Spend Matters: Live From China (Second Dispatch)

Initial Observations

Even though we've only been on the ground for a couple of days here with the MFG.com team here in Shanghai, we have already had numerous discussions with a number of Chinese sourcing practitioners and manufacturers who've been thinking quite a bit about government economic and export policy. Here are a few key learnings thus far:

VAT rebate reduction (the supplier perspective) -- Chinese manufacturers are nervous that the government will eliminate all VAT rebates except in high-tech and high value-added areas by the end of the year. The industry that is most nervous is plywood and lumber, but the talk is that further cuts in the VAT rebate reduction or a complete VAT rebate elimination will cascade across hundreds or thousands of export classifications. This is the Chinese government's way of raising additional tax revenue, redirecting investment internally, encouraging foreign manufacturers to create their own manufacturing operations in China, and appeasing the US government's need to address the trade imbalance with China.

VAT rebate reduction (global sourcing perspective) -- It isn't only Chinese manufacturers that are nervous about governmental changes. Procurement organizations -- especially US organizations, who are also faced with a declining dollar -- that have made sourcing decisions based on a single digit savings may be at significant risk. Dual sourcing and multi-country sourcing strategies are critical from a risk management perspective.

Category observations (semi-finished metals products) -- In general, semi-finished metal products (in particular aluminum) look to be okay in the near future from an export competitiveness / pricing standpoint. Basically, if the raw materials are widely available in the Chinese market (and not imported) they should stay globally competitive. At risk metals products -- from a China sourcing savings perspective -- include anything in which the raw materials are imported into China.

Industry transformations -- Certain industries are transforming in China. One of the primary industries we've observed that is undergoing a transformation is machining. Manufacturers are buying more precision equipment from German and American made manufacturers -- often from Chinese produced factories -- and churning out parts suitable for both low mix/high volume and high mix/low volume environments. Historically, China was only competitive in the machining world for higher volume, low mix production runs, but it's clear this is changing.

Stay tuned for additional observations -- as well as analysis -- on the latest regarding China sourcing in the coming days and weeks on Spend Matters.

This post is part of the Spend Matters / MFG.com China Sourcing series. Aptium Global's Lisa Reisman contributed to this blog entry.

Jason Busch

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