By Gary Huang
As we’re getting ready to close the year and enter holiday party mode, there are two important things to consider as we prepare for the new year in 2018 so we don’t start off the year with a hangover!
China is getting clean and the new regulations are here to stay
The China EPA’s stricter regulations are here to stay. Contrary to what some believe was a temporary measure to clean up the air during the major government meetings in Beijing in November, this time the government is serious about cleaning up the environment. So factories are being forced to live with these new rules.
There are numerous industry categories that were targeted this year. This means that this could be the first round of cleanup targeting the “dirtiest” or most polluting industries. Factories that emit volatile organic compounds or pollutants that are released into the air were the main targets.
In order for factories to comply, they would need to invest in equipment that would reduce these emissions. As a result their costs of operations of rising.
What does this mean?
Expect your costs to rise in 2018!
Traditionally suppliers may absorb small cost increases throughout the year in order to facilitate business. If raw material costs grow then they may not immediately pass the cost increases on to their clients (in this case you) right away for the sake of doing good business. If you have a good relationship or “guanxi” with your supplier this is normally the case.
However, they will not absorb these costs forever. Businesses in China will evaluate their profits and losses and settle all debts by the end of the lunar year, aka Chinese New Year. Take for example the restaurant industry. Typically prices will maintain steady throughout the year but after they return from Chinese New Year, the prices on the menu will be readjusted and expect your lunch to cost 10-15% more. I’ve seen this year on year in my time in China in nearly all industries from manufacturing, hospitality, real estate, and the service industry.
This is one of the elements of Chinese culture that dictates business practices.
So I would expect product costs (i.e. FOB and EXW quotations) to rise in Q1 and Q2 so be prepared and review your margins to make sure your business is profitable.
Winter is Coming – Chinese New Year
Chinese New Year is approaching. It will be from Feb XX to YY. The exact dates are less important because factory workers typically leave their jobs days if not weeks before the start of the holiday. And they don’t return until much later after the official end date of Chinese New Year. The reason is this is the largest human migration in the world. According to government sources, 3 BILLION PEOPLE will be making trips during CNY. So that means there’s a good chance that train, bus, and plane tickets will be sold out so workers need to leave before the rush.
This is a nightmare for many factory owners who have orders to deliver and are trying to manage their workers during this turbulent time.
So the key thing to remember is that your factories will be shutting down from 2 weeks to up to a month in February to early March. This article I wrote goes in more detail into Chinese New Year best practices to minimize disruptions to your business.
What can you do?
Smart business owners plan ahead. In terms of inventory, they will place orders in advance and have additional stock on hand to sell during Q1 while Chinese factories are shut down.
If you have orders pending delivery in January, I strongly recommend monitoring the delivery dates. Be vigilant!
What normally may be a 30 day lead time could longer because factories are slammed pre-Chinese New Year trying to finish all their orders before they leave for the holiday.
It’s common to see quality take a dive in order to meet these deadlines. So be sure to have a good quality inspection or QC process in place. 3rd party inspectors such as Asia Inspection are a great way to check your orders before they leave the factory floor.
Consider a China +1 Strategy
As a long-term view on China, given the increased scrutiny on environmental protection, steady cost increases, and a shift away from manufacturing low cost, heavily polluting commodities, it makes sense to consider sourcing from other countries.
India and Bangladesh for example, are strong in textiles. Vietnam is another target that many multinational corporations such as Nike have already entered. This is the natural evolution of the global manufacturing game.
Be aware however that skilled labor and productivity levels in these countries will be lower because China has the advantage in experience.
Logistics in China is more developed as well so the shipping process tends to be smoother.
Also, China has more experience with the whole export process.
We are seeing that large corporations are not be leaving China outright because China still offers a wide breadth of product manufacturing and it has the entire supply chain available.
However, when there are disruptions from policy changes to extended holidays, it makes sense to have a backup plan to shift manufacturing to fill in any gaps so your business will run like a smooth oiled machine well into 2018.
Recently, I was interviewed by Mike Jackness from EcomCrew about my outlook on sourcing from China, Chinese Amazon FBA sellers, and best practices for 2018. EcomCrew is one of my favorite podcasts when it comes to e-commerce and you can basically take any of the episodes and implement the tactics discussed to grow your business. Check out the interview here.
Happy holidays everyone and stay safe!
PS: On the bright side, this fall in Shanghai, the skies were the bluest they were in recent memory. I only had to turn on the air purifier a couple of times, which was much less than before. Overall the air quality has improved in my view which is a positive sign for China and the rest of the world!
Gary Huang is an American based in Shanghai, China, and working in sourcing since 2008. He is the creator of 80/20 Sourcing, which helps small business importers quickly and efficiently source from China. Gary also serves as the Co-Chair of the American Chamber of Commerce in Shanghai’s Supply Chain Committee. You may contact him at www.8020sourcing.com/contact.