Opinion - Leader Page Articles   

Where rags to riches stories are no longer rare

Pallavi Aiyar

The Chinese city of Wenzhou owes its success to the development of a cluster model whereby hundreds of small enterprises work together producing complementary goods based on efficient division of labour, saysThe Hindu's Beijing Correspondent.

A 40-MINUTE flight south of Shanghai, one smog-filled Chinese city alone is responsible for a majority of the world's smokers being able to light up; for tens of millions of sight-impaired spectacle-wearers being able to see; and for supplying zippers and buttons to most countries.

Located in the southern part of the Zhejiang province, Wenzhou is in fact the unlikely setting for large-scale realisation of the Chinese version of the American dream. Over the last 25 years, Wenzhou's farmers have turned tycoons, and rags have transformed to riches with almost monotonous regularity. In 2005, the city's GDP reached RMB160 billion ($20 bn).

Eighty per cent of the world's metallic-shell lighters and zippers are produced here. The single Wenzhou district of Qiaotou produces some 15 billion buttons a year. The millions of workers, often as young as 16, in Wenzhou's assembly lines also produce 25 per cent of China's shoes, 80 per cent of its spectacles, 60 per cent of its razors and 65 per cent of its electricity transformers. Ninetyfive per cent of Wenzhou's produce is exported.

Cigarette packet in hand, Rifeng Ligher Co. Ltd.'s 52-year-old founder-owner Huang Fa Jing tells a story, as common in Wenzhou as are metallic-shell lighters. In 1984, he found himself ignominiously unemployed, having been laid off as a technician from a machinery manufacturing plant. He then embarked on a series of entrepreneurial adventures, which saw him setting up an electrical appliances workshop with an investment of RMB20,000 ($2,500), followed by a spectacles outfit.

In 1990, in partnership with his brother-in-law, Mr. Huang founded Rifeng lighters. At that time, there were over 2,000 family-owned lighter manufacturers in Wenzhou. Fifteen years later, following waves of consolidation, there are less than 500. Rifeng is among the most successful of these, with a workforce of over 400 and an annual production capacity of 10 million lighters. Today Rifeng exports some 90 per cent of what it makes and last year earned $5 million from exports.

A few kilometres away at the Kangnai shoe factory, the company's vice-president, Zhou Jinmiao, talks emotionally of the founder, Zheng Xiu Kang. Zheng resigned his job in a machinery factory, as soon as China's reform and opening up policy came into play in 1978. In 1980, he set up a tiny two-person workshop in a room in his house where he and his wife made shoes by hand and sold them in the streets. Today Kangnai makes 8 million pairs of shoes a year and has 2,500 own-brand retail stores across China. Employing close to 5,000 workers, Kangnai exports 10 per cent of what it manufactures to over 30 countries. In 2005, the company's sales touched RMB1.2 billion.

In typical Chinese showcase cities such as Shanghai and Beijing, it is well-funded state-owned-enterprises (SOEs) and high-profile foreign investors who rule the economy. What makes Wenzhou exceptional is that 97 per cent of the city's 1,30,000 enterprises are private, accounting for some 90 per cent of its industrial output. From 1979, when China first opened its doors, till 2002, the total FDI into Wenzhou was a mere $600 million.

For China as a whole, estimates of the size of the private sector range from the official one-third of GDP to private assessments of up to 65 per cent. In the Zhejiang province, even the official figure is as high as 65 per cent although most experts say the true figure is closer to 80 or even 90 per cent.

The average per capita GDP for urban residents in the province is $2,024 a year and for farmers, $827. This is the highest in the country after Shanghai and Beijing. On average, the people of Zhejiang earn twice as much as those in China's northeast, home to the majority of the country's hulking SOEs.

Zhejiang's private sector has also been successful in creating jobs and absorbing migrant labour from farms and defunct SOEs from across the country. Xie Hao, Deputy Secretary-General of the Wenzhou municipal government, says the city alone has created jobs for around 1.8 million migrant workers.

Wenzhou suffers from a combination of bad topography and incomprehensible linguistics. The city is surrounded by mountains and water, and the lack of arable land has historically forced its people to depend on trade rather than farming. Geographically remote, the city's peculiar dialect is not understood even by people from nearby towns. It has, therefore, always been isolated from the rest of China.

"We have a special history, special culture and special location," smiles Mr. Xie. "We are far away from the central government and so have had more room for manoeuvre. We have always been very practical, not ideological." Indeed across China, the Wenzhounese have the reputation of being unparalleled wheeler-dealers.

Over a million-and-a-half Wenzhou natives are known to be living outside the city, and 4,00,000 outside of China. "We have traditionally been risk-taking and outwards oriented," says Mr. Xie.

In China it remains extremely difficult for private enterprises to get access to credit. Bank loans still go overwhelmingly to state corporations, as do stock market listings. Private businesses thus rely largely on informal networks of credit such as money raised from friends and family and on retained earnings.

That Wenzhou and other cities in the Zhejiang province have focussed on light industries is thus no accident. These are precisely the sectors where entry barriers are low, not requiring sophisticated technologies or high start-up costs. Kangnai's vice-president explains that for years Zheng Xiu Kang relied on his own savings and financial assistance from family, and negotiated credit from suppliers. It is only now, after Kangnai has become one of the largest shoe producers in China, that it has easy access to bank credit.

A significant reason for Wenzhou's success is the development of a cluster model, whereby hundreds of small enterprises work together producing complementary goods based on a very efficient division of labour. The city's lighter manufacturers, for example, comprise hundreds of firms, some specialising in particular components, others in final assembly — leading to fast, flexible and competitive production, explains Mr. Huang. "As a result of very specialised division of labour, we can produce over 10,000 different varieties of lighters here."

While the private sector may be the most dynamic component of China's economy, growing at over 20 per cent a year according to a recent World Bank report, for the moment Zhejiang remains an exception rather than the rule. Private enterprises in China are still far from enjoying a level-playing field.

Property rights, or rather the lack of them, remain a fundamental issue. Despite being declared "inviolable" in 2004, private property retains its second-class status and public ownership continues to get preferential treatment.

Even today, nearly three-fourths of the private sector have to depend on "shadow banks." These technically illegal institutions can comprise groups of family members, neighbours or friends who pool their cash and lend it.

Moreover, Zhejiang's family-owned businesses face significant challenges as they grow. The dominance of an individual gives a company clear lines of command and flexibility but once it tries to expand, the firm often finds it difficult to scale up and adopt professional managerial practices.

Mr. Xie says the authorities give preferential access to land and special honours to companies that adopt "improved management techniques." But in practice the large majority of the city's thousands of private enterprises remain small, employing less than 10 persons.

Most Zhejiang businesses live solely on cost and competition is brutal. Profit margins are very narrow. For example, the profit on each cigarette lighter produced can be as little as RMB 1. Even a small revaluation of China's currency can thus make a huge difference to the profits of Wenzhou's export-oriented companies. Anti-dumping measures add to their woes.

But Kangnai's vice-president is confident that the company will be able to weather any protectionist storm. He says: "Even if the yuan gets stronger and even if the European Union persists with its anti-dumping tariffs, rich countries will import from us because they can't make them cheaper themselves."

For the foreseeable future, a steady stream of razors, buttons and lighters will continue to flow from Wenzhou for consumers in the far reaches of the world.

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

BJP's difficult yatra
Best buys for health
Where rags to riches stories are no longer rare
Destruction of Amazon forest linked to fast food
The evolution of the model code
The problem that refuses to go away
Corrections and clarifications
TV giants `stifle creativity but Internet will free it'
Unfortunate
Fast as an instrument
An indelible blot
Thanks again

Copyright © 2006, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu