How is the “trade war” affecting Chinese factories?

Last week we drew a picture of how the year-long “US-China” trade war has affected small businesses in the USA. Today we wanted to give you a peek inside the Chinese side of this conflict.

In order to do so, we asked two questions about our closest manufacturing contacts in China:


1. How is trade war affecting your business?

The responses varied. 4 out of 5 factories responded that the trade war had not affected their business yet. However, 3 of those factories qualified their response by saying that the majority of their business does not come from the US, so they have a cushion protecting them from US-China trade fluctuations. Those factory bosses also shared that their oldest, US-based clients have kept ordering steadily from them and the main impact has been on orders from the newer, less established customers. This report of minimal impact may change with the additional tariff growth planned for October and December but, for now, these 4 factories haven’t been hurt by the trade war.  

One of the factories we interviewed reported a 20-25% decline in their US-based orders. Even though a majority of their orders come from the EU, they are considering establishing a company and small factory in Taiwan to avoid tariffs on Chinese imports. 

We also reached out to our inspectors for anecdotal evidence of trade war impact on the factories they visit. They reported that many factories are considering relocating their production facilities to out to Southeast Asian countries such as Myanmar or Vietnam.


2. How is the RMB devaluation impacting your business?

Since May, 2019, the RMB has devalued 5.2% against the USD; from RMB 6.7383 : USD 1.00 (June 1st, 2019) to RMB 7.0895 : USD 1.00 (September 18th, 2019). This should be good news for Chinese factories who export to the US, as they purchase raw materials using (relatively cheap) Chinese Yuan (RMB) and sell finished goods to US customers in (relatively dear) US dollars.

Screenshot 2019-10-31 16.29.14

Source: https://www.x-rates.com

Our survey results, however, show varied opinions between Chinese suppliers:
One factory did not report any change stemming from the USD-RMB fluctuation, as most of their business comes from Europe. Another factory owner said that any benefit from the RMB devaluation was eclipsed by the rising cost of raw materials and labour in China, so they have not felt any benefit. A third factory is planning to hedge against RMB-USD currency fluctuations in general by conducting more of their operations in HK dollar or Taiwanese dollars.

The other two factories said they were not feeling any impact one way or another, but that is probably because, like the first factory respondent, although RMB devaluation is a mild tailwind for their businesses, their headwinds (trade war generally, rising costs in China, etc.) are much stronger. 

 

Thanks for tuning in!

ola@thayer-consulting.com

 

To learn more about how to benefit from the devaluation of the yuan, check out our previous article:

http://www.thayer-consulting.com/blog/2016/04/08/weakening-rmb-time-to-ask-your-chinese-factory-for-a-discount/

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