Export Slowdown

The global financial and economic crisis has started to impact China in many different ways.

In the southern export-driven boomtowns of Dongguan and Shenzhen thousands of factories have closed already. Tens of thousands of people who migrated from the countryside to work in these factories have lost or will loose their jobs.

What will happen to them ? Many will return early to their rural home towns ahead of the Chinese new year (January 26th). They will return home to their families. Those who leased their land before they migrated to the coastal boom towns will find severe problems because the holder of their land lease will not necessarily welcome them back. This could cause problems for both parties as the returned migrant seeks to return to their previous work and the lease holder seeks to hold on to the lease.

Regardless of what the workers end up doing the key question is will the Chinese export machine recover ? Will these factories be able to shift their focus from simple labor intensive export businesses to higher value added businesses ?

This shift will be very hard to complete in the short run because the majority of these workers do not have professional skills. They are not well educated. Shifting careers or advancing careers is extremely difficult.

Some will find ways to retrain by entering vocational training programs.

Some will return to the rural areas and try to start small businesses.

Some will migrate to the growing number of small and medium sized urban cities being built across China's inner provinces.

Chinese export industries must find innovative ways to re-direct their focus from exports to domestic consumption. This will take years but with such a large market available in China there is certainly opportunity if companies can make a rapid shift.

Personally I think that shifting to domestic consumption will be extremely difficult for the former export-driven enterprises.

The original export business model was based on the following principles:

1. Produce products at very low cost and acceptable quality
2. Sell the products for cost to overseas buyers in volume.
3. Collect the Chinese government export credit payment
4. Generate profit based on the export credit

Given that there is no industry subsidy for domestic production many enterprises will have to find ways to differentiate....this means higher quality....higher quality than the next competitor.

Higher quality means investment in fixed assets and training the workforce. This will raise costs and put pressure on margins.

To sum this up in one sentence:

Many Chinese enterprises have made a significant amount of profit in the last 10 years BUT this has been "easy money." That is a rising tide lifts all boats.....now that the tide has receded enterprises must differentiate or die.

This is the current challenge.