A mobile phone production machine displayed in an exhibition in Shenzhen Photo: IC

Shenzhen Fu Chang Electronic Technology Co, an electronic parts supplier to domestic telecommunication giants such as Huawei Technologies Co and ZTE Corp, experienced a protest by thousands of employees and suppliers at its headquarters in Shenzhen, South China's Guangdong Province, over the weekend, following its abrupt closure.

Fu Chang issued a statement late on Thursday saying that it would stop all operations immediately because it was having liquidity problems after facing legal and debt issues, according to media reports. 

The sudden closedown left suppliers and employees, who had just returned from the week-long National Day holiday, in shock at losing their jobs and their business with the company.

Protests started after the Thursday announcement and continued through the weekend, with thousands of people gathered outside the company in the Longgang District of Shenzhen, demanding compensation, according to Chen Li, whose company supplied packaging materials for Fu Chang.

Chen told the Global Times on Sunday that the impact on his company may be severe.

"It might even lead to liquidity problems for our company and we might end up going out of business," he said, adding that Fu Chang owes his company 2.51 million yuan ($395,600).

Fu Chang owes banks 190 million yuan in debt and suppliers 270 million yuan, and it is two months behind on pay for its employees, the National Business Daily reported on Friday. The newspaper also said the shutdown would affect more than 3,800 employees and more than 300 suppliers. 

Fu Chang couldn't be reached for comment as of press time.

Chen said business with Fu Chang had been going as usual before last week's announcement, and he was not aware of the financial trouble the company was in.

"We didn't notice any signs of [Fu Chang] closing down," Chen said, adding that his company continued to supply materials for Fu Chang and even received a check of 300,000 yuan at the end of September.

Chen noted that he has joined other suppliers to "protect our rights" by drawing the local government's attention to the issue, but the move has yet to generate any results.

He added that negations regarding payment to suppliers are continuing.

But a former employee of Fu Chang told the Global Times on condition of anonymity that the company has paid the overdue wages for its employees, and a deal has been reached on compensation for workers with less than three years of service.

Huawei could not be reached for comment, but the company was quoted by the National Business Daily as saying that it had immediately changed suppliers to ensure delivery of products.

Fu Chang mainly provided parts for Huawei's mobile broadband and home electronics operations, which accounted for only a small portion of the telecom company's overall purchases, said Huawei.

Fu Chang is the latest telecom device parts supplier to go bankrupt.

Just last month, two other plastic hardware suppliers from Guangdong reportedly went out of business.

Experts attributed the closures to the companies' failure to innovate, combined with higher labor costs and low profit margins.     

"The labor costs of those companies have kept rising but profits haven't kept pace, a combination that can be found at lots of suppliers in the Pearl River Delta region," Zhang Yi, CEO of Guangzhou-based market consultancy iiMedia Research, told the Global Times on Sunday.

Zhang noted that these suppliers' production costs have risen while demand for their cellphone products has weakened, putting them under great pressure.

But to some experts, the situation reflects the competitiveness of the telecommunication industry and it is good for the sector in the long run.

It is a normal situation that suppliers experiencing difficult operating conditions would close, given the intensifying competition in the cellphone industry in recent years, Wang Yanhui, secretary-general of the Mobile China Alliance, told the Global Times on Sunday.

Rationalization in the industry will drive out companies with weak management and obsolete  manufacturing procedures, Wang said. It is exactly this process that is at work in the industry at present, Wang noted.

Wang said that the mobile phone market was formerly more profitable, which attracted many new entrants.

But now, technology is becoming more important, and these companies must innovate to cope with changing market demand, he noted.