Sorry spectacle

In looking for reasons for the somber outlook, Louis Lu, president of Wenzhou Sanshan Optics Co Ltd, goes beyond falling export orders.

Rising labor costs and the rising value of the yuan have also played a role, he says. "Compared with many years ago, profits have fallen greatly."

Sanshan Optics, a 12-year-old company with a workforce of 1,000, had turnover of 180 million yuan last year.

"That figure is by no means small, yet profits are almost zero, not worth mentioning," Lu says.

Adding to this catalogue of woe for Wenzhou companies as a result of the economic crisis, there have been cases of business leaders unable to repay high-interest loans obtained through backdoor channels fleeing the country. That in turn has made it more difficult to obtain credit.

One of the most publicized cases was that of Hu Fulin, president of Center Group, one of China's largest spectacle makers.

"Because Center Group is the largest spectacle maker in Wenzhou, Hu's flight caused a lot of worries," says Wu of Wenzhou Spectacles Industrial Association.

China Daily had reported earlier that Hu had fled to the US on Sept 21, leaving debts of up to 2 billion yuan. He returned to Wenzhou less than three weeks later to restructure the company with the help of the local government.

"Some foreign customers have called our spectacle makers to check whether they have cash flow problems similar to those of Hu's Center Group," Wu says.

"The problem was that Hu had stepped into other areas such as real estate and high-tech businesses, which need long-term finance, but he could only get short-term, high-interest funds. This is what did the damage to Center Group's cash flow."

Hu agreed to be interviewed by China Daily, but later changed his mind.

Wu Jianmin with the spectacles association says Center Group has resumed production, and there may be some kind or merger involving some local big businesses.

"Things are being negotiated now. Although it is unclear who will take on Center Group, it is clear that the group is back on track, which is good for the industry."

John Quelch, vice-president of China Europe International Business School, says the way out for these spectacles makers is to move up the value chain and go into the high-end market.

"The current problems in the spectacles industry of Wenzhou are not limited to (that city). It reflects that China as a whole, whose economy is largely driven by exports, should strive to move up the value chain and establish more global brands, instead of winning market share and foreign exchange through cheap labor products (as it did) many years ago."

That may be a lot easier said than done.

"Currently, there are about 500 spectacles manufacturers here in Wenzhou, and almost 90 percent are just doing the OEM and without their own brands," says Hu Zhenhua, professor of economics at Wenzhou University.

"Everyone knows that it is essential to do self-building. But for most local spectacle manufacturers, the complicated market structure and huge marketing expenses are far beyond their capacity."

One company that has its eye on the high-end market by establishing its own high-end brands and opening up new retail stores is Yuanyang Optics Co Ltd.

Ye Xuebo, 28, the general manager, dressed in a stylish jacket and wearing fashionable sunglasses, says that over the next five to 10 years "we will gradually transform from an OEM-based company to one famous for our own high-end products".

Ye, a university graduate who majored in business management, says the biggest problem in forging that transformation is the lack of original designs.

Yuanyang spends almost 20 percent of its revenue on design and employs more than 80 people doing that and research and development, with 18 of the staff based in Hong Kong.

Yuanyang, founded in 1995 by Ye Xuebo's father Ye Zijian, now boasts several well-known brands, such as Hailang and Ouman.

"These brands are becoming more and more popular among our foreign customers," Ye Xuebo says.

"Last year our sales revenue totaled 130 million yuan, of which 40 percent came from sales of our own brands. That's a big step forward considering the ratio was just 15 percent in 2010."

Others are also making the move up the value chain. Chen Guoguang, 46, president of Ouhai Optics Co Ltd, says that he always makes innovation and design his top priority.

"Every year Ouhai spends 25 percent of its revenue on design and research and development. And we are considering possible merger and acquisition opportunities to enhance Ouhai's R&D capability."

Plans are now afoot to launch franchised stores across the country.

"We plan to open two franchised stores to sell our own brands in Shanghai, and 10 in Wenzhou in 2012," Chen says. "Through opening up new outlets, our brand recognition will be enhanced. It is also beneficial for us to expand the domestic market, which is of great importance to develop our brands in the long run."

Ouhai employs 1,000 people and had a turnover of $30 million last year.

The local spectacles makers' efforts have won some clients' confidence and trust.

Samuel Jocobson, 45, the president of Identity Eyewear Inc of Florida, has been buying OEM products from Wenzhou for nearly 17 years. He says it is not fanciful to imagine that Wenzhou eyeglasses can be highly popular in the high-end market with their own brands.

"The precondition is that they make full use of the current advantages like their fast speed in delivering the goods with sound quality. What's more, they need to take time to build up the high-end image step by step."