October 29,2008

Bankruptcies and Closures:"Toy Stories" in the Pearl River Delta

By CSC staff

The world financial convulsion is seeping into the Pearl River Delta, base camp of MADE IN CHINA, via Hong Kong. Toy export processing businesses, many owned by HK businesspeople, are closing their doors or going bankrupt because of order reductions from the United States and Europe, or huge losses from inept speculation in financial derivatives.

Following the bankruptcy of three mainland factories of Smart Union Group, a global toy manufacturing giant based in Hong Kong, a number of listed companies in Hong Kong such as BEHRINGER, Tailin, U-Right, 3D-Gold have applied for liquidation.

According to Yu Wenfeng, head of the Assembly Department of Smart Union Group’s Po Shan factory, located in the town of Zhangmutou, Dongguan, orders have actually been pretty good even in early September, and workers have sometimes needed to put in overtime. But insiders disclose that in 2007 Smart Union Group invested and lost 100 million yuan in Fujian Tiancheng Mining, which, along with another HKD 200 million lost in the stock market by some shareholders, brought down the company.

On October 20, Li Ka-shing's Hutchison Harbor Ring Limited (HHR) announced the sale of its Crown-Ace Toys Company, a toy manufacturing giant with about 7,000 staff in Humen Town, Dongguan.

According to HHR, toy manufacturers are facing business challenges, and the sale is in the best interests of HHR and its shareholders. HHR will sell 81% of the rights of Crown-Ace Toys for HKD 36.45 million, at a loss of about HKD 800,000, and the net sale proceeds will be allocated for general operating purposes.

Chuangyi Toys in Shenzhen, a subsidiary of Hong Kong Hua Xing Group, announced its closure on the same day. The boss has absconded, leaving nearly 1,000 employees jobless. The Longgang District Government in Shenzhen had to seal up and sell the property to pay wages to employees who hadn’t received any for a long time.

The spate of closures or bankruptcies of toy companies is not a coincidence. Wang Jun, chairman of the Guangdong Economic Society and vice-president of Lingnan College at Sun Yat-Sen University, points out that the impact of the financial turmoil on China's tangible economy may be earlier than developed countries. "Economic recession in developed countries triggered by the financial crisis will lead to the reduction of import orders for local enterprises."

The continuous decline of export growth supports such a judgment. According to customs statistics, during the first three quarters of this year, toy export turnover reached $ 6.31 billion, a growth rate of 3.7%, which is 16.3% below the same period of last year. From January to July, 3507 toy enterprises in China's showed good export performance, a decrease of 52.7% over the same period of last year.

"Guangdong, whose processing trade accounts for nearly 60% of the whole country’s, will be the first to be affected by the financial crisis," Wang Jun said. The published data show that from January to July this year, toy export firms in Guangdong dropped by nearly 80 percent. The number of toy exporting businesses in Guangdong now totals only 1404, with 3618 firms having withdrawn from the export market.

Zhao Lei, of Goodbaby Child Products Co., believes that the overwhelming majority of toy businesses in Guangdong are OEM-based with low margins, facing fierce competition, and prone to hiccups in the external environment. That a closures wave is prominent in Guangdong should come as no surprise.

The bankruptcy of toy businesses is only the top of the berg in China. With the spread of financial crisis to the tangible economy, SMEs will go bankrupt one after another when even strong large-scale enterprises are unable to remain unscathed.

As of October 21, nearly 50 Hong Kong enterprises have applied for liquidation in the month, an average of 3 companies a day, among which are well-known companies, and the factories the majority of them set up on the mainland make up the main component of their corporate profits. 

As with the last round of closures of a large number of SMEs, many closed companies are OEM businesses with a single product and a high production, generally over-reliant on single market structure. Any substantial reduction in orders makes survival iffy.

Ye Zhongping, on the board of directors of Guangdong Forever Industrial Development Co. and known for his active response to foreign anti-dumping accusations, has extensive experience in foreign trade. In his view, before July, the collapse of a large number of SMEs was due mainly to rising raw material and labor costs, tightening processing trade policy, reductions of the export tax rebate, and continuous RMB appreciation.

"But after July, the collapse of so many large firms is directly related to the financial crisis." Ye said that along with this, many companies had invested large sums in securities and commodities markets, which have fallen sharply.

CITIC Pacific Ltd. is expected to lose over HKD 15 billion from a leveraged foreign exchange contract in an Australian iron ore project, and its share price plummeted more than 50% in one day, greatly shocking the whole industry. Ye Zhongping said there are still a large number of companies with the same leveraged operation that have not yet been exposed.

On October 16, "Sugar King" Pang Guixiong, chairman and CEO of Guangdong Zogood Group, committed suicide by jumping from a building, delivering another shock. Among the reasons for his suicide was a one billion yuan loss from long-term futures speculation.

With the credit crunch sweeping through western financial institutions, Hong Kong and the Mainland banks are tightening up on credit, which will result in the further tension for many businesses. Henry Tang, the Chief Secretary for Administration in Hong Kong, said a few days ago that the closure and layoff wave among Hong Kong enterprises will have a strong impact on the Pearl River Delta economy.



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