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/

How is the “trade war” affecting your business?

This is the most common question we are asked these days. The simple answer is “not much, yet.” However, we’ve seen some interesting impacts on our clients and factory partners. 

Sudden tariff increases

This past June, one of our clients noticed that the tariff for their product was taxed at a rate of 25%, when it had been taxed at 3% only 6 months prior. The rate increase cost them an extra $8000 and increased their landed unit cost by almost 22%. Although they (and we) knew about broad announcements of rate increases, we had no way of knowing which categories would be hit, until it happened. Frustratingly, at the time, their product category was still listed by the US Government website as 3% on the HTSUS official website, although as of Sept. 1 there is a new addendum posted on the site regarding China tariff hikes. 

Screenshot 2019-10-31 16.19.32

None of our other clients have experienced any import tariff increases so far, but nobody really knows what rate they will be charged on their imports until they get the bill from US customs, after the fact. 

Longer delivery times

Another area where we see a change is budgeting for delivery times from China. Over the past year we have noticed increased port traffic that has slowed many of our clients’ shipments and more regular customs holdups. The congestion in the port of Los Angeles caused one of our clients to wait almost an extra month for their goods to be cleared for delivery. As a result, we are advising our clients to budget an extra 1-2 weeks for customs clearance, which adds up to a roughly 25% increase in delivery time for our clients. 

Article

 

Photo source: https://www.greenworldwide.com/los-angeles-long-beach-port-congestion-persists-into-2019/

 

Considering exiting China

The final impact we’re seeing is one of inquiry. 2 out of our 6 biggest clients have asked us a question in the past 6 months that they never asked us before, which is “Should we look for new vendors outside China?” Our freight forwarder also noticed that their clients are more likely to be investigating sourcing options in SE Asia (especially Vietnam) or asking their current manufacturers to move or expand out of China. 

 

In sum, we’re not seeing import rate increases across the board or a mass exodus from China, but we’re not seeing a whole lot of good news for our clients or our business due to the Trade War. 

How about the Chinese factories?

 

Tune in next week for news from our Chinese factory partners and how the Trade War is affecting their businesses. 

We love your questions!

ola@thayer-consulting.com