Lutai Textile: A sample of corporate survival under high currency values
In August 2008, an internal report drafted by the Jinan Branch of the People’s Bank of China was placed on the desk of Jiang Daming, the governor of Shandong Province. The report, titled “Enlightenment of Luthai Textile Co., Ltd.’s high profit growth under zero-profit conditions in the industry,” investigated and analyzed the specific methods of Lutai Textile Co., Ltd.’s response to the appreciation of the RMB. A week later, the Shandong Provincial People’s Government organized relevant departments to set up a joint investigation team to conduct an in-depth investigation of Lutai Textile Co., Ltd. According to the official leading the team, in addition to reporting to relevant leaders, the results of this survey also need to be studied and exchanged among local government officials. The experience of Luthai Textile has guiding significance for many small and medium-sized enterprises in Shandong Province.
<BR The operating pressure of higher textile enterprises has generally increased, and the average industry profit is at an extremely low level. In the first quarter of last year, a famous textile company in Shandong Province, which had long been among the top ten cotton textile companies in China, was forced to accept mergers and acquisitions from other companies due to a broken capital chain. In the second quarter, another well-known listed textile company in Shandong Province also fell into crisis due to operating efficiency and funding problems, and has not yet found a solution. Luthai Textile Co., Ltd., which is also a listed company, has achieved high growth in corporate efficiency. As of the end of September 2008, the company's main business revenue increased by 7.32% year-on-year, operating profit increased by 46.35%, net profit increased by 35.41%, and sales profit margin reached 21.54%.
. The scope of the company’s registered trademarks has not only expanded to multiple fields such as yarn, fabrics, clothing, decorations, etc., but has also registered overseas trademarks in Japan, Canada and other places. The brand effect has helped Luthai Textile develop a large number of long-term and stable customer groups. However, the above-mentioned textile companies that were forced to accept mergers and acquisitions and a certain listed textile company that is still struggling are actually doing very well in actively operating their own brands and striving to establish their brand image, and they also have a group of long-term and stable customers. group.
Some people say that in order to improve product technology and market competitiveness, Ru Tai Textile has introduced advanced equipment with advanced levels from Belgium, Germany and Japan to carry out the production and organizational project of high -grade woven fabrics. After large-scale technological transformation, it has now become one of the yarn-dyed fabric manufacturers with advanced production equipment in Asia. However, a textile company that was forced to accept mergers and acquisitions and a listed textile company that is still struggling are also equipped with first-class equipment.
Some people say that Lutai Textiles continue to extend the industrial chain, forming the ability of cotton planting to clothing production. The corporate cotton planting area reaches 120,000 mu, and its production capacity reaches 15,000 tons, saving a lot of raw material costs. However, a textile company that was forced to accept mergers and acquisitions and a listed textile company that is still struggling have also made useful and even successful attempts to extend the industrial chain. Among them, the financial rupture caused by extending the industrial chain is precisely the important reason why a well-known textile company that has long been among the top ten cotton textile companies in China is sent to the road of no return.
” So happiness is only because it wisely avoids all kinds of misfortunes.” Luthai Textile’s experience in dealing with changes in the business environment caused by the appreciation of the RMB is indeed valuable for reference and promotion.
Actively adjust the structure of domestic and foreign currency liabilities to obtain benefits from the appreciation of the RMB; third, increase the import of raw materials and reduce exchange losses.
Starting from April 2005, Lutai Textile and BankA forward exchange settlement contract with a total amount of US$80 million was signed, effectively avoiding the 2% exchange loss caused by the initial appreciation of the RMB exchange rate in July of the same year.
In terms of settlement, the company comprehensively uses a variety of settlement methods such as long -term letters and duration letter of credit to deal with the operating risks brought about by the appreciation of the RMB, try to shorten the period of export settlement, and try to extend the term of import payment.
At present, Ru Tai Textile’s export volume has been reduced from nearly 20 million US dollars per year to $ 10 million per year. It is expected that the settlement volume of import forward letters of credit this year will exceed 13 million US dollars, and the amount of overseas unpaid import bill advance financing will increase from less than 700,000 US dollars last year to 8 million US dollars. Luthai Textile comprehensively utilizes foreign exchange spot accounts to increase the adjustment of the liability structure, shorten the spot retention time, rationally adjust the import and export structure, and maintain the company’s spot exchange at a reasonable level.
When Japan implemented exchange rate reform, the company’s current account balance was less than US$2 million, effectively avoiding exchange rate losses.
Lutai Textile actively increased the amount of foreign exchange borrowings. From August 2003 to July 2004, it borrowed a total of 45 million US dollars from banks, all of which were settled at the then spot foreign exchange price of 8.27 yuan and used in circulation to this day. This alone resulted in exchange gains of RMB 23 million. Since the country implemented exchange reform, enterprises have borrowed a total of 40 million US dollars to pay for imported goods, and this alone generated exchange gains of 58 million yuan.
In recent years, Lu Thai Textile has taken advantage of the appreciation of the RMB to actively increase the procurement of imported production materials and expand the proportion of raw material imports, which has partially offset the exchange losses caused by the exchange collection of export products.
According to statistics, the amount of cotton imports in 2005, 2006, and 2007 was US $ 8.707 million, US $ 19.257 million, and US $ 29.739 million, respectively. The proportion of imported raw materials accounted for all cotton consumption. In the first half of 2008, Lu Thai’s textile raw material imports reached US$32.563 million, an increase of US$2.824 million over the whole year of 2007, and imported raw materials accounted for 40% of the total consumption.
Thinking behind success
Under the influence of the international financial crisis, the survival of many textile companies has been threatened. Export orders have dropped sharply, and reports of corporate bankruptcy and production suspension have frequently appeared in the press. The central government has successively issued a series of policies to increase support for labor-intensive industries such as textiles and light industry. However, the plight of small and medium-sized textile enterprises cannot be improved in a short period of time. This reminds people of the appreciation of the yen in the mid-1980s. At that time, many companies in Japan that were not suitable for the high currency value closed down one after another. Those who survived and succeeded. They are all technology-based brand enterprises that have experienced industrial upgrading.
At present, while the Chinese textile industry participates in the competition of the international market with a lower cost advantage, it is necessary to rely on the external scale economy, strengthen technological innovation, and improve the core competitiveness of the enterprise. In particular, export-oriented companies, while striving to develop the domestic market, must use financial derivatives and financial knowledge to avoid the risks caused by RMB appreciation, like Lu Thai Textile. Many entrepreneurs have also reached a consensus: Under the new currency environment and international competition, Chinese textile companies are facing long-term tests.
The reality is that many textile export companies have little understanding of exchange rate hedging financial products such as options and swaps, resulting in most textile companies having insufficient means to deal with RMB appreciation. This requires relevant government departments and industry authorities to place an important emphasis on strengthening the skills training for foreign exchange risk hedging for small and medium-sized enterprises, and through effective measures to help enterprises skillfully use various financial derivatives to prevent exchange rate risks and improve the textile industry. The viability of small and medium-sized enterprises.
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