Doing Business in China: Regulatory change to have impact on U.S. shippers
Patrick Burnson, Executive Editor — Logistics Management, 3/19/2008
SAN FRANCISCO—As reported here yesterday, shippers are telling LM that sourcing manufactured goods from China will have a few new wrinkles in the coming months. According to Saji Daniel, president and CEO of Tradex International, it is now time for U.S. shippers to take a fresh at look trade issues now if they are to remain competitive in this marketplace.
“The Chinese government is taking deliberate steps to shift manufacturing to high-tech industries,” he said. “Last summer, the government reduced value-added tax (VAT) rebates on thousands of products. These rebates provide tax relief for exporters, but were removed for many commodity goods and products requiring high levels of energy to manufacture.”
Daniel also made note of a new labor law enacted January 1, which substantially increased production costs by requiring employers to pay insurance, overtime, and severance benefits to eligible employees.
“Our company has experienced direct increases in cost as a result of this new legislation, with labor costs estimated to have grown between 30-to-40 percent,” he said.
In the short-term, said Daniel, businesses in and around Beijing may also be seriously impacted by the 2008 Olympics. The government plans to reduce pollution prior to and during the games by shutting down factories surrounding the city, effectively stopping production for over a month.
Not that it will require a global sporting event to earn media scrutiny, he noted:
“The most publicized example is Mattel,” noted Daniel, “which recalled millions of toys last summer following the discovery of lead in many of its products produced in China. The recalls impacted not just toy manufacturers, but all importers, as questions regarding the safety of Chinese products drew international spotlight.
Daniel said that Mattel’s lack of oversight exemplifies the complexity of manufacturing overseas; issues like lead content, long ago dissolved in the United States, must still be considered in China.
“In a marketplace characterized by instant, global communication, one mistake can significantly damage the reputation of your brand both in the United States and worldwide,” he said.
By way of transport advice, Daniel suggests shippers stick with reliable ocean carriers with a proven record in the trade lane.
“Historically, Hanjin, Hyundai, Cosco, and CMA CGM have provided us with the best lead times and service,” he said. “The nature of our business does not require the use of air freight, as our chief concern is cost rather than delivery time. We maintain ample levels of safety stock domestically to satisfy any interruptions in the supply chain.”
Nor does Daniel recommend taking on too many of the intermediary functions of goods sourcing:
“We continue to find benefit from the use of freight forwarders, and utilize several different services to varying degrees. Freight forwarders reduce our staffing requirements by handling procurement, and our EDI capabilities enable us to monitor shipments by providing automatic updates from our forwarding partners,” he said.
In conclusion, Daniel observed that freight forwarders also provide his company with “peace of mind” by enabling them to delay its insurance liability for shipments until they arrive.