Download The Selections of Development Paths for Small and Medium-sized

The Selections of Development Paths for Small and Medium-sized
Enterprises Under the Circumstance of High Cost
DONG Baoming, JIAO Lili
1. School of Business and Management, Hebei University of Economics and Business, Shijiazhuang,
Hebei, China, 050061
2. School of Business, Hebei University of Economics and Business, Shijiazhuang, Hebei, China,
050061
[email protected]
Abstract: With the appreciation of RMB, the rising of staff wages together with the rising price of
production such as land and raw material, the advantage of low cost for the small and medium-sized
enterprises losses gradually, which made the bad needs of funds from bad to worse. From this point of
view, the researching of development path for the small and medium-sized enterprises under the
environment of high cost becomes an important subject that deserves to study. Began with the analyses
of current rising operation cost, this paper tries to seek some possible development paths for small and
medium-sized enterprises under the condition of high cost.
Keywords: High cost, small and medium-sized enterprises, development path, counter measure
1 Introduction
One of the biggest short boards for the small and medium-sized enterprises is the shortage of funds.
During the process of researching and developing, marketing and purchasing of manufacturing
equipment, the enterprises cannot put sufficient funds to them because of the funds shortage, which
makes the competitiveness of the enterprises wandering around the low level. The small and
medium-sized enterprises used to dealing it with the manner of compressing the operation cost. But with
the appreciation of RMB, the rising of staff wages together with the rising price of production such as
land and raw material, the advantage of low cost for the small and medium-sized enterprises losses
gradually, which made the bad needs of funds from bad to worse. From this point of view, the
researching of development path for the small and medium-sized enterprises under the environment of
high cost becomes an important subject that deserves to study.
2 The Rising Operation Cost of Enterprises
Broadly speaking, the rising operation costs are mainly the following three aspects: labor cost, land and
raw material cost and cost brought from the changing policies.
2.1 The rising labor cost
The implementation of new Labor Contract Law makes the employment of private enterprises canonical.
The rules in the aspects of relative insurance, accumulation fund, labor contract have raised the labor
cost considerably. Taking the sorts of insurances and accumulation into account, per capital expenditure
for the enterprises will exceed more than one thousand. Furthermore, the provisions of singing and
cancellation of contract, probation period, penalty, downsizing, etc., such detailed regulations give the
full protection to the employees, meanwhile increase the enterprises’ labor cost.
On the other hand, in order to protect the lower-income person to cope with the soaring price of the
commodities, the minimum wages levels are continuously lifted at provincial levels. The trend began
with Jiangsu province in Jan.2010, and 18 provinces, such as Beijing, Henan, Shenzhen, Shan’xi, Anhui,
Hainan, have up-regulated the minimum wages at the average level of more than 20%. It goes without
saying that the lift of minimum wages level will bring huge pressure to the small and medium-sized
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enterprises which characterized with the traditional low added value and labor intensive industries.
Taking a long run view to the lifting minimum wages level, it will help to narrow the gap between the
rich and the poor, build harmonized labor-capital relationship and realize the sustainable development
for enterprises. But from a short run view, it will bring the great burden to the small and medium-sized
enterprises considering the low profit level at the current situation. Moreover, the labor cost will be
continuously increased in the near future if taking the following two factors into account: on one hand,
the minimum wage level is still in the low position compared with other country, it has the room to
reach the higher level; on the other hand, the implement of wage collective bargaining will considerably
promote the employee’s discourse right in the salary setting.
2.2 The rising prices of industry- used land and raw material
Because of limited land supply, the policy of “Zhao PaiGua” for industry-used land is brought into force
in Sep. 2006 and in 2007, the policy were carried out all over the country. The immediate result of this
policy is the soaring price of land for industry-used proposes which increased the enterprises’
augmentation cost.
According to the national bureau of statistics’ data, in Feb.2010, the purchasing prices of raw material,
fuel and power roused 10.3% on annual basis, nonferrous metal and electric wire roused 30.1%, fuels
and energies 25.4%.Moreover, the possibility is there that the steel price will go up following with the
rising price of iron oxide. This will conduct the relative industries and affect the whole economy running.
The rising of price especially the rising of raw material makes the small and medium-sized enterprises
cannot keep sustained profit.
2.3 Rising cost resulted from policy changing
Because of unsound marketing economy, the relative policies are always in the frequently amending
which bring lots of uncertainties to the enterprises’ development. The smaller scale, the greater changing
cost led by the policies amending. Presently, the small and medium-sized enterprises’ operation cost are
affected by the following four policies amending: trade policy, monetary policy, exchange rate policy
and relative industrial policy.
2.3.1 Trade policy
The current export stimulating policy has the great chance to gradually recede from the trade policy
accompanying with the economy improvement. This means that China may lower the export rebate rate
and add more restricted processing trade types. This will increase the operation cost to the foreign trade
company.
2.3.2 Monetary policy
With the upturn of economy, the inflation led by the over-delivered currency has been noticed by the
decision makers. It is considering how to draw back the market currency through the monetary policy.
But no matter what way it is, the invariable result is the curtailment of bank facility. This will raise the
financing cost for small and medium-sized enterprises.
2.3.3 Exchange rate
It has researched the consensus of RMB’s appreciation in the long run, but the biggest uncertainty lies in
the velocity and amplitude of appreciation. The RMB appreciation is the opportunity as well as the
challenge for the large scale enterprises, but for the numerous small and medium-sized enterprises, if the
appreciation reaches big amplitude in the short run, many of them would be knocked out of the business
once and for all.
2.3.4 Industrial policy
The new requirements concerning the environment, industry and scale etc. have been set by the
government through the continuous brought out industrial policies. In order to fall in line with these
policies, the small and medium-sized enterprises have to improve the soft and hard wares by means of
inputting large scale funds to equipment and production technology. This will increase the operation cost
directly.
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The main problems that small and medium-sized enterprises faced are following two: One is the worse
financing environment which makes the enterprises can’t get sufficient low cost funds for development;
the other is the increasing operation cost devours the enterprises ‘profit which makes enterprises
impossible accumulate the necessary funds for development. The worse financing environment is the
worldwide difficulty, even in the Europe, the States and Japan which has relatively sound systems
cannot settle it radically. While suffering the increasing operation cost is the inevitable stage for Chinese
economy development. With the continuous increase cost of labor, industry-use land, raw material,
together with the continuous adjust of relative polices, it is a must for enterprises’ operation cost to
increase. But this change will do small and medium-sized enterprises in a fiercer situation.
3 The Development Paths for Small and Medium-sized Enterprises
The increasing operation cost does exert a certain effect on small and medium-sized enterprises, but
there are still countermeasures to meet this. If they deal with it in a proper way, the new development
opportunities will emerge. Three roads are available.
3.1 Extending the profit room
The reason why the small and medium-sized enterprises are more sensitive to the cost increase can
attribute to the low profit gaining. So the first and foremost for them is to extend the profit room. At the
moment, three ways can achieve the goal of enlarging the profit: industry upgrading, technology
improving and brand promoting.
Industry upgrading is a normal way for enterprises to expand the profit. By doing so, the enterprises can
step into a higher profit industry and lift the whole profit level.
Technology improving is a normal way to lift the individual product’s profit. By incessant technology
innovation the technological content can be realized. The enterprises can improve the competitiveness
and get away from vicious circle of price competition. This will make the profit in a high level.
Brand promoting is a key measure to improving the profit level for small and medium-sized enterprises.
It is hard for themselves to build their own strong brand. The weak competitiveness in terms of scale and
price leads to low market share and market influence. By brand promoting, the enterprises can get brand
premium and enlarge their profit room.
Most of the enterprises need to extend their profit room when a certain stage is achieved. But the goal
realization depends on two factors: one is the improvement of management level; the other is upgrading
the technological innovation ability. Both of them must play hand in hand. Because of the limited
capacity, for small and medium-sized enterprises, the outsider power such as consulting company,
advertising company, industrial designing institute, high academic and research institute must be
cooperated in order to fulfill the leaping development.
3.2 Making full use of modern information technology
Thanks to the information technology, the enterprises can lower their operation cost and improve the
operation efficiency. So making full use of modern information technology is an important path for
small and medium-sized enterprises under the environment of high cost.
3.2.1Improving the informatization level
Compared with the large scaled enterprises informatization constructing, small and medium-sized
enterprises have advantages as well as disadvantages. They must take the advantage of their own strong
points if they want to improve their competitiveness by lifting management and running level. The
strong points lie here: because of the simple organizing framework, the inner side business integration is
relatively simple which leads to a relatively low cost of informatization. For them, if they want to
improve the informatization level, scientific planning is a key step. Making full considering of business
procession order to extend the enterprises’ competitive advantage and reinforce enterprises’ competitive
capacity. Regarding this being starting point, integrate the information stream and improve the working
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efficiency.
3.2.2Developing e-commerce
China’s e-commerce is at its high speed development period. According to the result of China‘s
twelve-year-investigation issued by China B2B research center, as of June. 2009, the number of
large-scale e-commerce websites has reached12282, among them, B2B is 5320 and B2C, C2C are 6962.
In 2008, the trade volume was 3150 trillion and reached in 4000trillion in 2009.
Since the e-commerce can considerably decrease the transaction cost and provide large market for small
and medium-sized enterprises, so as far as them are concerned, one of the effective way to extend the
business in low cost is to develop e-commerce. For details, according to the profit appraisal of scale and
system, the first step is to decide which platform should be adopted: using the platform provided by
e-commerce enterprise or building their own platform; secondly, building a specialized organization to
charge that job; thirdly, based on the analysis of demand, possibility and target of e-commerce, the
strategic planning should be set and executed.
Broadly speaking, the using of modern information technology can effectively improve the management
level and operation efficiency which the small and medium-sized enterprises should make a full
acknowledge to this. Grasping the operation method of modern technology information can ensure the
enterprises stay in the business in the future.
3.3 Gaining the scale advantage through clusters
The other reason why the small and medium-sized enterprises are more sensitive to the cost increase is
the small scale. So expending the enterprises scale becomes one of the paths to overcome the increasing
cost.
It is difficult for the small enterprises to enlarge scale by their own strength. But small and
medium-sized enterprises can get cluster around a certain geography area in order to realize
complementary advantages through mutual efforts. Rapid development can be achieved by shared public
facilities, research institutes and service organizations.
The forming of clusters can be formed by itself or guided by the government. Compared with the
time-consuming self-development clusters, the government-guided clusters are much more efficient. The
development zones have been set by the government on each level in order to realize the geographical
cluster. The small and medium-sized enterprises should make good use of this cluster and play the
advantage of this in order to share sorts of resources and strive for government supports.
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Conclusion
Small and medium-sized enterprises are the main body of our private-own economy and they are the
most vigorous economic formation. They play an important role for a stable society by promoting the
economic development and providing huge working positions. Under the background of increasing
operation cost, small and medium-sized enterprises should consider how to face this great change with
the positive attitude. To a certain degree, the process of dealing with the up soaring cost is the process of
self-improvement for enterprises. During this process, some of the companies may be knocked out of
the business circle which can’t improve themselves, but most of the enterprises can get the sustainable
development by using kinds of resources and measures to upgrade their selves’ competitiveness
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