How to Lower your Product Costs, Part 1: This is China

China lawyers VAT rebateWith the onslaught of tariffs, many companies that import products into the United States are facing price increases. Our China lawyers are getting an earful about this from some of our clients, especially those that sell large chunks of their products to big retailers like Walmart and Target. On the other hand, our clients with super strong brand names and eye popping margins have for the most part not even mentioned the tariffs and their increased costs to us.

And yet, no matter who your downstream customers may be or what your margins are, now may be the best time ever to get your China contract manufacturing costs reduced, and our China attorneys are working with many of our clients to do exactly that. For many of them, we are working to help them diversify their manufacturing to countries outside China — so far this has mostly been to other Asian countries, such as Vietnam, Cambodia, the Philippines, Malaysia, Pakistan, India and Thailand, but also to Mexico and Eastern Europe and even to Canada and the United States — more so after the announcement of the “new NAFTA” agreement, a/k/a the USMC. Part 2 of this series will address the pros and cons of moving manufacturing out of China, to include a quick country-by-country analysis.

This post is going to focus on the steps you should consider taking now to reduce your China manufacturing costs.

In early February of this year, 1 dollar was worth 6.28 Yuan whereas that same dollar is worth 6.87 Yuan today, a nearly 10 percent increase. What this means in real life is that if you were paying your Chinese manufacturer $5 per widget in February and you are paying your Chinese manufacturer the same $5 per widget today, your Chinese manufacturer is making nearly 10 percent more today than it was yesterday, ignoring inflation, etc. What about you ask your Chinese manufacturer to at least share some of that 10 percent difference with you. I can tell you that virtually all of our clients that have made this request have gotten at least half of this savings back for themselves and many have pushed for and received all or nearly all of it. And for good measure, they are writing into their contracts that they get any future currency “savings” as well.

Our European clients are not “eligible” for quite the same savings, but seeing as how it was 7.41 Yuan to the Euro in mid-June and it is 7.88 Yuan to the Euro today (an approximate 6.5% increase) they too are “entitled” to not insubstantial price reductions as well.

But wait, there’s more.

Many Chinese factories (largely depending on the industry) will very soon be seeing fewer buyers and smaller purchases. How do I know this? I don’t know this for a fact, but I am virtually certain this will be the case. Last week, in On the Impact of China Tariffs: Is This a Dead Cat Bounce? I wrote about how business at my law firm is booming right now because so many companies are looking to move as quickly as they possibly can to get product made and out of China before tariffs further escalate and/or in time for the upcoming holiday season:

So for now at least our China practice and our international trade law practice are both booming and this state of affairs holds true for every China lawyer, every manufacturing lawyer and every international trade lawyer with whom I have spoken in the last three months. An old adage about lawyers is that we do well when times are good and when times are bad, just not when things are staying the same. That has been the case so far.

Not surprisingly, it is not just international lawyers at full capacity these days, American and European companies that do business with Asia (mostly) are seeing many choke points as well. We are hearing the following from our clients and our readers:

  • We are hearing that the Chinese government has increased the VAT rebate for exports from 13% to 16% to encourage more exports.
  • The RMB has depreciated and that means Chinese goods are cheaper than they were, further encouraging exports.
  • “Everything along the supply chain is at or near full capacity right now. We are hearing that both China and US West Coast ports are really busy and ships are full and shipping costs are rising.
  • The time for getting products from Asia through U.S. customs and getting products from the United States through China customs has greatly increased. This is due in part to the increase in shipment volumes, but also because customs officials in both countries are “going through everything with a fine-tooth comb” that comes from the other country. No surprise, right?
  • An old China hand friend of mine put it this way: “Prices are rising at every point. Tariffs, freight forwarding, shipping and trucking are all going nuts. It is one big clusterf–k.” He went on to say that he expects things to get considerably worse over the next few weeks because of the new and widespread tariffs and because of the upcoming Christmas/Holiday Season. “Everyone is and will be racing to get their products to port to avoid the possibility of more and increased tariffs in January; everything is going to go into hyperdrive like nobody has ever seen before.”
  • Our international litigation lawyers are already seeing an increase in disputes related to late delivery and shipping disputes.

I concluded that post with the following call for responses:

So for now, things are booming but for how long will this last? Will there be a crash in February or when or not at all?

What are you seeing out there?

And boy did I get it. I must have gotten nearly a dozen emails (roughly divided between people I knew and people I didn’t know) and pretty much all of them were at least somewhat angry and pretty much all of them talked of plans to move manufacturing out of China either as quickly as they could or at least within the next few years. I fully recognize that these emails are not anything close to being a scientific study and what highlights that is that not a one of them came from industries where I do not expect there to be much if any movement out of China in the next two years if ever — industries like electronics, biomedical devices, and pharmaceuticals to name just a few. But even if these emails were confined to only ten percent of industries, there is very likely going to be that move. My favorite email — both for what it said and because of who sent it (a 20 year China veteran and logistics guru who I know very very well) had this to say (modified slightly):

Companies are starting to move out of China already. A good friend of mine has a small business designing and selling high-end _______ in the US. He has been manufacturing them in Vietnam. He stopped making them in China a few years ago because labor costs had risen so much but they remain pretty low in Vietnam. He told me he was shocked recently when his Vietnamese vendor had to lengthen delivery schedules (for the first time) from four months to six months because it was swamped with orders that used to be filled in China before Trump’s trade war. Just one example of what you and I know is going to be an onslaught.

If you are a Chinese company that just lost a chunk of your business to Vietnam or to wherever, you are going to be more willing to reduce your prices than before these business losses started happening.

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The Chinese government recently increased its subsidy of various exports via an increase in its VAT rebate. Go here for a good (but somewhat outdated) explanation on China VAT and China VAT export rebates. Very generally, China charges a 16% value added tax (VAT) on product sales but most product sales for export get a partial or full rebate of the VAT paid. A few weeks ago, China’s finance ministry announced that effective Sept. 15, “tax rebate rates for light-emitting diodes (LEDs), lithium batteries, multi-component semiconductors, machinery products, books and newspapers will be increased to 16 percent.” Reuters, and pretty much nobody else, carried this story in an article entitled, China to increase export tax rebates on 397 products:

The ministry, in a statement on its website, did not say what the current rebate levels are on those products. China assesses a 16 percent value-added tax on some exports, so a rebate of 16 percent will mean exporters get back the full amount paid.

“This is in effect to negate the impact from U.S. tariffs,” said Mei Xinyu, a researcher at a think tank affiliated with the Commerce Ministry.

For some other products, the rebate will be increased but not to 16 percent. According to the statement, China will increase rebates for stainless steel products to 9 percent and steel pipes to 13 percent. It was not clear immediately what the level of current rebates are.

Rates for chemicals also being increased, the statement said.

Exports are one of China’s key growth drivers, and any loss of momentum for them will pile more pressure on its already cooling economy.

China’s export growth has exceeded analysts’ expectations for the past five months, with some analysts believing Chinese exporters are rushing out shipments to beat fresh U.S. tariffs.

Last week, China’s state council said that it decided to increase the rate of export tax rebates for some products to support the economy.

Go here for the finance ministry’s announcement/list. This is in Chinese but if you go to the bottom of the page and click the part that says “xlsx” you will be able to download an excel spreadsheet that lists all of the items for which the rebate has been increased. If one of your products you have manufactured in China is on this list, you should figure out the rebate increase your manufacturer will be getting and you should consider asking it to “share” that rebate with you.

What all have you been doing of late to get your China manufacturing prices down?

This article was written by Dan Harris and published on China Law Blog. Original Post: https://www.chinalawblog.com/2018/10/how-to-lower-your-product-costs-part-1-this-is-china.html      

View the original article here.

Dan Harris

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.