Over the past three decades, Zong Qinghou, now the richest man in China, accumulated every cent of his wealth from selling bottled water and fast food. However, things are changing.
Zong, the founder and chairman of Wahaha Group, China's largest beverage producer, said he is going to channel tens of billions of yuan to real estate and mining sectors.
"Industrialists are finding it harder and harder to make money. Last year, soaring raw material prices eroded at least 5 billion yuan of our profits, as the prices of sugar and milk powder doubled," Zong said during the ongoing annual session of the National People's Congress (NPC), the nation's top legislature.
In 2009, Wahaha's business revenue was less than 40 billion yuan, but its profits stood at 8.7 billion yuan. A year later, its revenue expanded to 55 billion yuan, but profits shrank to slightly more than 6 billion yuan.
Zong is among a handful of Chinese private entrepreneurs who are loyal to manufacturing. Even during the peak of the property market, when prices increased 10 percent a month, Zong said he would not have stepped into the "upstart" industry since manufacturing is tangible and bubble-free.
However, as labor shortage worsened and inflation increased faster than expected, a number of manufacturers decided to turn to other investments for greater and easier returns. Zong is no exception.
Zong's shift reflects a common problem facing China's private capital. Due to pressures from escalating labor costs, inflation and excessive liquidity, manufacturers are looking for other ways out.
China's remarkable economic rise over the past three decades is largely built on the booming manufacturing industry. A vast pool of cheap and diligent labor force has made the nation the world's workshop.
The east coastal province of Zhejiang, where Wahaha Group is based, is home to China's most vibrant manufacturing-based private businesses and is one of the richest provinces in China.
In 2009, more than one-third of private capital was invested in the property industry. Meanwhile, the manufacturing sector, which was led by private businesses, saw investment grow by only 7.4 percent from a year earlier.
"Private businesses in Zhejiang now allocate their money this way: one-third for manufacturing, one-third for real estate and one-third for financial investment," said Zhou Guanxin, a researcher with the Zhejiang Federation of Industry and Commerce. Investments in the last two sectors are on the rise, he added.
"It is not surprising at all that private businesses are shifting from manufacturing, because capital chases profits in nature," said Cheng Enfu, an NPC deputy and chairman of the World Association of Political Economy.
The profit margin of the real estate industry is at least 30 percent. Financial investment also generates handsome returns. By contrast, profits from the manufacturing industry have been squeezed paper-thin.
Although China has become the world's largest exporter, profit margins are less than three percent. The situation could get worse with a stronger Chinese currency, Cheng said.
Traditional manufacturing has little room to expand. More capacity will not necessarily increase market share, said Chen Xinwei, executive president of the Seven Wolves Holding Group, a Quanzhou-based garment maker in southeastern China's Fujian Province.
China has looked to transform the country's economic development pattern as a major task in the 12th Five-Year Plan (2011-2015), upgrading resources and labor-intensive manufacturing to a technology- and innovation-based economy.
However, private manufacturers are short of impetus to test this strategic and tough transformation, said Zhou Dewen, chairman of the Wenzhou Council for Promotion of Small- and Medium-sized Enterprises.
Wenzhou city in eastern province of Zhejiang is the birthplace of China's private economy. It contains dozens of production bases, which churn out items ranging from shoes to electrical appliances.
"It is getting harder and harder to maintain good profits from making shoes and other small commodities. We are not going to put more money in it," said Zheng Shengtao, head of the Wenzhou Sunlead Corporation.
Wenzhou businessmen are famous for group speculation on property. Known as the "Wenzhou Real Mission", they cashed in at least tens of millions of yuan to buy dozens of apartments and villas in one-off payment. The businessmen sell the properties when prices go up to secure handsome profits. They have also come under intense criticism for pushing up China's sky-high housing prices.
It is estimated that Wenzhou's private capital totals around 800 billion yuan. If the money in circulation outside is included, the total sum could exceed 1 trillion yuan.
As manufacturers grapple with growing difficulties, a Sword of Damocles is hanging over their heads.
The industry could see further contraction as first-generation entrepreneurs, who have passed their fifties or sixties, begin to consider handing over their positions to their offsprings who have developed an affinity for financial investment but have no interest in traditional industries, said Hu Hongwei, a researcher on Zhejiang's private business.
The Jinjiang-based Hengan International Group is China's largest producer of hygiene products with sales revenues exceeding 10 billion yuan.
Xu Lianjie, the founder of the company, sent his three children to study abroad. Xu gave each of his children 100 million yuan after they returned home to set up investment companies instead of asking them to look after the hygiene business.
Unlike their fathers or mothers who earned their fortune from making socks and shoes in shabby workshops, the "rich second generation" are born into rich families and are sent to Western business schools. Most of them get their first taste of the capita l market on Wall Street.
Huang Jianwei, who oversees capital assets worth 15 billion yuan, has just set up a new mutual fund. To his surprise, many fund-raisers of the 5-billion-yuan fund belong to the "rich second generation".
"Different from their fathers, who like to stay within their family-owned business, the new generation wants to have more interactions. Capital connects them together, and that would possibly make them a new fortune," he said.
