INSIDEVIEW
China
Supply Chain
trends in
the economic
downturn
By Duane Bolinger, BBK Shanghai
ditional financial stress on firms in the supply chain.
Over the last several years, BBK Ltd., a leading inter-
national business advisory firm has reviewed the financial
This article focuses on the key findings of a survey
statements of thousands of private and public suppliers
that BBK, a leading business advisory firm, did throughout the world to ascertain their financial health. To
among 100 Chinese suppliers, to assess their
determine how the economic downturn has impacted sup-
financial health based on two key financial metrics:
pliers in China, BBK reviewed the data from approximately
total liability to equity and current ratio.
100 Chinese suppliers and focused on two significant fi-
nancial metrics, both of which deteriorated in 2008. (Chart
I) In 2008, the ratio of total liabilities to equity increased
Supplier viability could be much more important than to 2.0 from 1.4 in the prior year. This increase indicates
contract performance this year and most likely next year. that Chinese firms, relative to their owner’s investment,
Most industries are destined to experience significant sup- took on more liabilities such as borrowings or extended
plier failures resulting from the tightening of credit markets trade payables. This trend is important to note since it
globally, declining demand in most industries and produc- is more difficult for companies with high leverage to ac-
tion capacity at tier 2 or tier 3 being idled or removed. cess additional capital which could be needed to weather
The same consolidation and restructuring that is taking a downturn.
place elsewhere in the world will certainly happen here in The current ratio represents a company’s current as-
China and the pressure is on local manufacturing compa- sets (such as cash, accounts receivable, inventory or
nies to be one of the survivors. prepaid accounts) divided by its current liabilities (such
Chinese firms are facing challenges stemming from as accounts payable, debt payments due within the year
negative macroeconomic trends. GDP growth in China or tax liabilities). In 2008, the current ratio of Chinese
slowed to 6.8% in the fourth quar- firms deteriorated to 1.4 from 1.6
ter of 2008. The World Trade Chart I - Chinese Manufacturers in the prior year. It is worth not-
Organization data shows that after
Financial Metrics
ing that a current ratio of less than
two years of double digit growth, 1.0 implies that a company does
Chinese exports grew only 8.5% in
0.6
not have enough current assets to
2008. Even more worrisome, Chi-
0.2
cover its near-term payment obli-
na’s National Bureau of Statistics gations. A company who’s current
shows that exports declined 17%
Total Liabilities
ratio declines close to this level
to Equity
and profits declined 37% in the first represents a higher risk of distress
two months of 2009 compared to
1.41.6 2.01.4
Current Ratio
since business changes, such as a
2007 2008
the same period in 2008. Further- customer requiring longer payment
more, access to capital, which is essential for business terms, suppliers demanding quicker payments, or declin-
growth, has tightened due to the credit crisis. All of these ing sales place additional strains on a company’s liquidity.
factors translate into lower orders, declining sales and ad- Of the Chinese firms which were reviewed in this study,
42 MAY/JUNE 2009
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