The environment seems to be less and less optimistic for small companies in recent years. The rising raw material price and labor costs have combined to push up their export costs by 10 to 20 percent. The former factor in particular has become the greatest burden for enterprises and the most striking consequence is these enterprises’ sliding competitiveness in export.“The major difficulties faced by small and medium-sized companies include: first is the soaring production costs due to rampant inflation of raw material prices， such as high price of crude oil， cotton and the iron ore; the second is the rising labor costs， with labor shortage and employment difficulty still severe. Labor wages in coastal regions， including Yangtze River Delta and Pearl River Delta， have been increasing sharply，” said in an interview Zhu Hongren， chief engineer of the Ministry of Industry and Information Technology， “The two parts of soaring costs have squeezed the profit margins for small and medium-sized companies.”According to “The Report on Chinese Foreign Trade Conditions (2011 Spring)”(hereinafter referred to as the report) issued by the Ministry of Commerce， the current condition is that as the world economy is undergoing a process of recovery， and the external market turns for the better， the number of orders received by companies have increased. However， the foreign trade condition is still complicated， with uncertain factors affecting the trade balance still multiplying. The marked increases of raw material prices and labor wages have reduced the corporate profits by various margins and imposed cost pressures on small and medium-sized business enterprises.“Now those factors leading to high bulk commodity prices still exist and some of them are even intensifying. Thus the global bulk commodity prices will be further pushed up or remain at a high oscillation. The continuous turbulence in the Middle East would stymie local economic developments， and also further drive up the global oil prices，” says the report. Since the beginning of this year， as the world economy has been slowly recovering， with international demands for bulk commodities growing， the world has been awash with excess liquidity and the value of US dollar keeps sliding. Driven by spectacular fever and the aversion of risks， huge amounts of capital flew into the bulk commodity market and lifted the commodity price to a high level.The rising global bulk commodity prices also had its consequences at home. The first quarter witnessed a continuous rise of production material prices. The price for production materials in circulation has increased by 11.2% on a year-on-year basis. The crude oil price is up by 17.8%， steel price up by 17.6%， nonferrous metals’ price rising by 10.3% and the chemical products’ price rising by 8.8%. The purchasing price of industrial products has risen by 10.2% on a year-on-year basis.The skyrocketing global bulk commodity prices have imposed great cost pressures on export-oriented companies. Our interview work at the 109th Canton Fair shows that many enterprises consider the rising raw material prices as the most severe challenges they were facing. Participating companies claim that although lifting the export price could lesson part of the impacts from soaring raw material prices， in fact many export companies have limited power in price bargaining， and are unable to shift the risks. On the one hand， the rapid rise of raw materials affects orders taken by companies， who were unwilling to receive orders; on the other hand， some companies were complaining that losses had already happened even before the last year’s orders were finished， which reduced the company’s profitability. The most direct consequence of rising cost pressures and inflationary prices was the sliding competitiveness. Foreign customers contacted with alternative suppliers and tried to shift orders to countries and regions featuring cheaper labors. It is said that similar things has happened in small parts of the textile industry of Zhejiang Province， where customers shifted some of their orders to surrounding countries including Vietnam and Bangladesh.Cai Kang， deputy director of the Foreign Trade and Economic Co operation Bureau of Dongguan City， states that the operation difficulties faced by corporations now mainly lie in three parts: first is the weak consumption in the European and U.S. market has reduced the number of orders， and the decreasing rate of orders received by companies in our survey reaches about 15% on average; the second is the soaring operation costs for companies， including the raw material price and labor wages. The overall cost increasing rate has neared 11.4%; the third is the shrinking profits for companies， with the average profit margin of the industry dropping to 2%. With combined influences from more expensive bulk commodity and raw materials， and also the appreciation of RMB， the small and medium-sized businesses have been hit by a double whammy， with its export profit rate sliding to 1.44%， which is a threshold of collapse.The 2010 standard issued by the Ministry of Commerce shows that the Guangdong Province features about 40，000 export-oriented small and medium-sized businesses， accounting for more than 90% of all export companies. The rising operation costs are increasingly threatening their survivals. A recent survey involving 500 key foreign trade companies in Guangdong Province shows that the marked rise of costs for energy resources， raw materials and the labor， plus the appreciation of RMB， have inflicted losses on and caused bankruptcy of some small and medium-sized businesses. About 95% of the companies in survey mentioned the increase in their export costs (about 50% companies have witnessed a 10-20% increase of their export costs， about 20% companies see a more than 20% export cost rise)， and about 5% companies could balance the costs with last year. Also， companies having suffered lower profitability account for about 45%， an 8.3% increase from the same period last year.Monitoring data on 1500 key export-oriented companies of the Zhejiang Province also indicates that companies showing lower or unchanged profits this year account for about 77% of the total. The companies have reached a break-even point with pressures from rising costs， and some of them have to raise prices to ensure the profit margin.Evidences from some laborintensive companies in Hubei Province and Jiangsu Province show that now the increasing raw material prices have become the primary pressure upon local companies. Besides， costs from labor using， logistics and financing have all gone up， further squeezing the profit margin that is already very slim for foreign trade companies. Findings in Liaoning Province also point to the same conclusion. The production factors keep rising and the global bulk commodity price stays at the high level， making the profit gap between export and internal sales of resource-based enterprises like steel companies and mineral product companies.The RMB appreciation， rising costs and difficulty in financing have also exerted pressures on export-oriented companies in Sichuan Province. Local research shows that during the first quarter this year， the percentage for companies with few or none longterm orders due to RMB appreciation amounts to about more than 40%. Companies with capital deficit or financing difficulties account for more than 20%， and over 60% companies consider the rising cost as the primary reason for customer losses. A general survey on six provinces featuring strong foreign trade business， including Guangdong， Zhejiang， Jiangsu， Liaoning， Sichuan and Hubei provinces， shows that half of the companies in the above regions have experienced shrinking profits and some small and medium-sized companies have been closed or suffered heavy losses.Similar predicaments are also challenging foreign trade businesses in other regions. Overseas Group of Heilongjiang Province is a private company boasting a wide scope of businesses， including real estate， foreign trade， and industrial explosive and chemical products. Its chairman Li Baoyu told journalists that the import price of nitroamine has risen by more than 30% and the profit margin is as thin as a piece of paper. So the group has to cut its foreign trade business because it is almost no profit to earn.Private companies in Wenzhou are always dubbed as barometer of the Chinese private economy， and changes of local small and medium-sized businesses could reflect the overall downtown in the corporate developments. Because of the rising costs and the slim profits， labor intensive companies in Wenzhou find it difficult to continue operations. According to the Economic and Trade Commission of Wenzhou， during the first 3 months this year， about 35 export-oriented companies in the city， including producers of eye glasses， cigarette lighter， pens， and locks， are facing its sales dropping by 7% and profits declining by about 30% on a year-on-year basis. More than one fourth of these companies claim profit losses and only 30% of them could maintain a growing profit. The average profit rate for the industry is only 3.1% and the number of companies with its profit rate exceeding 5% is less than 10.But the reducing number of orders and shrinking profits may inflict deeper harms on foreign trade companies， and could even threaten the fundamental nature of corporate survival---talents. Generally speaking， foreign trade companies calculate labor wages on the basis of piecework， and the more products a worker produces， the more he earns. The reduction of the production capacity of many foreign trade companies also comes with the drop in labor’s monthly income， so the workers have to quit for another job. The most obvious case this year is the labor shortage in the manufacturing industry of the coastal regions. The insufficient labor supply has greatly pushed up the labor costs， and slice off the corporate profits. The emergence of Lewis turning point implies that the company has to pay more for the labor costs， but it also raises new questions for shifting the development mode of companies from labor intensive towards capital intensive or technology intensive.Experts say that the mounting costs have placed pressures on profit margin of export-oriented companies， because the pricing power of export commodities from China belongs to the international market， and it is very difficult for local manufacturers to shift away the additional costs. The costs for production factors such as labor and land will definitely rise as the Chinese economy keeps growing， and companies could not resume their strategies played in the era of cheap labor. The increasingly expensive Chinese com- modities are rekindling the recent debate on Chinese advantages in the manufacturing industry. Johnson Anderson， a UBS economist， has recently issued a report after he calculated and studied the import data of the U.S. and European countries in the first half year of 2011. The finding is that the proportion claimed by the Chinese light manufacturing sector has reduced from 50% to 48%， and the benefiting countries include Bangladesh (its export volume to the U.S. up by 19%) and Vietnam (its export volume to the U.S. up by about 16%). When talking of the shift of labor intensive manufacturing industry towards the Southeast Asia， Mr. Anderson said that the first half year of 2011 “seems to be a very convincing turning point”.The noteworthy is that compared with large-sized state-owned corporations， the small and medium-sized business enterprises， which hire the most Chinese labors， have to face both flagging external demands and deep threats from rising financing costs， rapid growth of labor wages and rising costs of investments. Some people even claim that the rising labor costs would call an end to Chinese boosting exports， because the major source of Chinese competitiveness is its huge and cheap labor supply.Cui Li， chief economist of RBS(Royal Bank of Scotland) in China， raised his doubts upon this viewpoint， saying that “the product upgrading and productivity growth have offset against pressures from rising costs， and Chinese competitiveness in export remains strong， especially in the traditional light manufacturing industry， despite the rapid growth of unit labor costs in recent years.”As a matter of fact， although the labor costs keeps rising， the world market share taken by China had increased from 7% in the year 2005 to 11% in the year 2010. Chinese electrical machines and transportation equipment have become the most important export items， and the impacts of rising labor costs on these areas are relatively small. Generally speaking， China has neither lost its full competitiveness in export trade， nor in the labor-intensive light manufacturing industry.
