Thinking Through the Procurement Implications of a Rising RMB

In the past couple of weeks, there's been an abrupt turn of events around the RMB, (from US pressure, and Chinese push-back) to a state where China appears ready to let the RMB rise. A recent Financial Times article shares some of the global currency and monetary implications that an appreciating RMB may bring. But what are the implications for global procurement organizations attempting to forecast Chinese competitiveness from a price perspective -- or operating within China to supply the local market? There are a number, a few of which I'll touch on below.

Let's begin by looking at the scenario of a company that looks at China largely from an export sourcing perspective (i.e., they're sourcing from China, rather than within or to China to supply the local market). For these companies, the impact of a rising RMB will largely depend on the amount of value-added activities going on within China (not to mention other select Asian countries, which some economists believe will also see their currencies rise as a result). If the portion of total cost attributed to raw material is a major component of a total cost breakdown, then chances are a rising RMB will have a less dramatic impact on price increases (since Chinese supplier sourcing materials for manufacturing and energy will be able to do so with a stronger currency, this will reduce the cost of imports, such as US coal for power plants). But for those companies where Chinese plants and suppliers are performing significant value-added activities that exceed the cost of materials, an appreciating RMB could lead to a very different storybook ending in the form of higher prices, making China less competitive from an overall sourcing standpoint.

For companies operating IPOs within China largely to supply the local market, a stronger RMB could have positive impacts, again due to reduced import costs. Local market costs may drop further, especially if US and European demand for Chinese products declines as a result of a stronger RMB, resulting in less demand for raw material consumption by Chinese suppliers where materials are coming from local sources within Asia. Another implication of reduced import costs could be price decreases for products, which could spur additional business and consumer demand within China.

Regardless of where you stand on China and its history of currency control and manipulation, it will be important to pay attention to Beijing's moves in the coming weeks and months. If you having sourcing operations in China or in other nearby countries, you can be sure a rising RMB could directly impact your global (and local) sourcing strategies and plans.

Jason Busch

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