TRADING PLACES

An OEM (original equipment manufacturer, which provides components for products another company sells to end users) for foreign brands, Liu’s company exported over 70 million yuan (US$10.5m) in goods in 2021, better than he expected, as manufacturing resumed earlier in China than many other countries. But his orders declined entering 2022. 　

Liu’s company had a margin of 15-25 percent, partly due to the relatively cheap prices of materials in China. But no more. The prices for raw materials rose by over 10 percent in 2022, but Liu still needed to fill his orders at the contracted prices. “The margins are getting thinner and thinner,” Li said. This is why he is turning to outdoor goods and pet hair dryers. 　

Yang Hui told NewsChina that the price for copper, the primary material needed to manufacture cables, has risen continuously since the pandemic started. Now the price has almost doubled, rising from 30,000 yuan ($4,900) per ton to over 70,000 yuan (US$10,500) per ton. But he did not raise his prices for fear of losing buyers, and decided to swallow the losses. 　

Because of blocked logistics at home and overseas, it also takes companies longer to finish and dispatch orders. Qin Bo, a textile exporter from Shaoxing, Zhejiang Province, told NewsChina that his customers usually pay a deposit first and pay the rest after receiving the goods. Previously, it took only three or four days to deliver goods to Europe and the US, and the entire process took about two months. Now it takes four months, which means they need to wait an extra two months to get paid. 　

This extended cycle also means they need more liquid capital. Qin revealed that compared to before, they need 30 percent more cash flow, and interest on these loans adds even more to the costs for companies. 　

In some cases, when deals are signed using cost, insurance and freight (CIF), a trade term for when the seller pays for freight shipped by waterway, exporters need to cover the rising costs. When there is a container shortage, companies need to pay in advance to book containers. “In the past it cost US$20,000 for 10 containers. Now we need to pay US$200,000 to book them, another enormous expense for us,” Qin said. 　

“The whole production and capital chain is disrupted,” Qin said. Since the textile industry itself is not that profitable, the dwindling profits means Qin is hardly bothering to take orders. 

　

“After staying busy for a year, we found we made no profit or even lost money,” Qin said. 　

Qin hopes the situation will improve soon. “In tough years, only the strong can hang in there. Many companies have already folded under the pressure,” he said. 　

A report published by China Council for the Promotion of International Trade and XTransfer, a cross-border financial service provider, found that between April 1-15 the payments received by Shanghai’s micro, small and medium-sized foreign trade companies dropped by 1 percent year-on-year, caused by uncertainties in manufacturing, logistics and container trucks. 

　

In the first quarter of 2022, the confidence index among micro and small-sized companies dropped below the threshold that separates contraction from expansion and it may continue to slide in the second quarter, as business owners are pessimistic about their income and operating costs, according to a report on the conditions of small businesses by Peking University. 

Many enterprises NewsChina interviewed said they have been affected by orders moving to Southeast Asia and Mexico in the past few months. 　

Yang Hui said that in the last two years, global buyers have turned to suppliers in countries like India, Vietnam and Thailand for products with lower technology and quality requirements. “The price of our products is relatively high due to rising costs across many metrics. Countries like Vietnam, India and Thailand have price advantages over China as the cost of labor and investment in equipment is lower,” Yang said. 　

The pandemic has made the situation worse, Yang noted. Besides supply chain disruption and logistics problems, it is difficult to fulfill after-sale service commitments like debugging. “Even if our engineers are willing to travel abroad despite all the Covid-induced troubles, the cost is high. Previously we paid an engineer US$50 a day, now the price is about US$300. Plane tickets remain expensive too,” Yang said. 　

China still imposes strict flight quotas on airlines, and flights are suspended if too many Covid cases are detected among inbound passengers. There are also quarantine stays in hotels in the port of entry to pay for, and possibly again in the engineer’s destination, although China has recently reduced the length of quarantine for inbound passengers in some cities. 　

In 2021, Yang went to Bangladesh to visit a customer. The customer bought equipment from China in 2020 but was unable to get debugging help from the supplier after the pandemic erupted, so he took his business to an Indian supplier in 2021. “If India is not available, they will turn to Turkey or countries in Europe, even at a higher cost, because even in the worst times of the pandemic, European suppliers promised to provide debugging services,” Yang said. 

　

“While Covid-related restrictions in China have not been lifted, other countries have lifted them. It puts China at a disadvantage,” Yang said. 　

But some are not so worried about the situation. “Southeast Asian countries like Vietnam might be able to partly replace the industrial chain in China, but not all of it, because of their population base,” Liu Yongbin said, adding that Vietnam still depends on China for industrial support. “It buys much of its industrial machinery for manufacturing from China second-hand and its industrial chain is incomplete,” Liu said. 　

Zhang Yuanqing, a furniture manufacturer from Guangdong, agreed that while the labor-intensive industrial chain is shifting to Southeast Asian regions, they still fall behind China in terms of resources in the short run. “But the region is catching up,” Zhang said. 　

A report published by Huaxi Securities in May shows that in Southeast Asian countries, the growth of exports in March and April is mainly reflected in metals and minerals, textiles and clothing and electronic products. In recent years, smartphone making has shifted from China to India and Vietnam, decreasing China’s share in global phone production capacity from 90 percent at the highest to 70 percent in 2021. International media reported on June 1 that Apple is planning to shift some iPad capacity from China to Vietnam, although the tech firm has not yet confirmed the report. 　

On April 11, Apple announced it would manufacture the iPhone 13 in India to meet market demand in India, the US and other markets. In the same month, China’s exports of machinery and electronic products to India increased, indicating that India’s manufacturing is recovering from the pandemic. Many phone brands like Samsung and Xiaomi have built factories in India and local industrial support is improving. 　

Gao Shiwang noted that while China’s share of global computer and phone exports is large, the production focus is on processing and assembling with low added value. Production of capital and technology-intensive integrated circuits and semiconductors still relies on imports. “China needs to go upward in the industrial chain by attracting foreign capital and updating technology,” Gao said. 　

Bai Ming, vice director of international market research at the Chinese Academy of International Trade and Economic Cooperation, noted that even though China’s exports were hit hard by the Covid resurgence in March and April, the pandemic is just one of many factors affecting the industrial and supply chains. “Southeast Asian countries might be too small to reach economies of scale on their own, but if the ASEAN community works together, it could speed up industrial support,” Bai said. He suggested companies producing labor-intensive products transfer to China’s central, western and northeastern regions because of cheaper labor and other input costs, such as power, or transfer their industrial chains to Southeast Asia or Mexico. 　

In response to losing export orders, the Ministry of Commerce said it will try every means to help companies tap markets through big exhibitions like the Canton Fair and will help SMEs attend exhibitions overseas. 　

To address surging freight and raw material costs, Gao suggested authorities enhance the coordination of international shipping capacity, guide China-invested companies to reinforce business in overseas ports, increase shipping support for Chinese brand companies that go international, provide guarantees for key industries in terms of freight and shipping capacity, and enhance the stable supply of bulk commodities. 　

Yang told NewsChina that the situation started to improve in May as production and logistics resumed. “When we need to load goods in a place, we just apply to the local government in advance and we can transport cargo direct to Shanghai Port. The cost of raw materials and freight fell too,” he said. 　

Liu is not too optimistic about the second half of 2022, predicting that exports will reach only half the volume of 2021. The CCCME predicted that Q2 export growth will continue to fall because of the suspension of production and blocked logistics in March and April. 　

Yang worries more about the declining confidence in Chinese suppliers that he has sensed in the past two years, which makes him feel helpless sometimes. “We can only try our best to keep our existing customers and be as responsive as possible,” he said. 　

He has been actively setting up overseas offices since 2021 to enable his company to provide swift maintenance services to his overseas clients.