China's exports rose almost 10 percent year-on-year in September, according to data released at the weekend. But speak to Chinese exporters and they say the economic doldrums in Europe mean many are facing more daunting challenges than they were during the 2008 heights of the global financial crisis.
To Zhou Dewen, head of an industry lobbying group in Wenzhou, the famously entrepreneurial city in eastern China, the situation is "already worse than 2008." "The difficulties are bigger and they are far more widespread."
Groups like Mr. Zhou's typically petition Beijing for export subsidies or tax rebates and his caution should be taken with a pinch of salt. But the past six months have been unusually difficult for exporters buffeted by sagging demand in western markets and wage and raw material rises at home.
Timothy Stuart, a Hong Kong-based businessman who supplies schools in the U.S. with classroom furniture from factories in southern China, says orders are smaller and his margins 30 percent lower than they were before the 2008 crisis.
"Customers are asking for smaller orders to manage their inventories better," he says. Other sourcing companies like his report that payment terms, meanwhile, are being extended by retailers and buyers in the west to as much as 90 days.
As China prepares to release growth data this week that is expected to confirm the slowdown in the world's second-largest economy, companies around the world are registering the impact.
U.S. companies such as Caterpillar, the earth-moving equipment manufacturer, and Alcoa, the aluminum producer, have warned of the impact on demand. Cummins, the engine manufacturer, last week said it planned to cut up to 1,500 jobs, in part because of the decline in the Chinese market.
Shannon O'Callaghan, an analyst at Nomura, said: "At the start of the year most U.S. companies were saying they thought China would get better in the second half. But by the summer, it was clear it was not getting better. If anything, it's getting worse."
On the ground in China the situation looks grimmer than the data reflects.
Economists say the seemingly buoyant trade numbers released on Saturday were skewed by seasonal factors such as the rush to get Christmas shipments out before week-long national holidays in early October.
David Ou, sales manager of Mr. Big Furniture Co., an office furniture supplier in Foshan, two hours from Hong Kong, says orders from Europe were three to five times higher last year.
"Lots of clients are asking for prices rather than placing orders. Hundreds of furniture makers in Foshan have closed down this year."
The theory used to be that growing domestic demand would offset slowing exports. But the problem now confronting many Chinese factories, says Olivier Levy, who heads Dragonsourcing, a purchasing service provider, is that "internal demand is not quite there yet."
David Liu, who has long sold most of his factory's production of handbags to Europe, diversified to sell to the domestic market last year. Now, he reports that "the Chinese market is also sluggish despite the fact that we added 20 new stores in a dozen cities this year" and online sales are growing.
The new paradigm of smaller orders and shorter lead times and the resulting slimmer margins is likely to persist across the labor-intensive export sector in China.
Demand from the large markets of Europe and the U.S. is unlikely to soon bounce back to levels seen before the 2008 crisis. In addition, many retailers in the U.S. and elsewhere have started to source labor-intensive products either from markets closer to home such as Mexico or to countries with lower wage costs such as Cambodia.
"Looking forward, demand of China's major markets will probably remain weak or even get weaker in year-on-year terms," Bank of America/Merrill Lynch economists wrote in a note on September's export data.
The way manufacturers are adapting is illustrated by Scovill, which makes zippers and other hardware for jeans and childrenswear manufacturers and has seen the margins on its manufacturing business in Asia recover after it closed a facility in 2009 in a village near the southern Chinese boomtown of Shenzhen.
The area once had "factories, factories, factories as far as the eye could see," says Brian Moore, its managing director in the Asia Pacific region. Now, many have closed.
Mr. Moore's company has farmed out orders to Chinese-owned factories elsewhere in the country and opened a factory in Cambodia. Gross margins for the business bounced back from 6 percent in 2009 to 35 percent in 2010 "purely because I didn't have this factory [near Shenzhen] sucking up all my wages," Mr. Moore says. The move has given Scovill's Asia business a new flexibility in managing costs.
But, even as the world faces up to a secular slowing in demand from western consumers, China's nimble factories and superior infrastructure give it a head start over its competitors, says Michael Bellamy, who heads Passagemaker, a sourcing company in Shenzhen.
The fastest growing market for his company is the besieged economy of Spain. "In the past three months, we have added six projects for Spanish clients. Last year, we had none," says Mr. Bellamy. "The rougher the economy is back home, the more important outsourcing becomes."
—Additional reporting by Zhou Ping in Hong Kong