by Gokmen Sirin
International investors and purchasers are always looking for opportunities in their sourcing to decrease operational costs and to increase efficiency. In this article, I want to talk about a practice called Bonded Logistics Parks (BLP) U-turn.
This practice is useful when buyers:
1. do not want to disclose details of their customers to their Chinese supplier,
2. want to sell their China sourced product to the Chinese domestic market, and
3. want to use BLP as a distribution center.
This article includes two examples explaining this concept.
When goods are taken into the BLP, the following activities can be conducted:
1. Simple processing for goods like changing packages, classification, labeling and marking,
3. Testing, controlling and maintenance,
5. International transit business,
6. Other activities approved by customs.
Once a China-sourced cargo has entered the BLP, it is considered “exported”, which means suppliers can claim the export VAT refund immediately (much faster than standard export practice). Buyers can, therefore, negotiate with their supplier for lower prices.
One concern among buyers is the Chinese supplier identifying their customers and contacting them directly. To prevent this, written agreements (including non-circumvention provision) can be signed with suppliers. But practically, it is always hard to prove this in a legal environment.
Delivering goods in a bonded area can help circumvent this situation.
Once the cargo is delivered and cleared by customs in a BLP (for example, FOB Shanghai, Waigaoqiao BLP), buyers may make labeling and marking changes on the cartons, re-classify products or consolidate orders from multiple suppliers based on customers’ requirements.
In the current global business environment, it is common to source the product in China and sell it to the Chinese customer/factory or Chinese domestic market. Many companies are doing this by using U-turn export-import practices. This sourced product can be half-finished or completely finished.
Manufacturer A in Guangzhou, China
Manufacturer B in Wenzhou, China
Product: Conveyor systems
Manufacturer A produces some components for Buyer X using imported raw material (note that in this case no import duty or VAT will be triggered for the raw material imported under export processing trade, but naturally it needs to be exported to qualify) and exports its cargo to the BLP warehouse. If there are no processing activities in the BLP, generally the cargo may leave the BLP a day later to be imported into China (after customs clearance and documentation).
1. Manufacturer A prepares his documents and exports the cargo to the BLP under Buyer X's name,
2. The cargo enters BLP,
3. The service provider logistics company in the BLP processes export declaration for Manufacturer A,
4. Manufacturer A may claim VAT refund directly (if applicable),
5. After export declaration, the service provider company processes import declaration for Manufacturer B,
6. All documentation is completed and the cargo leaves the BLP for further manufacturing at Manufacturer B.
In this practice, Manufacturer A and B do not get to know each other. Buyer X will save costs comparing the same practice with Hong Kong U-turn. After production is completed, Buyer X can sell the finished goods into the Chinese domestic market (even in this case no VAT or import duty paid for imported materials for both manufacturers). All export-import transactions can be made via a service provider logistics company in the BLP without the need to set up a company in China for Buyer X.
Manufacturer A in Wenzhou, China
Customer Z in Pinghu, China
Product: Fashion belts of a famous brand
Buyer X will sell their products to their Customer Z after sourcing from Manufacturer A. Workflow is similar to Example 1.
In this practice, Manufacturer A does not get to know Buyer X’s ultimate customer. Buyer X can assemble his goods in the BLP (for example, final stitching on the buckle) and also control the quality of goods. Buyer X can use new packaging, perform value added services and mark the cartons according to Customer Z’s specifications.
In addition, Buyer X can sell his goods in smaller batches to his customers and use the BLP as his distribution center. Needless to say, all these activities can be made via a logistics company in the BLP, without the need to set up a company in China for Buyer X.