Lack of investment in employee training plagues entrepreneurial hub

Recent finance and investment reforms in China's eastern coastal city of Wenzhou in Zhejiang province are to be welcomed and definitely represent a move in the right direction toward a more liberal business environment. Allowing private investors more freedom to set up small banks is a welcome initiative, as is permitting individuals to make overseas direct investments in yuan.

However, the recent announcements not only go nowhere near far enough but also obscure the real cause behind the catastrophe of corporate collapses over recent years across one of China's most entrepreneurially spirited cities.

For example, commercial banking law still bars private capital from setting up small banks on its own. It stipulates that a commercial bank must be the initiator and must hold at least 20 percent of equity in the bank.

The root cause of the problems facing Wenzhou's army of small, often export-led, businesses is their reliance on one simple and increasingly outdated business model - low-cost production followed by low pricing with little investment put back into the business.

Until quite recently this approach resulted in substantial financial rewards, but Wenzhou's business owners have used their money to speculate in cotton, property development and private loans, rather than investing in the real economy and all aspects of brand building.

In recent years, this crude approach has been harshly exposed by the severe downturn in the global economy, especially in the Unite States and Europe. The impact of a dramatic decrease in international orders has been compounded by a sizeable increase in labor and material costs of around 30 percent.

This "double whammy" has led to huge financial pressures and calls for reforms but, sadly, no apparent acceptance of the need for fundamental change to the business model.

It should be noted that such a change in the business model, from low cost/price to high quality, premium branded/priced, is not only required in Wenzhou. The challenges facing Wenzhou's business community are a microcosm of those facing businesses right across the mainland.

Wenzhou's coastal position and geographical proximity to Shanghai have provided international trading opportunities. Location alone is the primary factor behind commercial gain in Wenzhou.

Often cited as one of China's major sources of competitive advantage, lower wages have actually contributed to the pressures currently being experienced by Wenzhou's small businesses. A lack of investment in staff training and career development continues to plague Chinese industry and Wenzhou appears no different.

No amount of financial reform and further liberalization of China's banking sector will address the serious challenges facing Wenzhou's entrepreneurs. However, "liberalization" is the key issue here but it is liberalization in the area of business leadership and management that can only provide a path toward a more modern business culture in Wenzhou's business sector. Such liberalization in Wenzhou should then be replicated across China's entire small- and medium-sized enterprises sector.

The growth of China's SMEs, and the consequent and significant shift in the balance of power with China's State-owned enterprises, will not take place without 180-degree change in business direction.

Wenzhou's business leaders do require more financial freedom, but far more importantly they need to completely reconfigure their understanding of business leadership and management. Specifically, change is essential in the attitude toward staff and product investment and a focus on premium branded goods and services.

The author is a visiting professor at the University of International Business and Economics in Beijing and a researcher at Nottingham University's School of Contemporary Chinese Studies.

Contact the writer at [email protected]

Special Coverage

Wenzhou pilots financial reform

Related Readings

Wenzhou to reveal details of financial reform
Wenzhou to inject capital into SMEs
Private lenders offer little help for sagging SMEs
Slowdown hits key export hub
Financial reform in Wenzhou comes to help