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| Gain valuable insight into how China's 2007 VAT rebate changes and quality concerns affect your sourcing options.
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China's Rapidly Changing Sourcing Tides—Webinar Q&A Document |
- What role does contracting and long-term agreements play in managing risk in China?
Contracts can help you to stipulate situations for pricing changes with associated conditions and benchmarks so as to minimize surprises or arguments. However, contracts and long-term agreements may not be the tool to eliminate pricing fluctuations in all cases and they can sometimes serve as a double-edged sword.
- James Jin (MFG.com)
- What is the history of VAT changes? In other words, has this happened before, and should we expect this to happen again? The charts displayed only show a result of one week's worth of effect, is there any way of understanding how past changes have or have not affected Chinese export?
The VAT rebate policy was adopted in the late 1990's to use as a tool to promote China's export business. Since then, the government has made a few changes and is expected to continuously do so down the road. The most recent change to the VAT prior to this change was in September, 2006. The changes have surely made some impact on the export volume as well as product portfolio. However, China continues to hold significant trade surplus with major trade partners such as the U.S. and Europe which means that Chinese products have continued to remain pricing competitive so far.
- James Jin (MFG.com) and Lisa Reisman (Aptium Global)
- If we source companies in the interior part of China, will this trade be slower due to a poorer infrastructure or poor road-transport conditions?
I think it is logical to assume that there will be some additional transit time. Whether or not that is 2-3 days or more than a week is dependent upon the actual location of where you are sourcing from. So in short, it adds length to the supply chain. Poorer infrastructure is a given though that situation is changing quickly.
- Lisa Reisman (Aptium Global)
- This issue seems to have taken many people in North America by surprise. How come, since these changes were announced in advance?
Much of this information is widely available in the Chinese press but not so in the American press. It is also somewhat of a technical method of changing trade policy. Other methods like currency fluctuation can be tracked easily as there are many websites that publish these. But VAT changes are more complex, are internal to China and require broader media dissemination for others to hear and comprehend the impact.
- Lisa Reisman (Aptium Global)
- What about the impact of increasing labor costs?
This is a huge issue in China, particularly in areas around Shanghai and other coastal areas. Labor costs are increasing but still and on the whole they are significantly lower than Mexico, for example. Increasing labor costs represent an opportunity to move inland. In addition, most forecasts that I look at suggest it will be many more years still before China's labor costs begin to approach the western world.
- Lisa Reisman (Aptium Global)
- What about the Olympics—is this a big factor?
The 2008 Beijing Olympic Games is becoming a more and more important factor as it is approaching. However, this one time event may not become the top factor in many grand economic decisions especially related to long-term international trade.
- James Jin (MFG.com)
- Where would be a good and reliable site/source I can go to for China manufacturers?
We're obviously biased in this regard, but MFG.com is a great place to start.
- Are there other China policy changes on the radar that may have significant impact to sourcing to China? What changes have happened in the past? What can we expect in the future?
They're many changes that might happen going forward. Some include: additional VAT rebate changes (including both reduction as well as increase), RMB Yuan appreciation, elimination of export processing trade zones, and elimination of corporate income tax holidays for companies registered in special economic zones.
- James Jin (MFG.com)
- Do you have any stats available regarding the difference between the selling prices of different products fob origin when sold in China as compared to when sold to overseas buyers?
If I interpret this question correctly, you are asking if there is a difference between "the China price" and the price quoted to western manufacturers. My answer to this is an emphatic yes. We have seen as much as 12-15% difference between what we call the mezzanine price (which typically is just under the US domestic price) and the China price (the price that is actually quoted to Chinese producers). The mezzanine price is typically the first price thrown out by the Chinese supplier. It is basically used to engage the Western buyer. But it is never the last price. Regrettably I have not seen any stats that actually describe this difference. I have however, seen it on most sourcing projects that I have been a party to.
- Lisa Reisman (Aptium Global)
- Do you see any similarity to the bubble burst that Japan experienced in the early 90s happening in China?
This is a very interesting question. I think the bubble of China is more similar to the bubble of 1997 with the other Asian Tigers in terms of too much growth too fast. Japan had many weaknesses in their market system including extremely weak banks (that lent money when they should not have). I think China is different from Japan mainly because China is a planned economy. Beijing can control the knobs on the dial, if you will, whereas Japan is a market based economy which largely solved its own banking crisis. Unfortunately for Japan, it has taken many years to rectify its weak banking system. China looks more like Thailand, Taiwan etc in 1997 but the difference is China is being guided toward a safe landing by its government.
- Lisa Reisman (Aptium Global)
- Are some Chinese manufacturers not affected by the VAT? (e.g., duty free zones, etc?)
Yes. Those who are involved in the encouraged product categories, i.e. high technology oriented, less polluting, or less resource intensive are not currently affected.
- James Jin (MFG.com)
- Can you help explain how to determine a total landed cost model?
The main factors that companies may or may not be calculating when creating their landed cost models include: a) US import duties b) fully burdened logistics costs—including US inland freight c) inventory carrying cost—the finance costs d) trade finance costs (opening and managing letters of credit and other financial instruments) e) the cost of quality—the costs involved with getting your Chinese supplier to meet or exceed the defect rate of parts supplied by your domestic or near-shore supplier. Each of these elements relies upon specific formulas which can be used to calculate your actual landed cost. Percentages and freight estimates are often wrong by many percentage points. In addition, each of these cost factors comprises many sub-components which may or may not apply to your specific part or category. Determining which of these costs apply to your organization should also be taken into consideration when developing total landed cost models.
- Lisa Reisman (Aptium Global)
- Are steel and aluminum machined parts affected by the VAT refund reduction?
It is difficult to determine VAT rebate rates based on materials or industries. It depends on the specific code of the Customs Tariff. Generally speaking, yes, aluminum and steel parts have been affected by the VAT rebate changes. You will need to research your specific HTS codes to determine by how much your parts have been affected.
- James Jin (MFG.com) and Lisa Reisman (Aptium Global)
- Given the fact that the majority of IPOs are not anticipating huge costs increases I would assume that the majority of goods being exported from China are high value added commodities. Is there a specific industry that the Chinese government is targeting to eliminate due to heavy pollution involved with production?
In general, the criteria for discouraged categories are lower-value adding, lower technology involvement, more resource intensive, and higher polluting products. There is a list published by the government with all the products impacted. We have not found any English versions available. MFG.com is currently producing an English version for our community members for reference and convenience and it will be available soon.
- James Jin (MFG.com)
- Are the changes applicable only by the type of products or by regions?
The changes are applicable only by the type of product. It does not matter which region produced the product or where the final product goes. The VAT rebate is used as a tool by the Chinese government to encourage or discourage various industries.
- Lisa Reisman (Aptium Global)
- What role does contracting and long-term agreements play in managing risk in China?
I am of mixed mind with regard to contracting and long term agreements for use in China. To the extent that the agreements are established with resolution processes in the US, I think that is helpful. However, the Chinese do not value contracts the same way as the Western world. But, as in the Western world, having spelled out procedures and policies that will be followed in the event of a claim or lack of performance can be extremely helpful. In my experience, the Chinese as a culture are much more relationship-oriented. If you do business with companies in China, it is likely that they will want you to visit them, tour their city and learn about their way of life. From this perspective, we have found our experiences in China to be excellent ones whether or not you have a long term contract or agreement in place. So long as you "save face" and kindly work with Chinese suppliers if there are quality or performance issues, you will get an excellent response. The Chinese do not respond well to direct confrontation or hostile means of resolving problems.
- Lisa Reisman (Aptium Global)
- With my 25+ years of experience in dealing with Asia, if we (as customers) do not specifically tell the Chinese EXACTLY what we want with a complete spec then we will be disappointed. Do you agree?
Yes indeed and it applies to most of suppliers in the world, doesn't it? Besides product specifications, your product application and even a physical sample would help a lot to a new supplier to better understand your requirements. It is particularly true when you deal with international suppliers from other countries which may have different industrial standards.
- Mitch Free (MFG.com)
- Will the Yuan floating kill the opportunity, when it rises 20-40%?
There are always multiple variables in the landed cost of a product, which could include materials, labor, manufacturing efficiency, foreign exchange rate, government subsidy policy, as well as foreign policy. Furthermore, it also depends on the relevancy of changes from other comparable countries. For example, the appreciation of Yuan should be benchmarked with currencies from Mexico, Brazil, or any other countries that you might be sourcing from.
- James Jin (MFG.com)
- What effect have the new labor/union laws had on costs and operations in China?
The major one is the termination cost as the law will have more protection for individual employees.
- James Jin (MFG.com)
- Even the CSCC noted that 431 household goods have been recalled in Canada since 2005 ... so quality, despite smear campaign, is a problem ... how are China's manufacturer's going to address this?
China certainly has areas for improvement but if you look at food product rejection rates in North America, for example, the Dominican Republic and Denmark outnumber them in total and have greater rejection rates. This is not just a China problem.
- Mitch Free (MFG.com)
- We have heard that the VAT was delayed until August. Is that correct?
The recent change of VAT rebate came effective as of July 1, 2007. However, the government did allow companies to extend the shipping dates with a grace period if they did file in advance with legitimate reasons for delayed shipment.
- James Jin (MFG.com)
- There was an acronym SME, on an earlier slide. What does that mean?
SME means small and medium sized enterprises (same as SMB).
- Lisa Reisman (Aptium Global)
- How many Chinese companies took part in the survey responses?
Chinese suppliers took part in the phone poll conducted by MFG.com on July 6th, 2007. With more impact to be seen in the next few weeks, we are planning a new survey with a much bigger sample size and will share the information with our community once it becomes available.
- James Jin (MFG.com)
- Is the material increase occurring in China also happening in other countries?
Great question. Yes, the material increases are being felt globally. I used to think that the underlying commodities were always priced within a narrow band amongst suppliers. What I have learned is that some countries can access raw materials at much lower prices than others. In other words, there is often a pretty large delta between what one supplier in one country might pay for raw material and what another supplier in a different country might pay for that same material. In general, the trends work the same way around the globe (in other words, if ferrochrome is increasing in price in the U.S., it is also increasing in price in China). The difference, however, may be that a U.S. supplier will pay $.08/lb more than the Chinese supplier pays, even though both are paying more than they did three months ago.
- Lisa Reisman (Aptium Global)
- Is there a press release that provides codes, descriptions, and the changes in excel? The Chinese-originated one I found had descriptions in Mandarin. I went to the BEA site and took the BEA site and took their list to look up against the Chinese, but not all the codes matched; i.e., 2/3 were #N/A.
At MFG.com, we are in the process of translating the list to English, and hope to make it available soon.
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