China Sourcing: The Future Ain't What it Used to Be (Post 4)

Tonight, I'd like to welcome's James Jin to Spend Matters. James is GM of's China operations. I've asked James to explain what's going on in China from a local, on-the-ground perspective from Shanghai.

What's Happening in China: Just the Facts

As of July 1, 2007, China has slashed VAT rebates on 2,831 products, which account for roughly 37% of total product and material classifications, according to China Customs Tariff. For those who do business with China and are familiar with Chinese export products, this is big news. The VAT refund has been used by the Chinese government as a tool to control its export business since 1985, by either promoting or discouraging certain classifications.

As per the new policy, VAT rebates will be completely cancelled for 553 products and reduced for 2,268 products, with only 10 products exempted from VAT charges. The official announcement by the government indicated the reasons for such a big move were to: 1) reduce trade surplus; 2) remedy trade frictions; and 3) discourage export products which are high energy-consuming, high polluting, or resource-intensive. However, these reasons have quickly translated into an indicator for higher costs of China products. There is a fair reason for such speculation, as many of you have seen pictures on internet of Chinese suppliers rushing their containers to sea ports, trying to grab the last savings prior to July 1.

Buyers sourcing from China have legitimate reasons to worry. However, the level of your concern really depends on the products that you are buying. If you have been buying toys, furniture, raw castings, and many other low value added, high material content, or high polluting products, you may have to burn some midnight oil to work with your current suppliers to figure out how to survive the short term pain or simply start thinking about sourcing somewhere else.

On the other hand, the good news is that if your products fit into the encouraged categories (i.e. higher value added, lower sources intensive, or no low pollution), you may enjoy watching this story unfold. This is true in many cases for advanced manufacturing processes – especially for sophisticated custom parts which are ultimately assembled into higher technology, finished products.

For many of you that have been involved with China market, whether traveling or living here, you may calmly say: “this is just another major change among many other major changes which have been happening in this fast changing country.” You are probably right. We have been through so many surprises and by the end of day they no longer become surprises. There are no bad times or markets to smart business people.

Based on a quick survey conducted by the China Team among international buyers and China suppliers, we've discovered some intriguing insights. We'll be sharing it next week, and will link to it from Spend Matters.

James Jin serves as General Manager, China. He can be reached via email: jamesjin [@] mfg [dot] com

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