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Feature: China's Silicon Valley faces tough time in financial crisis
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20:40, January 06, 2009

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It should have been good year-end sales season for Huang Ping's IT products shop and similar shops in Zhongguancun, the technology hub in Beijing. But Huang didn't see surge in sales. Instead, sales slumped almost one-third compared to the previous year. She still felt lucky.

"At least my business kept going, some shops could not survive and have gone out of business," said Huang, pointing at an empty office outside the door.

As the global financial crisis impacts economies around the world, Chinese enterprises are starting to suffer weakening demand, both internationally and domestically. As a result, Huang and her thousands of competitors in Zhongguancun, a place well known as China's Silicon Valley, are now facing a lonely winter.

Huang's shop is located in a popular electronics mall Kemao Electronics Market in Zhongguancun. It sells notebook PCs, desktops and other IT products. A series of natural disasters in 2008, such as the snow and ice disaster at the beginning of the year and the earthquake in Sichuan Province in May, Zhongguancun's sales volume had been greatly constrained. She had expected to celebrate high year-end sales.

However, although the present selling was higher than the previous months, it did not reach the level in the same period of 2007. Now the shop sells 300 notebook PCs per month, but it sold more than 500 PCs per month in 2007.

Thanks to the decades of economic boom in China, Zhongguancun has developed into a modern urban area -- a far cry from the bleak suburb in the Northwest of Beijing it once was. It is crowded with China's IT giants such as Founder and Lenovo, as well as thousands of IT products dealers. With a share of one-fifth of the total electronics in China, it is the biggest electronics market in the country and the IT market weathercock.

This place once saw heavy traffic jams and crowds in the electronic malls, but now the streets are empty of cars and the people are few. The people wandering the malls tend to be salesmen rather than customers. When a customer entered Kemao Market, a crowd of salesmen hoping to guide the customer to their respective shops, immediately besieged her.

"Too many monks with too little porridge," said Huang, referring to the increasing number of salesmen and shrinking numbers of customers, "now salesmen look at customers as if wolves look at sheep."

Huang's storefront had only two or three customers. The 20-square meter room was once filled with more than two dozens of people waiting for their notebook PCs in the same period of the previous year.

Huang said the end of every year saw a great deal of corporate purchases, ranging from 10 to 50 PCs every time. But as most businesses, especially the small and medium-sized enterprises, face tough times due to the financial crisis, they have to cut cost and staff, not to mention the purchase of new office appliances.

Wu Linguo, another electronics dealer who opened 22 storefronts in Zhongguancun said that his company suffered a 30 percent decrease in sales in November last year compared to the previous month, while December saw another 15 percent drop.

"My customers, both small and medium-sized companies and government customers have cancelled a number of purchase projects," said Wu. "Now individuals are our primary customers."

When the sales began to slump, Huang was trying every way to reverse the situation. However, bulk discounts, lucky draw and advertisements did not attract many customers. Huang said she kept losing money for six months.

As the sales decreased, small shops could not survive. Huang said these dealers were mainly newcomers with only one or two years' experience. Without regular customers, these shops were the most vulnerable.

On the other hand, the crisis gave the bigger dealers chances to snap up smaller ones in a bid to expand and diminish competitors. As some shops have closed, Wu rented some newly empty storefronts in November and December last year. Wu hoped his expansion would make profit when the economic situation improved.

Li Zhongjin, chief business officer of Dinghao Market, another major mall here, said earlier last month that about 5 percent of electronics shops in Zhongguancun area had gone out of business. Other industry insiders estimated a 30 percent drop of wholesale volume in Zhongguancun.

"It's difficult to predict when the financial crisis's impact on Zhongguancun's electronics market will come to the end," said Xia Wenjun, vice president of Hilon Capital Management Corp. Ltd., a company that manages the Hilon Plaza -- one of the most popular malls here.

Most shop owners expect the worst in 2009. Wu Linguo said his company would probably make no profit in 2008, and he thought an upturn would come next year. Huang hoped the sales would take a favorable turn at the end of this year.

In order to spur the ever-shrinking market and lower the overhead, most of the malls are cutting rent. Xia said that the rent of storefronts in Hilon Plaza would be cut down by 5 to 10 percent. After the thriving period of 2006 and 2007, the rent surged by as much as 40 percent since 2005.

Shop owners have also found ways to cope with financial challenges. Wu's company began to cut all unnecessary costs. He had to cut the spending on comfort in office, corporate image building and advertisement. In the meantime, Wu's employees have had to work overtime without premium pay, another form of salary cut. But there were little complaints. Instead, his 200-plus employees felt lucky as their boss promised not to cut staff.

Various sales channels have been employed. Wu found he couldn't just wait for customers to visit his storefronts. He began to visit his regular corporate customers in an effort to find new orders.

E-commerce is another way dealers have been coping. Thanks to e-commerce, Huang Ping's shop was not as deeply affected by the crisis as other shops with same size. Huang's team built an online forum about the basic tips of choosing and utilizing computers, and answered visitors' various questions. In time, visitors began to trust the company and choose her as their supplier of IT products.

Huang estimated that about 80 percent of her sales volume came via Internet. While many dealers face a lack of customers, Huang's e-commerce tactics have brought customers nationwide.

Han Wei, media and public manager of the Hong Kong-listed Alibaba, the leading e-commerce company in China, said more enterprises turned to e-commerce to cut costs and expand their ever-shrinking customer base Alibaba is now taking this advantage to expand its reach.

Wu, who continues to maintain traditional storefronts, began e-commerce two months ago, just after the crisis broke out. Online sales now account for 10 percent of Wu's total sales volume.

"It does help me," said Wu referring to his cost-cutting measures and foray into e-commerce, "I hope the loss can be limited to 15 to 20 percent of the total assets."

Xia said dealers in his plaza showed great interest in online business. With their support, Hilon is now building a business-to-customer trade platform with Zhongsou, a Chinese-language online search engine.

"Under the present situation, e-commerce is a way to expand sales and survive the economic winter," said Xia.

Source: Xinhua

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