Manufacturers struggle with low value-added products, weak industrial chain

By Li Xuanmin in Shenyang and Chen Qingqing in Liaoyuan Source:Global Times Published: 2016/12/15 19:08:39

Reforging the Northeast

Manufacturers in Northeast China, once the cradle of the country's manufacturing sector, are struggling with shrinking orders and revenues, which have left the region's economy stricken. In response, the central government unveiled a target in the end of 2016 to transform the region into a modern and highly competitive industrial base. The Global Times recently visited Northeast China's Liaoning and Jilin provinces to find out the major challenges facing manufactures and learn how they are dealing with them. This is the second part of a four-part story.

A car passes by the Shenyang Machine Group's (SYMG) factory in the Shenyang Economic and Technology Development Zone in Northeast China's Liaoning Province, on Monday. Photo: Li Xuanmin/GT

A car passes by the Shenyang Machine Group's (SYMG) factory in the Shenyang Economic and Technology Development Zone in Northeast China's Liaoning Province, on Monday. Photo: Li Xuanmin/GT

Wang Ming, a 45-year-old factory worker, was rushing to stop machines and pack his bags at 5 pm on Monday.

Wang works as a compressor at State-owned Shenyang Blower Works Group (SBW) in Shenyang, capital of Northeast China's Liaoning Province.

Soon, he will start his second job for the day - working as a part-time driver for Didi Chuxing, an online riding-sharing platform. Wang said he earns 3,000 yuan ($432.65) to 4,000 yuan in extra income per month from his part-time job.

"My salary has shrunk a lot over the last two years, dropping from about 6,000 yuan at its highest to around 2,000 yuan now. But I have a large family to feed ... What else can I do?" Wang said as his car passed through Tiexi district, a traditional industrial base whose glory days have long passed.

Wang's wages, composed of base wage plus a bonus based on the number of parts he made, plunged in 2015 due to the SBW's declining orders and revenues.

When contacted by the Global Times on Monday, SBW's spokesperson declined to disclose its revenues over the last few years. But according to a public document from the company's IPO application in 2013, its net profit plunged to 118 million yuan from 298 million yuan in 2011.

It is a common situation for companies in the Shenyang Economic and Technology Development Zone, the newly established harbor for equipment manufacturers where SBW is located.

Across the street, State-owned Shenyang Machine Group (SYMG), which had once been another of Shenyang's banner enterprises, is mired in a similar situation.

In its financial statements the company released on October 14, SYMG predicted that its net loss for the first nine months of 2016 will grow to between 750 million and 850 million yuan, up from 470.4 million yuan a year ago.

SYMG's international orders have nearly vanished in 2016 because the quality of its products has lagged behind that of its foreign competitors, such as Germany-based DMG Mori and Japan-based FANUC, an SYMG employee, who only gave her surname Xue, told the Global Times on Monday.

That loss was a blow to SYMG. In 2011, international orders accounted for about 10 percent of its total revenue.

Low value

SYMG has entered an era of slim profits on its products, Li Xiandong, the chief of Enterprise Culture Department at SYMG, told the Global Times on Monday.

The company makes only a few thousand yuan in profit from the sale of one machine tool, which it prices in the tens of millions of yuan, said Liang Qidong, vice president of the Liaoning Academy of Social Sciences.

Quality is one problem. Shenyang Liming Aircraft Engine Co has bought SYMG's machine tools because they cost more than 700,000 yuan less than a competing product made by FANUC, a Liming factory worker, who also only gave her surname Fu, told the Global Times on Tuesday. However, the SYMG machine tools frequently break down.

The problem of small profit margins, caused by the production of low value-added goods, has haunted many manufactures in Northeast China regions.

Shenyang-based Qianding Group, which makes reduction gears, saw its revenues fall to 50 million in 2015, down from 120 million yuan in 2012, said Xu Xiaobin, the company's chairman.

One problem is that Qianding's products do not have anywhere near the bearing capacity of those made by their Japanese and German competitors, Xu said.

For example, a 30-kilogram reduction gear produced by Japan-based Nabtesco Corp can handle twice as much weight as a Qianding-made one, Xu told the Global Times on Tuesday.

The low value-added issue is more pressing in the Northeast China's light manufacture industry, which has also struggled with rising labor and raw material costs.

At a 1.2 million-square-meter industrial area known as the "Northeast Socks Park" outside of Liaoyuan, about 270 kilometers from Shenyang, some private manufactures are concerned about how much longer they can stay in business.

The industrial area, about a half-hour drive from Liaoyuan, is home to more than 300 manufactures.

"Workers are now paid an average of 3,000 yuan to 4,000 yuan, which is relatively high in Liaoyuan," one worker there, who declined to be identified, told the Global Times on Tuesday.

A weak chain

Xu, the chairman of Qianding Group, is also worried about the patchy industrial chain in the Northeast China regions. He pointed out that some of the key components of his company's reduction gears need to be sourced from South China's Guangdong Province.

"It's like making dumplings," Xu said. "You might have the dumpling wrapper, but you still need the seasoning and the stuffing … but those are produced somewhere else, which drives up the transportation and time costs."

Building a robust industrial chain in the Northeast China regions is vital for the region's economic recovery because it produces a "cluster effect" that simplifies manufacturing, Liang said.

The transportation infrastructure there also poses another obstacle to the regions' development. 

Further growth in the region's sock manufacturing industry will hinge on infrastructure improvements because most of the products shipped from the region are still transported by road, which is expensive, said an owner of a sock factory in the "Northeast Socks Park," who asked not to be named.

The prescription

Reviving the Northeast's manufacturing industry is one way that authorities have focused on to reinvigorate the region's sluggish economy. In line with the central government's "Made in China 2025" initiative, the Liaoning provincial government has issued policies to boost intelligent manufacturing, which is based on smart and automation technology, including unveiling 200 pilot projects, according to a statement the local government sent to the Global Times on Wednesday.

Government support may be important, but what's more urgent for manufacturers is to figure out "how to cultivate their ability to produce highly sustainable value-added goods, so as to escape the trap of zero profitability," Liang told the Global Times on Wednesday.

SYMG has pinned its hopes on the i5 series of intelligent machines to upgrade its production, Li said. The machines, which debuted in 2015, can be used in the aerospace, automotive and consumer electronics industries, as well as others that require high-precision parts. So far, SYMG has received orders for more than 16,000 units of the i5 series.

"If everything goes well, we will be able to balance our books in three to five years," Li said.

Posted in: INSIGHT

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