Over the past few months the news on China has been filled with gloomy economic forecasts. Speculation around devaluation, a stock market crash, continued rising wages, declining factory orders, and economic slowdown have dominated the headlines. Given the size of China’s economy, and considering its level of interconnectedness with global economy and the opacity with which China generally manages economic data and monetary/fiscal policy, the prospects are scary. How this will affect importers of Chinese goods is a difficult question to answer but let’s examine some of the issues. As a China based supply chain management company, we believe we have some unique and first-hand insights that can help any client looking to implement a successful and effective supply chain management strategy in a China that is increasingly becoming more and more difficult.
Issue: Will a continued depreciation of the RMB lower the cost of my goods?
There are many issues that go into the cost of goods ranging from the nature and complexity of the product, the location and quality of the factory and the cost of labor, among other factors. Given the number of variables involved, it is unlikely that a gradual depreciation of the RMB will have any material impact on USD costs While it is true that a weaker currency will make exports more competitive in the aggregate and increase export demand, it will also increase the cost of imports and commodity inputs that are priced in USD and may eventually lead to higher inflation, which will have an impact on labor and other factor costs. Therefore, it is not anticipated that the continued depreciation will have a large impact on price – with only gradual declines available to those who are in a position to seek out new sources of supply and over a longer period of time where competition for exports will lower costs. Nevertheless, should the RMB experience a maxi-devaluation, where the exchange rate were to drop significantly overnight, the cost implications would certainly be more dramatic and cost reductions more widespread in the short-term, eventually creeping up as inflation and higher commodity prices make their way into the cost structure
Issue: Will my suppliers and factories have problems during a recession?
It has been evident for a long time that many Chinese factories are operating on a “shoestring budget” and/or are highly leveraged. There has always been a fear that if there were a major recession in China, and any sort of clean-up of the banking system, that thousands of factories would go out of business. This would certainly cause problems for importers trying to maintain an effective supply chain management strategy. Already we have seen a number of smaller under-capitalized factories go out of business as a result of the competitive environment that export entities operate under in China. We have also witnessed a tightening of payment terms or outright elimination of any supplier credit in order to make up for challenging working capital considerations. All of these pose clear challenges during recessionary or stagnant growth periods. Yet fortunately China has experienced decent growth over the past couple decades and companies that implemented proactive supply chain management strategies in the good times are now benefiting from an effective supply chain management infrastructure as times become more difficult.
Issue: Will there be delays in shipments due to economic headwinds and can I expect similarly effective supply chain management service and quality from my factories as in the past?
This is a definite risk worth pondering. As suppliers and factories struggle to procure raw materials and cut overhead, there can be delays and corner cutting in numerous situations. We have heard from new clients about their prior experience of receiving goods of lesser quality, not meeting specification because of substituting lower grade materials, and orders delivered late or short shipped due to production problems or quality concerns, etc. There have also been numerous instances of factories shutting down due to brownout power shortages or overtrading that result from factory closures that push competing factory capacity to threshold limits. All of these can have the undesirable effect of delays, incomplete orders, or shortcuts that can manifest in quality issues down the line.
How can I manage these risks so as to protect my business?
The best offense for a company that is buying product from China is truly a good defense. Understanding the risks and the possible consequences is a first step toward setting up the appropriate safeguards to protect your business from many of the deleterious effects of economic weakness. A good relationship with suppliers, knowing when and how to push on costs without putting at risk the quality of your product, and tight production oversight can go a long way toward protecting your margins and avoiding more serious quality or inventory concerns. This means finding someone with a dedicated and experienced team on the ground in China that will ensure that your project is handled with care, ultimately benefiting from long-term planning and appropriate controls. Sertus prides itself on having a diverse supplier network where each factory is properly screened and vetted and is monitored for compliance with our supplier criteria and with specific client quality assurance standards. Furthermore by having relationships with over 200 factories, we are able to quickly substitute new suppliers in the event we run into a problem with a preferred vendor, which results in minimal supply chain disruptions, if any. Our supply chain management services combined with our rigorous QA/QC protocols, warehousing capabilities and ability to provide financing, mitigates economic problems and the knock-on effects for your orders such that our clients can focus on product innovation, sales and marketing while your China Sourcing Experts take care of problems on the ground.