Revaluation in China - A wake-up call?

When assessing their China sourcing strategy in light of these long-expected developments, companies would be well advised to compare as many different sourcing models as possible

Well, the inevitable has finally happened - and the Chinese Renminbi (Yuan) has, as expected, increased by just over 2% against the dollar.

Whilst this has long been feared by many China-based Export Companies and their customers, it has created some profound and compelling reasons for using 'value added' sourcing solutions when sourcing products from China.

Normally, when foreign companies locate a good product source in China, little thought is given to the mechanics of how those products are actually paid for.

All too often, it is seen as being 'no problem', and customers in the US or UK simply 'pay for the goods in USD' and then 'receive the product'.

However, in the majority of cases the actual manufacturer is only allowed to accept payment in local currency (ie RMB), which means that 'somebody somewhere' is having to convert those dollars into RMB on their behalf - and they are unlikely to be doing it for free! This function is usually performed by so-called 'Trading Companies', which basically take foreign currency from their customers, convert it into RMB, then pay the actual manufacturer in local currency - but not without taking a cut in the form of commission, of course.

Sometimes these companies pose as the actual manufacturer, and sometimes they work with the manufacturer 'behind the scenes' in order to include their commission with the FOB price of the goods.

Even companies with Representative Offices in China have to use these companies when buying from local factories, which means that Trading Companies have traditionally been an important part of the Chinese supply chains of most foreign companies.

In a summer which has been particularly hot across China, though, Trading Companies like these may truly be 'feeling the heat'.

Their prices have just risen by over 2% overnight - and may even rise further.

Depending on how lean their operating costs are, and whether or not they are involved in 'off-the-shelf' commodity products, this may push them out of some of their ultra-competitive markets, in which undercutting the competition is the one-and-only 'name of the game'.

For Export Companies which offer entire sourcing solutions, however, this could be good news - a much anticipated 'blessing in disguise'.

Instead of earning a commission for simply 'flipping' paperwork on behalf of a local manufacturer, there are a number of Export Companies out there which offer entire product development programmes, all the way from initial design right through to product development, vendor sourcing, contract manufacturing, in-line QC, packaging, and logistics.

E-Trade2China is one such company, except it offers a second option which takes this concept even further.

Instead of just operating on a straightforward 'trading' basis as described above - which it already does successfully - E-Trade2China can also act as a true 'extension' of its clients operations, whereby it provides everything that is needed for its clients to have a fully-functioning operation in China.

This not only includes full-time professional sourcing staff who work exclusively for the client to which they are assigned, exclusive office space and all the necessary equipment required to run a successful sourcing office, but also access to the very Export Licences needed to export products from China at cost.

This can save its clients money, and can also speed up its clients lead times dramatically.

The cost? Probably less than opening and running a Representative Office - and that's before one even considers the commission that gets saved by cutting out commission-charging Trading Companies or the savings that can be made by having full-time staff on the ground in China, re-sourcing products from even more competitive local vendors.

Any further rise in the value of the RMB against the USD will only increase the reasons to cut out unnecessary layers in the supply chain from China - and provide further compelling reasons to look for a partner in China that can help engineer out the unnecessary costs associated with Trading Companies and Representative Offices.

When assessing their China sourcing strategy in light of these long-expected developments, companies would be well advised to compare as many different sourcing models as possible in order to identify ways to mitigate increasing costs as a result of a floating RMB.

To find out what E-Trade2China can do for you, please send details of the products you are looking for to Jonathan Fayers at E-Trade2China.

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