China’s Export Subsidy Cutback Brings Uncertainty
By Nina Ying Sun
PLASTICS NEWS STAFF
AKRON, OHIO (July 10, 2007) -- If $6 (46 yuan) in profit is deducted for every $100 (760 yuan) in sales, how much will it affect a manufacturer’s business?
That question has hovered in the minds of tens of thousands of Chinese plastics processors since June 19, when the Chinese government announced it would cut its export rebate for plastic resin and products from 11 percent to 5 percent, effective July 1.
For Taipei, Taiwan-based Win Industry Co. Ltd., which makes rubber and plastic parts for electronics at factories in Shenzhen and Huizhou, Guangdong province, the impact is definitive.
“We have to find other ways of [saving costs], but our cost structure is already quite lean,” said marketing Vice President Allen Wang.
The change in the export rebate -- a subsidy paid by central and local taxation authorities -- applies to all exports from China. “It’s not us alone,” Wang said in a telephone interview. “Everyone is affected.”
The company exports more than 50 percent of its products to Europe, and 30 percent to North America. But Wang said he believes most buyers will not risk disrupting their delivery schedules, or trade quality, for a price increase of a couple percentage points.
“The price increase won’t be significant enough to justify extra cost associated with switching to suppliers from other countries,” he said. “It’s a complicated process, especially the initial setup.”
Win Industry falls into the category of foreign-invested enterprises in China, which in this case are subject to the same export rebate policies as domestic Chinese companies. So does Mocap Inc., a St. Louis, Missouri-based custom injection molder that opened a factory in Zhongshan, Guangdong province, earlier this year. Mocap expects to mold 20 million to 30 million plastic parts in its first year of business.
In the first six months, Mocap’s China plant exported all of its product. Though the rebate cutback will affect the operation, “the impact is actually minimal,” said Paul Miller, vice president of operations.
In general, Western firms that manufacture in China will not experience any major effect. “Since their competitors are doing the same thing, the impact is even across manufacturers,” said Larry Hotaling, founder of Hong Kong-based consulting firm Global Diligence Ltd.
“No one manufacturer will have a major advantage. The loser will be the consumer who may see higher prices,” he said.
Voices from China
But the China Plastics Processing Industry Association tells another story.
“We believe the new policy will cause 2007 exports to drop quite a bit,” said Ma Zhanfeng, the association’s general secretary.
China’s plastics exports fell in 2006, based on volume of plastics processed, according to association statistics. The trade group cited trade barriers as a major cause.
“About 96 percent of China’s trade surplus is light-industry products, including plastics products. In order to solve the constant trade friction with developed countries, the Chinese government has to reduce and eventually abolish export rebates,” he said.
Ma said profit margins at average Chinese processors are very slim.
“The official figure is 4.61 percent for the light industry in general,” he said. The loss of the rebate is “hitting the struggling businesses when they are down.” He said many companies will go out of business, resulting in higher unemployment.
“The export market outlook is gloomy,” he said.
But the government says the pain may be worth it, for a better economic model and industry structure.
Officials from China’s Ministry of Finance said China’s trade surplus totaled $85.7 billion (651.3 billion yuan) during the period from January through May, up more than 83 percent from the same period of 2006. The government intends to push to reduce the export of high-energy-consumption, high-pollution, resource-based, low-added-value and low-technology products. In the long term, that strategy will promote more economic growth and sustainability.
The plastics industry is not the only one affected by the government policy. A wide array of sectors, including rubber, some chemicals, furniture and certain machinery, are facing different adjustment measures: rebate cutback, zero rebate, or zero export tax.
“It is affecting a number of industries and starting to change the dynamics in international sourcing,” said Chris Runckel, president of Portland, Oregon-based consultancy Runckel & Associates.
Impact on U.S. buyers
U.S. manufacturers that source from China now wonder whether the policy change will lead to cost increases.
Experts’ opinions are mixed.
“To this point, most Chinese suppliers have absorbed the costs, but most have signaled that they cannot absorb much longer. Costs are therefore likely to go up,” Runckel said.
Bill Liu, vice president of Chicago-based NaviAsia Consulting Group Inc., said his U.S. clients are safe from price hikes in this round. His said manufacturers and middlemen are “swallowing the impact,” in order to keep the business running.
It also depends on the volume of your outsourcing order. Liu said small orders are less immune to price increases. The policy change will have to reflect somewhere along the supply chain, Liu said.
“Many low-end exporters are already on the edge.” He used a Chinese idiom: “paper can’t wrap in fire” -- meaning it will come out sooner or later -- as a metaphor. Since it takes half a year after the actual sale for Chinese manufacturers to cash in the export rebate, there also will be a time lag before the cost structure is impacted.
U.S. buyers also need to factor Chinese currency re-evaluation and the volatile resin prices in China into the equation, Liu suggested.
“Many U.S. companies are starting to feel nervous as they feel the Chinese government seems likely to continue to cut back on export subsidies, to continue to let the [renminbi] increase in value, etc.,” Runckel said.
The recent reduction of the export rebate for plastics products to 5 percent was following a first-round cut from 13 percent to 11 percent last September. But the government is speeding up in the phase-out process.
Resin pricing fluctuation
Being the world’s second largest processor of resin, China still relies heavily on imports for most plastic materials. But huge domestic demand has fueled capacity buildup and caused overcapacity in some cases, such as with PVC.
The drop of the export rebate from 11 percent to 5 percent translates to a loss of $60 (450 yuan) in profit per metric ton for Chinese exporters, reported by China Chemical Industry News.
“On a short term basis, this will tend to raise PVC prices in Asia and lower China domestic PVC prices,” said Steven Brien, global practice leader of chlor-alkali and vinyls at Houston-based Chemical Market Associates Inc.
Chinese resin producers will try to sell more PVC within China, pressuring domestic Chinese PVC prices to go down. Meantime, since China will reduce its exports of PVC, prices in the rest of Asia may rise.
“We are already seeing this effect as China’s domestic PVC prices are dropping and market prices outside of Asia are increasing. We think this will continue until an equilibrium of PVC prices is reached. Who knows for sure, but probably within a few months an equilibrium will be reached and China will export again,” Brien said.
Hotaling, who is currently working with U.S. compounders that are selling to or within China, sees no huge impact on China’s ability to export, “their costs are so low and they are improving capabilities.”
More importantly, resin exports are not a big portion of sales for most Chinese suppliers.
“They have minimal dependency on export so will feel minimum impact,” he said in an e-mail.
Future is uncertain
“When and if Chinese companies start passing along these increased costs, many U.S. and other companies may start looking elsewhere for new suppliers,” said Runckel, who also serves the chairman of the U.S.-Vietnam Chamber of Commerce.
He said many U.S. companies are already exploring backup companies in Vietnam, India and other lower-cost countries while waiting to talk with their Chinese suppliers to see if the costs will be absorbed.
“What the future will bring is hard to say. I doubt it will bring jobs back to the U.S., but it well may make more companies more rigorous in their cost review on the cost and benefits of overseas sourcing.”
Runckel said Vietnam and India “may well be beneficiaries of this. At least in our experience, Vietnam is getting a lot of consideration from companies wanting to site a new factory, much more so than last year, which was also a good year for Vietnam.”
Liu of NaviAsia said many Chinese manufacturers are beefing up their investments in Vietnam and Cambodia.
“Costwise, many inland regions inside China still offer good options. But by setting factories in lower-cost neighboring countries, the Chinese entrepreneurs benefit a lot from trade polices,” Liu said.
Meanwhile, plastic machinery is unaffected at this time, said Michael Lai, the Canadian owner of Shanghai Onyx Machinery Inc. But the industry suspects the government will cut back the subsidy sometime in the future.
“We are enjoying [double-digit export rebate] while it lasts,” said Alfonso Keh, sales manager of Dingye-USA Machinery Manufacture Co. Ltd. of King of Prussia, Pennsylvania, which helps more than a dozen Chinese machinery makers to export.
Manufacturers in China´s free-trade zones that process imported materials into exports are not subject to export duties and therefore won´t be affected by the rebate cut.