Dilemmas and the Way Out of Yiwu’s Global Trade

By Yunlei Duan, Hao Zhu, Tsz Nga Tsui, Xinmeng Wang

Over the past few decades, Yiwu, a small city in the middle of Zhejiang Province, has successfully transformed from a poor county to one of the wealthiest counties in China by a successful international trade business. 

Nowadays, the products from Yiwu are sold to over 200 countries, mostly to the Middle East, Europe, and Latin America. In 2019, Yiwu’s GDP hit a new high to ¥142.1 billionAnd the value of export in Yiwu has reached ¥286.8 billion, accounting for 12.4% of the province’s exports.

Prosperity: From domestic factories to the world

From factories, through front shops, to customers around the world, the industrial chain of Yiwu’s international business is simple but mature. 

On the production end, for many years, domestic factories scatter around Yiwu. Until now, those small and medium-sized factories play an irreplaceable role in Yiwu’s market. Mr. Yao is a local factory owner, whose team can design and produce all kinds of trinkets with tens of workers and few machines. With little concern of patent, his team can follow the trend easily and quickly, and sell the updated products from the small village to all around the world.

In contrast, some large factories comply with various standards more strictly. Mrs. Yang runs a chemical glow stick factory. She shows that her factory works hard to meet lots of industry standards, such as En71, Astm F963, and BSCI. 

For most factories, OEM (Original Equipment Manufacturer) is the dominant business model, especially those having many customers from developed countries. ‘This is because the people in developed countries have formed brand loyalty. They won’t buy in unfamiliar brands. ‘Mrs. Jia, the CEO of an exhibition company explained. 

While now more and more companies are making efforts to build their own brand. Some famous brands from Yiwu are called Langsha (knitting socks), Neoglory Jewelry, Redleaf (umbrella), etc. Even Mr.Yao’s micro company has built its own supply chain brand called Honglazi.

Yiwu International Trade City during pandemic

Yiwu International Wholesale Market is Yiwu’s landmark, as well as the trading center of most international businesses. In the market, there are over 50,000 shops and more than 1.7 million products in all grades. Lots of shops are family business. Mr. Yao also owns a shop in the market for product displaying. 

Every day, thousands of foreign purchasers come to select goods. Some purchasers will make a field trip to the factories to check whether it has the related qualification (even ethics of labor). Purchasing agents also play essential roles in the market, who help foreign companies find a reliable source of the products and do all the background investigations for them. 

Efficient transportation is the key base of international business. “There are four methods to export goods. Traditionally, people use self-delivery service, sending goods by parcel post, special line, and international express. The second way is using a special line logistics company, which is more expensive. The third way is using International express like DHL, UPS, TNT, and FedEx, which is the fastest but most costly. The fourth way is building an overseas warehouse in destination countries.” Mr. Deng, head of an international logistics company, said. 

Nowadays, Yiwu has gradually built a comprehensive and multi-dimensional international express logistics system, including land, air, and sea transportation. Most notably, in 2014, Yiwu opened the China-Europe freight train. Now there are 11 China-Europe freight train lines, linking Yiwu with 37 countries and regions, which is faster and more efficient than shipping. Among all the lines, The train from Yiwu to Madrid in Spain is the longest international train in the world. 

Transportation equipments in the Yiwu free trade zone.

Dilemma: Decreasing profit margin

In spite of the world-class business volume and positive development trend, Yiwu still faces lots of challenges. 

Above all, the decline of profit margin is at the heart of the troubles vexing most Yiwu dealers, which is the result of the decrease in price and the increase in the cost.

On the one hand, intense homogeneous competition causes a vicious circle. Without brand or patent, many products in Yiwu are really easy to be copied. With so many similar products in the market, most merchants have no choice but to continuously decrease their products’ prices to get customers. 

Mr. Liu, a dealer in Yiwu, said, “If we all find one product highly profitable, we will be all in it. I sell it more cheaply than you, without considering whether the industry will be destroyed. If someone sells for 19 yuan, then I sell for 18 yuan. Then, in such a vicious price war, the profit of the product will be squeezed to a very low level.” Mr. Yao shared his similar experience, “I sold one product for 1.2 yuan in 2007, but now it decreased to 1 yuan. Fewer and fewer the profit I can get.”

On the other hand, the increasing cost is also a headache for Yiwu dealers. Though the material cost of many industries hasn’t changed a lot during the years, labor cost has been keeping increasing, which is a big burden for businessmen.

“Labor costs in China are rising, sometimes violently. In fact, a 30% increase in some industries should be a very conservative statistic,” according to Yan Wu, from Liangshan aggie. Many other factory owners expressed their same concern.

In the drastic competition environment, some dealers fail to make ends meet and are eliminated by the market. At the same time, survivors are struggling in decreasing profit margin. Some try to increase prices. But the latter also encounters another risk: they may lose the price advantage in the global market. Nowadays, it’s not fresh news that more and more factories have moved from China to Southeast Asia where labor cost is lower.

A variety of products manufactured by Yiwu factory.

Way out: Branding and mechanization

Under this circumstance, developing their own brands is a promising way to stabilize prices. Mrs. Jia said, “OEM means the lack of product autonomy. Only developing our own brands can help us to get rid of others’ control.” As mentioned above, more and more companies have realized the importance of building their own brands, and been working hard on this path.

One of the most significant points to build a brand is targeting a promising market segment and forming brand features. Kangchen Glass company, a well-known supplier brand in Spain and Italy, offers a persuasive example. This company focuses on only a kind of glasses with wooden legs and plastic frames, which is popular in the international market, and gradually building the independent brand in the niche market. 

Besides, technological or design barriers are effective to prevent plagiarism. It not only depends on one company’s technological change but also the whole market’s respect for the patent system.

As for controlling cost, mechanized transformation is a key solution for many companies. Miss Wang, general manager of a Toy company, said, “Some manual parts in the production line will be replaced by machines.” Some other factory owners shared their similar ideas. As long as it’s more profitable, the transition is only a matter of time.

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