Taiwanese exporters risk going bust in China

Amid reports of rising bankruptcies among SME exporters in China‟s Guangdong province, we recently visited 13 Taiwanese SMEs with manufacturing operations in the province. Slowing overseas orders are raising fears that many smaller exporters in the region, both foreign and domestic, will go bust, risking a repeat of the dire market conditions seen during the 2008-09 crisis. Exporters in the region also face rapidly rising costs, intensifying competition, tight credit conditions and an appreciating Chinese yuan.

The Taiwanese manufacturers we visited include makers of textiles, apparel, shoes, audio components, TV casings, kitchenware and plastic tiles. Based on unofficial estimates, there are more than 24,000 Taiwanese manufacturers in Guangdong province, out of about 70,000 in mainland China as a whole.

Taiwanese producers in mainland China appear to be less affected by the current market uncertainty than their local counterparts. Many are less vulnerable than in 2008-09 because they have avoided expanding aggressively over the past two years. They are also in better financial shape than local SMEs, as they are less dependent on onshore banks (which are scaling back lending under government tightening measures) for funding.

Many indicated that overseas buyers are still placing small orders for the „quiet‟ postholiday period from February to April, apparently seeking to secure supply for 2012.

Here are some of our main findings:
Only three of the 13 companies we surveyed expect overseas orders to improve in early 2012 from this year, while the rest expect sales to slow in early 2012.

None of the companies surveyed are concerned that overseas orders will collapse, as they did during the 2008-09 recession.

Wages are up by an average 10-20% this year, while productivity has improved only mildly; this will put pressure on operating margins.

Many companies reported significant increases in the purchase prices of their top three raw materials, averaging about 10-20%. More than half expect the CNY to appreciate by 3-5% over the next 12 months, which may make their exports less competitive in overseas markets.

All of our respondents indicated the need to continue to invest in capital equipment. Some are considering moving overseas or moving their operations to lower-cost locations in inland China in response to increasingly unfavourable operating conditions in coastal Guangdong.