China Focus  

"Chicken Rib" Industry

By Dr CS Lim

SEVERAL LARGE-SCALE FURNITURE ENTERPRISES in Shenzhen of China wound-up their business recently, which triggered heated discussion.

In fact, furniture industry throughout the country, not just in Shenzhen, will go through a reshuffling phase. Yu Senjie, a professor from the National School of Development of Peking University, compares the furniture industry to “chicken ribs” which is tasteless to eat but yet one cannot bear to throw away.

In my opinion, the furniture industry is not entirely “tasteless” like chicken ribs. However, there is little “meat”. To what extend is it? Economist Wu Di remarks, “The current return on investment for credit and loan has fallen to the lowest level ever since the period of Reform and Opening-up”.

This means the return generated from those industries relying on loans to invest cannot cover the interests. In such a scenario, even if a company is not dependent on loan, it is quite meaningless to continue the business if the return is lower than banks’ interest rate. A company relying on loan will be dragged into a bottomless pit. If companies fail to raise its productivity, it is just a matter of time they will go out of business.

Why is the return on investment so low? Let us reflect.

In the early days of China’s Reform and Opening-up, these so-call chicken ribs industries are vanguards that drove economic development. About 35 years ago, Chinese furniture companies took over the chicken ribs businesses from counterparts in Korea, Taiwan, Hong Kong and Singapore and developed processing industry.

Without a doubt, cities near Hong Kong like Shenzhen and Dongguan made the greatest gains. The population of Shenzhen was already twice as large as that of Hong Kong. And unexpectedly, there are five to six five-star hotels in some towns in Dongguan.

There is an economics terminology called Middle-income Trap. To put it simply, it means a country will have to transform and upgrade after it reaches a certain stage in its early development. Like old moves in Chinese martial arts novel, one will fall into this trap if a same trick is used repeatedly. Middle-income trap occurs not only in a country, but can be extrapolated to a region and even a company.

Ye Zhongping, a member of the Public Advisory Committee in Shunde, recently released a research report on efficiency of furniture enterprises in Shunde. It was revealed that salaries of these enterprises took up 10.9% of output value at present. Statistics in the report indicate that many furniture enterprises are struggling in between meager profit and scant deficit.

As such “Success is the mother of failure”, if enterprises in Guangdong cannot leave behind methods that help them achieve their past successes, their past successes will be the starting point of their failure today. Hence, a great number of local enterprises in Guangdong that cannot continue profitably rent out their factories. These natives not only rent out their workers, but also their apartments, and then move to a better place for enjoyment.

Some experts and scholars advocate the following ideas - to extend to the tertiary-industry - to go high-tech - to adopt multiple business strategies - to consolidate or merge or acquire other enterprises.

Those who went into retirement were fortunate. They are lucky to not have listened to the advice of some experts to grow big and grow strong before stepping back. Companies such as Housen, FZD and Hua Ren ended up bankrupted.

It is quite difficult for owners of furniture enterprises in Guangdong to upgrade or transform since they are not well educated. Luckily, many amongst them educate their children. Hopefully their next generation will be able to go through a “grand ransformation”, something the Cantonese likes to say.

President, Council of Asian Furniture Associations Professor, Beijing forestry University , currently the Chairman of the Council of Asian Furniture Association (CAFA). He read at Nanyang University in Singapore and completed his PHD at Beijing University of Forestry. He holds a Post Doctorate from Michigan State University and is a visiting scholar there. Dr Lim has been active in the Singapore furniture industry, chairing both the Singapore Furniture Association and Furniture Association of Asia and Pacific previously.