Tag: sourcing

US-China Trade War Reshaping Global Economy

 

 

 

As a result of the ongoing trade war between the US and China, we expected data to show that imports from China had dropped and affected companies are relocating production back to the US. In reality, Chinese exports are not dropping, and production is not returning to the US but rather it is moving to places like Vietnam, India, Mexico and Thailand.

 

The Numbers

Before digging deeper into this phenomenon, let’s look at the chart below, compiled by the BBC, to get a grasp of the magnitude of the tariff situation.

 

Painful Start To The Transition

That doesn’t mean that this global supply chain transition currently taking place has been painless for the impacted Chinese & American firms. The American Chamber of Commerce in China conducted a survey last month. The results showed that “the vast majority (74.9%) of respondents said the increases in U.S. and Chinese tariffs are having a negative impact on their businesses. The impact was higher for manufacturers at 81.5% for U.S. tariffs and 85.2% for Chinese tariffs. The impact of the tariffs is felt through lower demand for products (52.1%), higher manufacturing costs (42.4%), and higher sales prices for products (38.2%).… Approximately 40.7% of respondents are considering or have relocated manufacturing facilities outside China. For those that are moving manufacturing out of China, Southeast Asia (24.7%) and Mexico (10.5%) are the top destinations. Fewer than 6% of members said they have or are considering the relocation of manufacturing to the U.S.”

Why Isn’t Production Returning to the US?

In our era of interconnected global supply chains and technology connectivity, several countries are involved in the production of every item. Deterioration in business or trading relations between one pair of countries is simply going to put others in a more advantageous position – let’s call it the yin and yang effect. The US-China tariffs are paving the way for better business in other countries that have been patiently waiting for an opportunity to shine or were already involved in the supply chain anyway. As a result, the White House’s policy is modifying the global supply structure rather than enabling a rise in domestic production. US imports and associated production are simply transitioning from China to other parts of the globe.

Who Are Or Could Be Some Of The Big Beneficiaries?

Vietnam is now one of the top choices, with its low wage levels, high standard of education, government-subsidized industry and other benefits that we can recall from China’s ‘awakening’ two decades ago. Vietnam has been receiving direct foreign investment for years and this tendency is continuing. While imports from China into the US are falling, those from Vietnam are rapidly rising. The chart below shows just how much this change means to Vietnam and, if the current trend continues, it would become the 7th largest importer into the US by year-end.

 

China’s Loss Is … China’s Gain???

Another critical element to remember is that, consciously or not, China has been preparing for the current circumstances with the US for years. How? By placing the geographical focus of its Belt and Road Initiative and corresponding production capabilities in some of the very countries where US companies have been transitioning their supply chain.

An example in Vietnam is the China-Vietnam Economic and Trade Cooperation Zone. One element of their ‘cooperation’ consists of an industrial park in the northeastern manufacturing hub of Haiphong, Vietnam that is 100% owned by the Shenzhen city government. The park is just one multi-billion-dollar example of how Chinese and foreign companies can avoid tariffs and have Chinese quality goods and pricing. Launching cheap hubs in Southeast Asia, including Vietnam, is proving to be a logical way forward and, when looking at the chart below, is unlikely to stop at Vietnam.

* Note that EDS International has a local presence in the countries highlighted on the chart.

What’s Next

The trends mentioned above run contrary to many people’s expectations, as one of the many objectives of the tariffs was for some of China’s production to return to the US. Global market analysts believe that factories and production relocating from China to other low-wage countries in the Southeastern region should not be a concern to the Trump administration. They contend that while developing more and more technologically advanced domestic production, the US should let others engage in labour-intensive manufacturing. However, the wheels of the global supply chain have already been set in motion so we see no end in sight to a continuation of the yin and yang effect.

Are you looking to transition part or all your supply chain outside China?

In addition to procurement and sourcing service, EDS international has been moving production lines around the globe for the last 35 years. If you are considering a move to one of the countries mentioned in this article, we are likely to have a local office to greet you. Our goal is to reduce your costs and improve the efficiency of your supply chain. Click here to check our services and past projects or to get your free quote today!

Sourcing Company vs. Trading Company – Similar Yet Very Different

In many cases, it is difficult to say in what ways a sourcing and trading companies differ. And people often mistakenly believe that they are the same. There is a fine line between the two, but it so fine that it is almost impossible to detect. And although many of their elements overlap, it still does not mean that the two terms can be used interchangeably. 

Sourcing Company

Sourcing services can be provided both by a company and a single person acting on your behalf whenever necessary, be it imports from China or any other country you might need to arrange sourcing or a stable production process.

Normally, global sourcing procurement companies offer services like supplier identification and selection, supplier capability analysis and audits, negotiations and contracting, supplier relationship management, quality control and inspections, logistics and transportation, and supply chain management.

Trading Company

Trading companies usually partner with a few factories and need to establish close business ties with their producers. These ties often become so close that traders seem to function as if they are incorporated in the production company. In some circumstances, they may even act as a de facto extension of the factory’s foreign trading department. Traders value cooperation with reliable factories as, placing orders with them, it is easier to agree on favourable prices, lead time, quality and get the necessary support. 

Let us explore the key similarities and differences between trading and a sourcing company so that our clients can make a well-informed decision when choosing who to partner with:

 Area of work

As a rule, sourcing companies organize business processes, including; inventory management, warehousing, and quality control. It is critical to ensure these processes are smoothly managed as this will determine the success or failure of a project.

At the same time, a trading company’s focus is mostly on an industry or a particular product. When looking for a special type of pipes, for instance, it makes sense to contact a trader working in the steel sector. They will know the product and the industry, but will not be usually specialized in the underlying business processes.

Product Catalogues

Trading companies have catalogues, whereas sourcing companies do not. A wide range of products is presented is traders’ catalogues, and there are established price lists. If it is necessary to develop a product according to certain specifications and arrange its production, a sourcing company is usually engaged.

Expert Knowledge

Sourcing companies know a lot about business processes from initial to final stages of production along with logistics and shipment. This expertise minimizes the risks of project complications or delays. Trading companies know their products and factories well, but when it comes to details as regards both technology and processes, there is usually not much expert assistance they can offer.

Protection of Interests

A trading company has to balance between managing manufacturers’ interests and clients’ interests. In case of a dispute, a trading company would rather act to benefit the manufacturer. It is unreasonable to risk undermining the established business relationship with the factory or sacrifice the advantages it may offer for the sake of a client.

In contrast, sourcing companies safeguard the interests of the customer as their function is to represent the client on the ground. Seeking to effectively fulfil the client’s order first and foremost, a procurement company can exert more pressure on a supplier or even change the supplier if the smooth implementation of the contract is compromised.

Strategic Goals

A sourcing company usually uses its expertise to help a client implement its project in the most cost-efficient way while also minimizing risks and achieving the best possible quality.

Trading companies mainly aim at high sales figures as, by placing a bigger order with the producer, they can earn more.

Value Added Services

There are a number of value-added services a sourcing company can provide. These tailored solutions include: extensive market research, identification of suppliers, development of a new product, or supply chain advisory services. A sourcing company can, therefore, be regarded as an extension of its client’s international purchasing office.

A trader can also give recommendations about existing products or industry or customize the existing products as value-added services.

Conclusion:

There is no one-size-fits-all manufacturer when it comes to importing goods from China. Get a clear understanding of what aspects you and your customers care about most as a basis for selection of a supplier that fits best.