BEIJING – A report published last week found that 72% of small and medium-sized Chinese enterprises said the rising cost of raw materials is the greatest difficulty they currently face. In comparison with the same period last year, the prices of raw materials have gone up 20% to 50%, causing a decline in small business profits by as much as 40% over the same period last year.

Without a brand to shield them, the already modest profits of smaller businesses can quickly evaporate if production costs rise. Many small business owners tell researchers that they are using their savings from the two previous good years in order to survive.

The survey was conducted jointly by the National Development Research Institute of Beijing University and Alibaba (China) Co. Ltd. In September of this year, researchers carried out field visits to 95 small and medium-sized businesses, 11 professionals, 15 local banks, as well as sent out 2889 questionnaires via the Internet to small enterprises located in the Pearl River Delta in Canton province in southern China.

In face of rising production costs, small businesses lack the capability to fatten their profits via brand-building or improvements in core technology. Take the garment industry as an example: Fabric prices have risen 30% to as much as 80%. And since most factories are at the end of the industrial chain, it's impossible to transfer the additional costs to product prices, which forces them to sacrifice profits instead.

In addition, increasing labor costs are squeezing the profits of small enterprises. Compared to 2010, wages have gone up 20% to 30%. Certain high-skilled workers' wages have even doubled. Even so, worker turnover is high while recruitment is difficult. According to the study, more than half of the interviewed small enterprises regard rising labor costs as one of the three major difficulties challenging their business.

Shrinking orders, both foreign and domenstic, and exchange rate changes also undermine company profits. The tightening of bank loans to medium-sized enterprises as well as the reduction effect of foreign buyers' purchasing power are causing huge pressure on raw material procurement. Meanwhile, the payment period for delivered products has been extended, putting extra pressure on these small firms' finances and highlighting the lack of funding channels.

Zhou Qiren, the Director of the National Development Research Institute of Beijing University, points out that the government needs to speed up interest rate reform in order to ease the availability of loans for small businesses. On the other hand, Chinese firms also have to control their costs, as well as to develop competitive products for the domestic market.

Read the original article in Chinese

Photo - Erik Charlton