When two weeks ago we reported [9]what may have been the biggest layoff announcement in China's current economic turmoil, after the second largest coal company Longmay Group announced it would lay off 100,000 - or about 40% of its entire workforce - while dramatic, the news did not shock too many. After all, China's commodity fiasco (as a reminder, as we first reported [10], at current commodity prices more than half of Chinese companies do not generate enough cash flow to even cover their interest expense) is known to most and as such rationalization of this kind are only just starting: it is not exactly clear how China will deal with millions of suddenly unemployed workers, but it will only cross that bridge when it comes to it.
Far more disturbing was today's news from China's prosperous, and far more high-tech, city of Shenzhen, and specifically major telecom supplier Fu Chang Electronic Technology Co. (also known as Fosunny [11]), which supplies parts to domestic telecommunication giants such as Huawei Technologies Co and ZTE Corp. as well as international telecom companies like Vodafone and AT&T.
The company made headlines last week after reports [12]that it had told clients it was planning to list on the stock exchange. The news couldn't have been more wrong because on Thursday, instead of going public, the company announced it would be going dark, when it issued a statement saying it was ceasing operations due to liquidity problems resulting from legal and debt issues.
Even more surprising is that Fu Chang wouldn't be the first - Fosunny is the third supplier of plastic parts to the telecom industry to go bankrupt in the past month, the Global Times said.
The immediate outcome of the announcement, according to IBtimes [13], was that thousands of factory workers and suppliers staged protests outside the company's Shenzhen office, where China Business News [12]showed pictures of a line of police in helmets confronting a group of protesters.
The Global Times says [14]that protests started after the Thursday announcement and continued through the weekend, with thousands of people gathered outside the company in the Longgang District of Shenzhen, demanding compensation, according to Chen Li, whose company supplied packaging materials for Fu Chang. Chen told the Global Times on Sunday that the impact on his company may be severe.
"It might even lead to liquidity problems for our company and we might end up going out of business," he said, adding that Fu Chang owes his company 2.51 million yuan ($395,600).
Fu Chang owes banks 190 million yuan in debt and suppliers 270 million yuan, and it is two months behind on pay for its employees, the National Business Daily reported on Friday. The newspaper also said the shutdown would affect more than 3,800 employees and more than 300 suppliers.
In a troubling sign for China's supposedly thriving telecom sector, Global Times cited experts as saying such firms "have seen their profit margins squeezed by rising labor costs in southern China, and a slowdown in both international and domestic demand. China’s smartphone sales contracted in the first half of this year, for the first time since 2009, while the country’s overall exports fell more than 8 percent in August, and more than 4 percent in September, compared to last year."
Labor experts told International Business Times recently that factory workers' wages have risen in southern Guangdong province in particular, not least because the new generation of better-educated rural migrant workers -- the mainstay of China’s labor force over recent decades -- is less willing to do mindless production line work. As a result, Guangdong has seen some of its lower value-added companies close, and others move out to cheaper parts of Southeast Asia or inland parts of China.
It is troubling (not so much for the business cycle which demands it but for China's increasing lack of centralized control) that what was once taboo, namely Chinese corporations defaulting, has now become a practically daily occurrence.
It is even more troubling that China's cash flow weakness appears to have spread far more rapidly and broadly than even we anticipated, and is impacting industries which most had though would be immune from a hardish landing, if only in the beginning.
But where it is most troubling, is that what recently became the largest market for Apple's iPhones suddenly appears to be stuttering. And while the Fed can pretend all it wants that there are no substantial and direct connections between China and the US (just don't tell that to Bravo TV's Millon Dollar Listing which while thoroughly fake would absolutely not exist without Chinese buyers), if and when the world's largest company by market cap admits just how bad the Chinese reality is, not even the US government secretly buying up all of AAPL's excess inventory (remember: Apple is the NSA's best friend [15]) will save the gargantuan gadget maker which simply can not exist in a world where the marginal consumer, whether in Boston or Beijing, has tapped out.
