 RMB. Situations like this, where he dared not take seemingly profitable orders, have occurred over a dozen times this year. On January 12th, the central parity rate was 1 USD = 6.6128 RMB, while on November 24th, it was 1 USD = 6.3570 RMB.
Chen Jingping informed reporters that his company had been working on a batch of shirts for export to Europe in the first half of the year. The fabric for these clothes came from South Korea, and all transactions with upstream and downstream enterprises were conducted in US dollars.
Recently, watching the continuous devaluation of the RMB, he currently cannot predict the trend of exchange rates. If the devaluation continues, he might stop rejecting orders; however, if it's a short-term dip followed by another appreciation channel, the more orders he accepts now, the more losses he will incur later.
"Data published by the Garment Industry Association shows that for every 1% appreciation of the RMB, the sales profit margin of the garment industry decreases by about 4%," said Chen Jingping. To avoid risks brought by exchange rate fluctuations, many export processing enterprises in Yantai are now very cautious. Since the beginning of this year, the pressure from RMB appreciation has significantly exceeded the pressures caused by inflation in domestic raw material and labor costs.
Unable to recover foreign debts, forced to delay payment of goods.
Chen Jingping's garment company has been in operation for over ten years. Except for the period during the 2008 financial crisis, the business has generally run smoothly. However, since the second half of this year, the company has been affected in multiple ways, leading to declining performance, and Chen Jingping has started suffering from insomnia.
On December 13th, when the reporter met him, he was reviewing financial reports in his office. "There are still over 630,000 RMB in accounts receivable that haven't been recovered, and I really don't know where to find the money for the workers' salaries this month." Although Chen Jingping spoke with a smile, the ashtray on the table filled with cigarette butts clearly showed his anxiety.
Garment processing lies at the center of the entire garment industry supply chain, connecting finished product sales on one end and raw material supply on the other. Due to the decreasing number of export orders, Chen Jingping has shifted part of his production to the domestic market. "I've always avoided domestic sales because domestic merchants usually withhold a portion of the payment. When the business was good, this wasn't noticeable, but now, even a debt of tens of thousands of RMB is unbearable for the company." Chen Jingping said that to ensure normal operations, workers' wages must be prioritized. Without options, he can only delay repayment to suppliers of fabrics, buttons, and other raw materials. As a result, the dreaded "triangle debt" has emerged.
"Raw material suppliers are also struggling. Yesterday, I received a call from the button factory threatening to halt supplies if the payment isn't cleared by the end of the month." Chen Jingping said that if raw material supplies are interrupted, the company's operations will grind to a halt.
Under normal circumstances, his company needs at least 800,000 RMB in working capital, but now just one mall in Qingdao owes them 250,000 RMB in unpaid goods. This sum constitutes 3% of the company's total annual sales, occupies 30% of the company's working capital, and is almost one-third of the company's annual profit. It's impossible not to feel anxious.
Expensive testing fees and insurmountable technical barriers
Just as small and medium-sized garment enterprises face mounting pressures from RMB appreciation and rising costs, in June, the EU's "REACH" regulations erected another technical barrier on their path to breakthrough.
Chen Jingping said that according to the EU's "REACH" regulations, products containing substances of very high concern (SVHC) exceeding limits must be reported to the EU Chemicals Agency before June 1, 2011. Products that fail to report will be unable to enter the EU market. "This new regulation is truly a disaster for us small enterprises."
The EU's "REACH" regulations, which officially took effect on June 1, 2007, represent a technical trade barrier. To retain European orders, Chen Jingping's company specifically assigned personnel to study these regulations and conduct rigorous product inspections.
Over the past four years, four batches of substances have been classified as SVHCs, including phthalates, arsenic pentoxide, chromium trioxide, among 46 substances. "Now, we need to first determine whether the newly added eight substances will appear in our products and inform suppliers to strictly control during the production process. If the product fails and recall is requested, all enterprises along the chain will suffer losses." Speaking of this, Chen Jingping looked utterly helpless.
The exorbitant testing fees have driven many small garment enterprises to abandon European orders and switch to the domestic market. Chen Jingping's company is barely holding on. He explained that textile and garment raw materials, auxiliaries, and production processes require the use of many chemicals. According to the "REACH" regulations, every additional substance requires an extra test, and each product must undergo dozens to hundreds of tests, with each test costing several thousand yuan. Such expensive fees almost drive all small garment enterprises out of the market.
Chen Jingping said that the new regulations issued by the EU have further reduced the scope of material procurement for small enterprises that already compete mainly on price advantages, adding invisible extra costs. Small and medium-sized garment enterprises primarily targeting the EU market will inevitably face closure if they do not transform promptly.