The Future of SMEs in China

Sunday, August 31, 2008 21:03
Posted in category The Big Picture

4 years ago while working on a project in the construction equipment arena, I interviewed a man and his wife who had set up a booth at the Bauma show to showcase their products.  they were clearly a small firm, they had clearly developed their regional niche, and they clealy did not understand what was going in the market on around them.

They relied on a single buyer, and they were in an industry that was consolidating small firms like theirs, rolling the individual components into systems, and then steam rolling the others.

It is a story I have seen over and over again, and the article  Zhejiang’s Market Rescue Plan details a recent announcement by Zhejiang’s officials to stimulate the SME sector:

China’s Zhejiang provincial banking commission has mandated a 7 billion yuan credit line to help local small and medium enterprises (SMEs) ride out a perfect storm created by tight credit, yuan appreciation, and increasing costs.

the article does a goodjob of highlighting the fact that SMEs are in distress, and that the policies putting in place will essentially aid SME on the liquidity, but through their “poster child”industry that I grew a bit conflicted:

Zhou Dahu, the director of Wenzhou’s Tobacco Product Accessories Association, said there were over 3,000 lighter-producing businesses in Wenzhou at the peak in 1993, but that the number had decreased to 600 or 700 in recent years. Today there are no more than 100 still in operation, he added.

Now of course, Mr. Zhou is going to look out for his own much as much as any American Union Leader would look out for their own, but if there were an industry that in my mind should have consolidated a long time ago it would be the Zhejiang lighter industry. The industry is highly capital intensive, is neither innovative nor new, it is tied to high percentages of raw material costs and it operates on the thinnest of margins.

So, what to do?

Obviously, this is an issue that China is going to wrestle with in a lot of areas.  To date, a large portion of the non-government back growth in China has come from the commoditized manufacturing sector, and there were too many players in it.

Growth will come in many ways, but one of the ways that it needs to come about is through their transition of 80,000 logistics companies to 250…. from 3000 lighter firms to 5… it is just going to have to happen, and much like the Bush administration doled out the credit to American consumer, this policy has a short term element to it that I am not sure brings about the long term benefit needed.

Perhaps the the Dalian SME conference will provide a better opportunity for its resident SMEs

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2 Responses to “The Future of SMEs in China”

  1. Dan says:

    August 31st, 2008 at 10:00 pm

    I agree with you Rich. No way can government expenditures like this do anything more than slow down a little the inexorable market forces moving for consolidation.

  2. James The Tjoean says:

    October 21st, 2008 at 5:50 pm

    Please tell us how can we (ICT -Australia ) help with the SME Network Expansion in China. We are now expanding the network in Asia Pacific Region. See our other website.