Is the China Pot Really Boiling Over? 
Are You Going to Get Scalded?
  

Consultants Corner  News China  Consulting

 

By:  Bruce S. Berton

It seems that every trade periodical, magazine, big city newspaper, and TV news program is speculating about what will happen when quotas cease on January 1, 2005. 

After reading a multitude of conflicting reports as well as attending and participating in numerous panels and seminars on this subject, I will try to give you (in layman's terms) my findings from a
Hands On
point of view. I cannot cover all of the areas involved, nor can I predict what will happen; however, since I am involved in this area every day, I will try to provide some insight that may help you plan your approach for a profitable future.

It is not easy to do business in China. Even though they have advanced to many new technical achievements in the textile/apparel and electronic industries, there is a huge gap between the numerous factories and how  they are managed, so you must be very careful.

First, let's talk about China and its efforts to comply with the rules of the WTO. Literally hundreds of China's laws must be changed in order to fulfill these regulations and many new ones put into place. This does not mean they can be administered!  To those of you who deal in intellectual property, trademarks, copyrights, patents, industry trade secrets, and exclusive design, all I can say is Good Luck.

Remember, you are dealing with a culture that is 5,000 years old and has transcended many successes and failures. While living in the Pacific Rim countries for many years, I learned that the words I will try, I will do my best
and It is possible, all mean No, and that it will not happen as you planned.

China's own economy is growing at a very fast rate, and its need for higher living standards and modern products is almost beyond comprehension. Those of you who wish to export into China must realize that China is creating its own standard for product to be sold in China, and it may not comply with your specifications. Therefore, to all of you in export, is the glass half empty or half full?

Countries with up to 55% of their textile/ apparel exports to the U.S. are wondering how to stay alive when quotas are removed.

Second, I can tell you this: China is focused on dealing directly with the buyer, whether the U.S. manufacturer/importer or the U.S. retailer, and is trying to eliminate the broker and  agent margins. This will allow Chinese manufacturers to have greater gross margins and remain competitive in costing.

Chinese banks can no longer loan monies to their manufacturers and accumulate additional uncollectible debt. Guessing how much uncollectible debt the four major banks in China are carrying is like betting the odds in Las Vegas. Does this really matter?  When you look at the total balance of China's trade debt with the world, it is really in pretty good shape, and they have a huge surplus of U.S. dollars.

Third, China and a few other aggressive countries are now in the process of assisting their larger, more sophisticated manufacturers to set up U.S. offices to service here directly.   This will not be just an individual firm, but  a much larger scale such as a permanent Expo or Mart format location. This means easier sourcing, but you must a WIP infrastructure in place to ensure that you get what you pay for.

When travel stopped due to the SARS epidemic and considering the terrorist situation worldwide, these countries realized they must now go to the mountain, as the mountain is not coming to them, and in a timely manner or not at all.

Since China and its quota holders will be losing billions of dollars in revenues, China is not rebating full export taxes back to the exporter of record.  The smaller banks are being told that they must loan on profitable orders received by their manufacturing clients, so we are not going to see as big a drop in F.O.B. prices as some people are calculating. Yes, there will be a drop in first costs for the short term, but I would not bet on it for the long haul.

Fourth, China is following the Taiwan model. It is privatizing its industries and, in the banking arena, making sure its local province banks have the opportunity to earn interest on its large exports. At present, the Hong Kong banks almost have a monopoly as corresponding banks for the Chinese exporters. Purchase order trade financing is coming into the mainstream, in order to enhance available production without LC's being required.

These are only a few of the many changes taking place, all at the same time.  If you do not think there will not be many, many mistakes, you have your head in the sand.

Our government has taken steps to prepare, and now other WTO nations are questioning the quota elimination.  We have put safeguards in place to stop dumping, U.S. Customs are now looking for transshipping and country of origin, and we have moved our U.S. Department of Trade into new management areas, all to try to stop lowball F.O.B. costing.

You will always find some importer dropping their proverbial pants to get the order from your customer. You must do your homework and make an extra effort to ensure that you have all the updated facts, know the true competitive cost, have the infrastructure in place to receive the quality you contracted for, and make a realistic commitment for on-time delivery.

There are many things to think about. Those who go the extra yard will survive, prosper and avoid getting scalded.


Bruce S. Berton is a business and management consultant with Stonefield Josephson, Inc., a leading regional consulting and accounting firm with offices in Santa Monica, San Francisco, Walnut Creek and Mexico City. The information in this column is of a general nature.  Readers inquiries are welcome; and may be sent to Bruce Berton, at Stonefield Josephson, Inc., 2049 Century Park East Suite 400 Los Angeles, California 90067 310-432-7437 Direct
866-225-4511 Toll Free
310-432-7519 Fax Los Angeles
Orange County
San Francisco
East Bay Silicon Valley
Hong Kong, or send an e-mail to: 
[email protected]

 

 

   
 


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