If $6 in profit is deducted for every $100 in sales, how much will it affect a manufacturer's business?
That question has been on the minds of tens of thousands of Chinese plastics processors since June 19, when the Chinese government announced it would cut its export rebate for plastic resin and products from 11 percent to 5 percent, effective July 1.
For Taipei, Taiwan-based Win Industry Co. Ltd., which makes rubber and plastic parts for electronics at factories in Shenzhen and Huizhou, China, the impact is definitive.
``We have to find other ways of [saving costs], but our cost structure is already quite lean,'' said marketing Vice President Allen Wang.
The change in the export rebate - a subsidy paid by central and local taxation authorities - applies to all exports from China. ``It's not us alone,'' Wang said in a telephone interview. ``Everyone is affected.''
The company exports more than 50 percent of its products to Europe, and 30 percent to North America. But Wang said he believes most buyers will not risk disrupting their delivery schedules, or trade quality, for a price increase of a couple percentage points.
``The price increase won't be significant enough to justify extra cost associated with switching to suppliers from other countries,'' he said. ``It's a complicated process, especially the initial setup.''
Win Industry falls into the category of foreign-invested enterprises in China, which in this case are subject to the same export rebate policies as domestic Chinese companies. So does Mocap Inc., a St. Louis-based custom injection molder that opened a factory in Zhongshan earlier this year and expects to mold 20 million to 30 million plastic parts in its first year of business.
In the first six months, Mocap's China plant exported all of its product. Though the rebate cutback will affect the operation, ``the impact is actually minimal,'' said Paul Miller, vice president of operations.
In general, Western firms that manufacture in China will not experience any major effect. ``Since their competitors are doing the same thing, the impact is even across manufacturers,'' said Larry Hotaling, founder of Hong Kong consulting firm Global Diligence Ltd.
``No one manufacturer will have a major advantage. The loser will be the consumer, who may see higher prices,'' Hotaling said.
Voices from China
But the China Plastics Processing Industry Association tells another story.
``We believe the new policy will cause 2007 exports to drop quite a bit,'' said Ma Zhanfeng, CPPIA's general secretary.
China's plastics exports fell in 2006, based on volume of plastics processed, according to CPPIA statistics. The trade group cited trade barriers as a major cause.
``About 96 percent of China's trade surplus is light-industry products, including plastics products. In order to solve the constant trade friction with developed countries, the Chinese government has to reduce and eventually abolish export rebates,'' he said.
Ma said profit margins at average Chinese processors are slim.
``The official figure is 4.61 percent for the light industry in general,'' he said. The loss of the rebate is ``hitting the struggling businesses when they are down.'' He said many companies will go out of business, resulting in higher unemployment.
``The export market outlook is gloomy,'' Ma said.
But the government's position is that the pain may be worth it, for a better economic model and industry structure.
Officials from China's Ministry of Finance say China's trade surplus totaled $85.7 billion from January through May, up more than 83 percent from the same period of 2006. The government intends to push the industries to reduce the export of high-energy-consumption, high-pollution, resource-based, low-added-value and low-technology products. In the long term, that strategy is designed to promote economic growth and sustainability.
Plastics is not the only industry affected by the government policy. An array of sectors including rubber, some chemicals, furniture and certain machinery are facing different adjustment measures: rebate cutback, zero rebate or zero export tax.
``It is affecting a number of industries and starting to change the dynamics in international sourcing,'' said Chris Runckel, president of Portland, Ore.-based consultancy Runckel & Associates.
Effect on U.S. buyers
The U.S. manufacturers that source from China now wonder whether the policy change will lead to cost increases.
Experts' opinions are mixed.
``To this point, most Chinese suppliers have absorbed the costs, but most have signaled that they cannot absorb [them] much longer. Costs are therefore likely to go up,'' Runckel said.
Bill Liu, vice president of Chicago-based NaviAsia Consulting Group Inc., said his U.S. clients are safe from price hikes in this round. His observation is that manufacturers and the middlemen are ``swallowing the impact'' to keep their businesses running.
The impact also will depend on outsourcing volume. Liu said small orders are more susceptible to price increases. The change will have to be reflected somewhere along the supply chain, Liu said.
``Many low-end exporters are already on the edge,'' he said. Using a Chinese idiom to illustrate his point, Liu said, ``Paper can't wrap-in fire'' - meaning it will come out sooner or later. Since it takes half a year after an actual sale for Chinese manufacturers to cash in the export rebate, there also will be a time lag before the impact is felt in the cost structure.
U.S. buyers also need to factor Chinese currency re-evaluation and volatile resin prices in China into the price equation, Liu said.
``Many U.S. companies are starting to feel nervous, as they feel the Chinese government seems likely to continue to cut back on export subsidies, to continue to let the [yuan] increase in value, etc.,'' Runckel said.
The recent reduction of the export rebate for resin and finished plastic products to 5 percent followed a first-round cut from 13 percent to 11 percent in September. But the government is speeding up the phaseout process.
Being the world's second-largest processor of resin, China still relies heavily on imports of most plastic materials. But huge domestic demand has fueled capacity buildup and caused overcapacity in some cases, such as PVC.
Cutting the export rebate from 11 percent to 5 percent translates to a loss of $60 in profit per metric ton, or about 2.72 cents per pound, for Chinese exporters, according to China Chemical Industry News.
``On a short-term basis, this will tend to raise PVC prices in Asia and lower China domestic PVC prices,'' said Steven Brien, global practice leader of chlor-alkali and vinyls at Houston-based Chemical Market Associates Inc.
Chinese resin producers will try to sell more PVC within China, which will put pressure on domestic Chinese PVC prices to go down. Meantime, since China will reduce its exports of PVC, prices in the rest of Asia may rise.
``We are already seeing this effect as China domestic PVC prices are dropping and market prices outside of Asia are increasing. We think this will continue until an equilibrium of PVC prices is reached. Who knows for sure, but probably within a few months an equilibrium will be reached and China will export again,'' Brien said.
Hotaling, who is working with U.S. compounders that are selling to or within China, said he sees no huge impact on China's ability to export because ``their costs are so low and they are improving capabilities.''
More importantly, resin exports are not a big portion of sales for most Chinese suppliers.
``They have minimal dependency on export, so will feel minimum impact,'' he said in an e-mail.
Future is uncertain
``When and if Chinese companies start passing along these increased costs, many U.S. and other companies may start looking elsewhere for new suppliers,'' said Runckel, who also serves as chairman of the U.S.-Vietnam Chamber of Commerce.
He said many U.S. companies already are exploring backup companies in Vietnam, India and other lower-cost countries while waiting to talk with their Chinese suppliers to see if the costs will be absorbed.
``What the future will bring is hard to say. I doubt it will bring jobs back to the U.S., but it well may make more companies more rigorous in their cost review on the cost and benefits of overseas sourcing.''
Runckel said Vietnam and India ``may well be beneficiaries of this.''
``At least in our experience, Vietnam is getting a lot of consideration from companies wanting to site a new factory, much more so than last year, which was also a good year for Vietnam,'' he said.
Liu of NaviAsia said many Chinese manufacturers are beefing up their investment in Vietnam and Cambodia.
``Costwise, many inland regions inside China still offer good options. But by setting factories in lower-cost neighboring countries, the Chinese entrepreneurs benefit a lot from trade polices,'' Liu said.
Meanwhile, plastics machinery is unaffected at this time, confirmed Michael Lai, the Canadian owner of Shanghai Onyx Machinery Inc. But industry suspects the government will cut back that subsidy as well sometime in the future.
``We are enjoying [the double-digit export rebate] while it lasts,'' said Alfonso Keh, sales manager of Dingye-USA Machinery Manufacture Co. Ltd. of King of Prussia, Pa., which helps more than a dozen Chinese machinery makers export.
Manufacturers in China's free-trade zones that process imported materials into exports are not subject to export duties and therefore won't be affected by the rebate cut.