Schmittzehe & Partners | China Business Consultancy

Chinese suppliers face slump as demand falls, 6 March 2009

By Paul Snell

Vendors in China are suffering as buyers around the world reduce their demand for goods and attempt to extend payment terms.

According to figures from the Chinese government, the volume of exports from the country in January was down 17.5 per cent compared to the equivalent stage in 2008. And even Chinese Premier Wen Jiabao has conceded exports “declined sharply” in the third quarter last year, as the nation’s economy suffers the effects of the global financial crisis.

“As a result of the economic slowdown many factories have either closed down or reduced their workforce significantly. Capacity in China has most definitely dropped,” says Alec Pettigrew, director of supply chain management firm Asian Sourcing Link. One estimate puts the number of factories that have closed their doors at around 70,000.

Chinese exporters have traditionally operated on small margins, exploiting the low cost of labour. But as purchasers slash order numbers and delay payments, vendors are struggling. “We now need to be careful in terms of paying deposits as its now not uncommon to hear about factories that have closed down and kept them,” said Pettigrew.

“It is an absolute nightmare for [suppliers],” adds Ben Schmittzehe, chief executive of china-focused consultancy Schmittzehe & Partners. “The slightest change in payment terms has a dramatic impact and really sinks them. There is a knock on effect on their suppliers and has a nasty domino effect.”

Bradley Feuling, CEO of supply chain consultancy Kong and Allan, agrees: “We are seeing it is not necessarily that orders are shrinking, but the buying cycle is changing,” he says. “If the buying cycle was 60 days, it is now 120 days.”

Schmittzehe adds suppliers forced out of business represents half the problem. If vendors were working to plans that meant the business would break even after five years, the owners of these firms now are wondering “do I bother?” and are deciding to cut their losses.

Feuling adds many Chinese suppliers are not sufficiently sophisticated to manage demand planning with production and the effect this has on cash flow.

And as impact of the global economic crisis on China is only just being seen, the situation is predicted to get worse over the next four to six months. “It is the beginning of a pretty ugly story,” says Schmittzehe.

But the downturn could be positive for buyers purchasing from the country. Schmittzehe believes it could be a good time for firms to invest in the supply chain, possibly by purchasing a supplier cheaply.

As Feuling adds: “The pendulum of buyer/supplier power has swung. Two years ago there was a lot more supplier power. Now that they are facing the downturn there is a lot more power for the buyer.”