The manufacturing industry in China has in the last year been affected by the US-China trade conflict. It seems there is now an agreement in place, but don’t count on that this is the end of the story. The unbalance in trade flow and openness of the market still has a long way to go.
This has had both positive and negative effects on Chinese factories. In our work with mostly European clients, factories have in the past often had a limited interest in smaller order sizes and has had a preference from American companies, who used to order in large volumes and pay well . We see now some change in attitude and more flexibility in taking on smaller volume orders.
At the same time there is of course an increasing risk that companies who lost American business will either close down, but more likely change direction. In both cases you face the risk of losing a supplier.
It is advice to regularly visit and audit your suppliers to check their status.
China represents a quarter of global manufacturing output and will for the foreseeable future be a potential source especially for engineering products. But with domestic consumption powering economic growth and active efforts from the Chinese government to increase import, foreign companies should also consider how they can sell more in China.
Talk to us if you have questions about low risk market entry to China.
A new foreign investment law in China comes into effect on January 1, 2020. It promises an equal treatment of foreign invested companies, forbid forced technology transfer and gives equal access to government procurement.
It is also bringing control of foreign investment policy to national instead of regional level.
It replaces 3 previous laws on foreign owned company entities. There is a 5 years transition period to adjust organization and governance structure.
The law is short on details but sets general direction and further clarifications are expected in the imlpementation instructions.
Buildings are being repainted, flowers are planted, and traffic rules are being enforced along with the fines sharply increased prior of the China International Import Fair or CIIE as its popular acronym. Shanghai’s party secretary has urged its citizens and administrators to go all out in the effort of hosting the international expo.
“This reminds me of the preparation before the world fair in Shanghai 2010”, says Per Linden businessman in Shanghai since 15 years and founder of Scandic Sourcing.
The exhibition will be opened by President Xi Jing Ping himself, who has taken the initiative to organize the event, welcoming heads of states, dignitaries and business leaders from around the world. Chinese companies have been commanded to show up and has in many cases got assigned purchasing budgets.
The event has been labelled as Chinas effort to show the world and its own people that it is serious of raising imports. Behind this is the huge trade surplus of 2.87 trillion Yuan and Chinas long term plan to transform from a production and export oriented economy to an innovation and consumption led society.
Last year with exports and imports respectively registered at 15.33 trillion Yuan and 12.46 trillion Yuan, growing by 10.8 percent and 18.7 percent from the previous year, the numbers are already pointing in the right direction.
The expo will be held in Shanghai on November 5-10. There will be about 80 country pavilions, more than 2800 companies on 270,000 m2 of exhibition space used at the New National Convention Center in the Hong Qiao area in Shanghai.
The Area consists of two sections, trade in goods and services. The section of trade in goods includes 6 exhibition areas: High-end Intelligent Equipment; Consumer Electronics & Appliances; Automobile; Apparel, Accessories & Consumer Goods; Food & Agricultural Products; Medical Equipment & Medical Care Products with a total area of 180,000 m2 . The section of trade in services comprises Tourism, Emerging Technologies, Culture & Education, Creative Design and Service Outsourcing with a total area of 30,000 m2.
“It will be interesting to see the result of this from the top approach to increase import and how much can be achieved in only five days, but as the old Chinese proverb say a journey of a thousand miles start with a single step and this is a very distinctive and powerful first step” Says Per Linden.
Difficulty in judging people and business partners and lack of available reliable data has always been a dilemma in China. China has been characterized as a low trust society, where trust is something that has to be built by good deeds, compared to the western world where there is normally initial trust until you destroy it by bad deeds.
The Chinese government launched already in 2014 an effort to by 2020 have ready a national social credit system with a single score for each individual and business with the purpose as “let the trustworthy to roam everywhere under heaven, while making it hard for discredited to take a single step”.
After many local pilot programs, systems for both individuals and companies now start to be available online. Most of this data was available before, but some of it not public.
The Chinese government agencies have long ranked companies according to how well they conform. This is the case with the tax bureau, customs, etc. Good behavior is rewarded with less control and faster processing. Bad behavior results with more restrictions, control, audits, etc.
“ We find it much easier to do background checks on suppliers, and useful to be able to fairly quickly access the ownership of a company, debt obligations and legal processes. While reporting of financial numbers is till optional”, says Per Linden CEO of Scandic Sourcing.
There are worries about misuse of this system and wrongly assigned punishment would take up to 5 years to clear, stifling a company’s ability to operate and a person’s ability to move around, get loans etc. Having suppliers and business partners on a blacklist will also affect the score. The idea is that this should be a fair and transparent and self-policing system. But there is a risk is that complaints from suppliers, customers and disgruntled employees can have big effects.
Active efforts to ensure compliance will be even more important in China, than before. Keep track of your own score as well as your business partners and suppliers.
We are looking for a Business Developer to join the team at our Shanghai office. The position offers a great opportunity to work in an international environment and with a broad spectrum of services within Business Consulting and Sourcing.
Get in touch with us and apply today.
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