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Difficulties and Potential Risks Facing Enterprise Development

Dec 15,2017

By Li Lan

Research Report Vol.19 No.6, 2017

The entrepreneur survey system project team of the Institute of Public Administration and Human Resources under the Development Research Center of the State Council organized the questionnaire survey on Chinese entrepreneurs in 2017. The questionnaires were distributed on August 10, 2017. As of October 16, 1495 copies were collected, covering a number of industries in 31 provinces, autonomous regions and municipalities directly under the central government. Specifically, state-owned enterprises (SOEs) and non-SOEs account for 3.6% and 96.4% of all enterprises surveyed; large enterprises, medium-sized enterprises and small enterprises account for 10.3%, 24.5% and 65.2%, respectively; and company chairpersons, managers and Party chiefs make up 91.7% of the entrepreneurs surveyed.

I. Overcapacity Still Serious in Some Industries Depsite Progress in Reducing It

According to the survey, 7.6% of the entrepreneurs think overcapacity is “very serious” in their industry, and 54.7% choose “serious”. They together make up 62.3% of all entrepreneurs surveyed, a decrease of 8.9 percentage points compared to the 2016 survey. Meanwhile, 37.7% of the entrepreneurs think there is basically no overcapacity in their industry, the highest proportion over the past five years (see Table 1).

It is to be noted that overcapacity is still a prominent problem in some industries. According to the survey, overcapacity is “very serious” or “serious” for more than 70% of the enterprises in mining, accommodation and catering, textile, papermaking, rubber and plastics, non-metallic mineral, iron and steel, non-ferrous metal, universal equipment, special equipment, and transport equipment manufacturing industries. In contrast, more than half of the entrepreneurs in industries like information transmission, software, information technology, apparel, and electronics think there is basically no overcapacity (see Table 1).

The survey finds that the policy to cut overcapacity has come into play in recent years, and overcapacity now exists just in some industries rather than all industries. Meanwhile, some industries, especially the modern service sector, enjoy broad prospects for development, laying a good foundation for promoting industrial transformation and upgrading and economic transition.

The equipment use factor can also reflect the severity of overcapacity. According to the survey, 50.8% of the entrepreneurs think the equipment use factor in 2017 was “75% or below”, 32.1% of the entrepreneurs choose “75%-90%”, and 17.1% choose “above 90%”. The average use factor of all enterprises was 71.1% in 2017. In particular, the average use factor of the manufacturing industry was 71.2%, up 4.6 and 3.7 percentage points compared to 2015 and 2016. By industry, the transport equipment manufacturing industry had an equipment use factor of less than 60%, while the ratio was relatively high in textile, instrument and other industries.

As to the projections of the use factor in 2018, 43.6% of the entrepreneurs think the equipment use factor in 2018 will be “75% or below”, 34.5% of the entrepreneurs think the ratio will fall within the range of “75%-90%”, and 21.9% predict a ratio of “above 90%”. The average equipment use factor of enterprises is estimated at 74.7% in 2018, of which the ratio for the manufacturing industry is expected to be 74.7%, a little better than in 2017. By industry, the average use factor of industries such as food and non-metallic mineral products is projected to be below 70% in 2018, while that of textile, iron and steel, electronics, and instrument industries will be relatively high.

With the progress in reducing overcapacity, the intensity of market competition has been alleviated. 34.4% of the entrepreneurs think the competitive pressure in the market since the beginning of 2017 has increased greatly compared to the same period in 2016, 44.1% think the pressure has increased slightly, 18.9% think the pressure has remained basically unchanged, and 2.6% think the pressure has reduced. To sum up, the proportion of people thinking market competition has increased is 75.9 percentage points higher than that of people thinking market competition has reduced, down 5.1 percentage points compared to 2016. By industry, market competition in transport, warehousing and post, wholesale and retail, real estate, pharmaceutical and electronics industries is relatively intense.

II. High Cost Remains a Prominent Problem for Enterprises

According to the survey, the biggest difficulties in enterprise development include: “rising labor cost”, which was chosen by 71.8% of the entrepreneurs; “heavy social security and tax burden” (49.7%); “rising energy and raw material cost” (40.4%); “low profit margin” (36.3%), “shortage of talent” (35.9%), “financial strain” (31.7%), “industry-wide overcapacity” (30.3%), and “recruitment” (21.9%). The survey finds that the increase in costs (including “rising labor costs” and “heavy social security and tax burden”) have been the main difficulty of enterprises in recent years, and the proportion of entrepreneurs choosing “rising energy and raw material cost” has increased this year, which is to some extent caused by the rapid rise of product prices in the upstream sectors. This may indicate that the increase in the prices of industrial products has a weaker influence on the profits of enterprises, and the gap in profitability of the downstream and upstream sectors has increased significantly (see Table 2).

It is worth noting that the main difficulties facing the enterprises vary by region. Specifically, the proportion of enterprises choosing “heavy social security and tax burden” and “recruitment” is higher in the eastern region than in other regions; the proportion of enterprises choosing “financial strain” and “industry-wide overcapacity” is the highest in the central region, while the ratio for “low profit margin” and “shortage of talent” is the highest in the western region (see Table 2).

As to the changes in labor cost, environmental protection expenditure and social security and tax burden, 88% of the entrepreneurs think the labor cost has increased year on year. Among them, those who think the labor cost has “increased significantly”, “increased slightly”, remained “basically unchanged”, and “decreased” accounted for 31.2%, 56.8%, 10.1%, and 1.9%, respectively. This shows that the proportion of entrepreneurs thinking the labor cost has increased is 86.1 percentage points higher than the proportion of those thinking the cost has reduced, the greatest difference over the past four years. Moreover, the increase in labor costs of enterprises in eastern and western regions, large enterprises and private enterprises is relatively large.

Raw material cost has increased considerably this year, becoming the third biggest difficulty for enterprises (see Table 2). According to the survey, 73.2% of the entrepreneurs think the material cost has increased, 70.1 percentage points higher than the proportion of those thinking the cost has reduced (3.1%), the highest over the past five years; those who think the material cost has been basically the same account for 23.7% of the entrepreneurs surveyed. Specifically, large enterprises in the eastern and western regions have seen a relatively large increase in material cost. By industry, the material cost of papermaking, non-metallic mineral, iron and steel and metal products industries has risen markedly.

As to environmental protection expenditure, 71.1% of the entrepreneurs surveyed think the expenditure has increased year on year, 27.3% think it has stayed basically the same, and only 1.6% think it has declined. This suggests that most enterprises have spent more on environmental protection this year. In particular, enterprises in the western region, large enterprises and foreign-funded enterprises have seen a relatively significant increase in environmental protection expenditure.

By industry, enterprises in chemical, pharmaceutical, iron and steel, ferrous metal, metal products and automobile industries estimate that their environmental protection expenditure will surge more than 90% year on year.

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