September 2008

Chinese government removes tax to profound effect

China's manufacturing industry is in the midst of a period that we consider evolutionary is how Bradley Feuling, chief executive of Kong and Allan, a supply-chain consulting firm, puts it.

Industry Week reported many Chinese manufacturing companies started when the Chinese government began offering a value-added tax (VAT) credit reimbursement to encourage exports.

A year ago, however, China reduced or eliminated the VAT export rebates for some industries. As a result, some Chinese manufacturers are operating now at a loss and many are in deep trouble.

"A number of manufacturers and industries in China are facing very difficult times," said Feuling, who operates out of Shanghai. "Competition has grown to a point where each manufacturer has a very small piece of a huge pie. Gaining market share means consolidation and acquisition, yet few operations have the cash to invest in purchasing other companies."

The majority of owner-operated companies are unwilling to sell to other local companies, though some will sell ownership to foreign buyers for the cash inflow.

Feuling continues, "The manufacturing industry in China is still expanding, but in a vertical migratory path instead of horizontal. Higher value-added services are beginning to have importance like customer service, for example, in working with foreign customers. Product or material design is another area. Supply chain operations and efficiency is a third. Companies can readily see that the future will require adjustment to remain competitive and in some cases stay alive."

End-to-end supply chain involvement is critical for U.S. manufacturers if their goal is to fully understand the cost of sourcing in China. "Sourcing accounts for more than direct cost," Feuling emphasizes. "When you buy a product, you buy the supply chain."

He suggests companies focus particularly on inventory and capacity management.