(March 7, 2008) — China's largest bag maker, Huaqiang Plastics Co. Ltd., shut down production shortly after the Chinese government introduced a new law with restrictive policies on plastics bags — including the ban of ultrathin ones.
But between the closure and the bag ban, is there a causal relation or just a coincidence? Major Chinese and Western media have indicated the ban forced Huaqiang out of business. They cited a report from Xinhua News, China's state-owned wire service, that said 90 percent of Huaqiang's production was ultrathin bags.
The news media connected the dots with seemingly reasonable logic.
But why did such an influential player give up so quickly? Why didn't the firm simply increase the gauge of its film with its established machinery and clientele, which also must convert from ultrathin to thicker bags?
What the public and general-interest media are missing is a look at Huaqiang's internal problems, which were uncovered by Plastics News' research.
The privately held company, still in the process of liquidation, did not give financial figures to the press. But an archived report from the local Zhu Ma Dian municipal government shows that one of Huaqiang's two factories in the region suffered a $1.22 million (8.67 million yuan) loss in the first three quarters of 2007.
Being an industry leader nationwide and a key tax source locally, Huaqiang was in the spotlight. The firm was an exemplary taxpayer, but its competitors, mostly unregistered small shops, weren't paying taxes.
“An effective tax collection system is absent,” the report said.
The firm's labor situation reflects another problem. In 1995, Huaqiang's owners traveled halfway across China, from its headquarters in Guang¼zhou on the southeast coast to the inland province of Henan, to build the firm's plants. The gap in labor costs between Guangzhou and Henan justified the decision.
Over the years, Huaqiang became a major local employer and, at its peak, had more than 20,000 people on its payroll. By the end of 2007, however, that number had dropped to around 5,000, as the company struggled to compete with thousands of small family-based bag-making businesses.
China's new labor law, effective since Jan. 1, requires employers to grant longtime workers with permanent positions. While unlicensed competitors continue to sneak under the radar, Huaqiang shouldered even more weight. That seemed to be the last straw.
Huaqiang's cross-regional investment in Henan Province had a lot to do with perks offered by the local government to out-of-province investors, albeit not as generous as those to foreign firms.
But the government bailed out when the time came to keep its promises. According to a report from Xinhua News, dated June 26, 2004, Huaqiang had to pursue litigation against the Luohe City government, which failed to fulfill a contract that would have enabled Huaqiang to operate the local power plant. Although the court ruled partially in favor of Hua¼qiang, the good faith was gone.
Not only did the rising cost of resin squeeze Huaqiang's margins, availability of materials was also an issue. The firm was consuming 22 million pounds of regrind a year, according to its Web site.
“I'd been approached by Huaqiang, which was hoping to buy scrap from me,” said Toland Lam, a recycler and molder operating in Texas and Guangdong. “But the pricing rules in the recycled plastics business are different from normal economics. When your order size gets to a certain level on such a tight market, you actually have to pay more.”
He stressed: “Since [Huaqiang's] products are extremely low margin, it didn't make good business sense [to pay a premium on materials]. I didn't think the company could survive for long.”
But there's much we can take away from Huaqiang's struggles of doing business in China, especially selling in the Chinese market.
Don't assume a local government has credibility. A contract generally works in China; though, sometimes it requires extra effort, like litigation, to have it followed.
Also, firms can face competition that bypasses laws and rules. And though those individual operations are tiny in size, thousands of them together can cast huge pressure on a lawful business. Policies change, costs go up, and large scale can end up being a disadvantage.
It seems to come down to common business sense. In many ways, Huaqiang's shutdown is a classic illustration of Gresham's Law of bad money drives out good.
Sun is Plastics News' Akron, Ohio-based staff reporter and Asia specialist.