Chinese Supply Issues Are an Opportunity for U.S. Manufacturers
For the past few years, if you opened any popular magazine or newspaper, you would be hard pressed not to find an article extolling the miracle of China, Inc. From helping raise the quality of living in the West by providing low costs electronics and other consumables to setting the standards for product quality in the automotive industry―the quality of GM’s Shanghai division exceeds that of North America―China has no doubt transformed the global manufacturing economy.
But my, how fast the PR tide can change. Since the beginning of the summer, we’ve been awash in a new type of headline about Chinese manufacturing―and none of these have been positive. From Time to The Wall Street Journal, there has been a rash of new stories reporting problems with China product and safety―not to mention rising China prices thanks to new export rules, tariffs and regulations. Many of these stories have been downright scary.
Take, for example, the case of China-made tires that were recently noted as having severe safety defects. According to The Wall Street Journal, “about 450,000 Chinese-made tires sold in the U.S.―and possibly many more―may lack an important safety feature, according to federal regulators.” The importer of these tires, Foreign Tire Sales, Inc. “does not have the money to pay for a recall,” according to reports, even though the tires have already been involved in at least one fatal accident where a “driver lost control and crashed, killing two passengers,”
Other cases of recent Chinese safety issues have involved tainted pet food, toothpaste and lead paint in popular children’s train sets. There’s no need to get into the details here but suffice it to say concerns over Chinese quality and safety have never been higher. In some cases, these types of concerns are warranted however, we should all remember that China quality has been rising every year. Furthermore, many Chinese suppliers are often more than willing to work closely with their customers to meet global quality, performance and safety requirements.
But quality and safety are not the only issues companies sourcing from China must grapple with. As of July 1, China either eliminated or reduced VAT rebates on nearly 3000 products. According to James Jin, General Manager of China for MFG.com, “For those who do business with China and are familiar with Chinese export products, this is big news. The VAT refund has been used by the Chinese government as a tool to control its export business since 1985, by either promoting or discouraging certain classifications.”
The reduced VAT refunds will translate to rising costs for those sourcing from China of between 2-1.0% for many products. According to Jin, “As per the new policy, VAT rebates will be completely cancelled for 553 products and reduced for 2,268 products, with only 10 products exempted from VAT charges. The official announcement by the government indicated the reasons for such a big move were to: 1) reduce the trade surplus; 2) remedy trade frictions; and 3) discourage export products which are high energy-consuming, high polluting, or resource-intensive. However, these reasons have quickly translated into an indicator for higher costs of China products.
Collectively, the recent quality and safety concerns along with rising China prices signal opportunity for U.S. manufacturers to increase their marketshare domestically and abroad. As the China price continues to increase and as Chinese quality and safety concerns continue to mount—regardless of whether or not they’re fully warranted―it should be music to shop floor ears across North America. We might even suggest that daring domestic manufacturers should be so bold as to invest in extra capacity to meet a growing market demand for locally produced products. Regardless, one thing’s for sure. And that’s the evolution of the Chinese manufacturing environment and its associated missteps represent opportunity for others. Let’s hope we don’t squander it.