The Chinese Yuan has strengthened against almost every Worldwide currency over the last 12 Months. Much of this increase is tied to the strengthening of the US Dollar and the fact that the RMB is loosely linked to it, but also the increase is due to the past and expected future growth of the Chinese economy.

There have been huge inflows of investment and cash into China and its economy over the last year to such an extent that the government had to put in place almost emergency measures to curb and control this inflow. Well the tide has now turned whilst no-one would describe the situation as an exodus there most certainly is an air of apprehension over current investments which I feel is likely to escalate.

Over recent years the Chinese have not suffered any loss of confidence in their economy and with double digit growth everyone has enjoyed a fairly profitable period. However, what will be interesting is how the Chinese react to the current situation, to reduced growth , massive redundancies and a general weakening of previously strong indicators. Chinese are very superstitious and extremely susceptible to emotion and as soon as they began to experience a drop in confidence we may see a run like nothing we have experienced in the West. We may well see an exodus.

My money is on a weakening Yuan over the next 12 months.

The shipping freight rate from China on most routes into the West have at least halved over the last few weeks. Will it last and if so for how long?

The reason for the drop is threefold.

Primarily, the amount of goods being shipped from China has dropped dramatically over recent months and as with any supply and demand relationship the less demand the lower the price. This demand is not likely to increase for quite some time and may in fact reduce yet more.

Secondly, the impact of the supply and demand effect has to some degree being reduced in the past by the ‘cartel’ or ‘conference’ of freight providers who agreed, controlled and set prices. This cartel has now broken up and now as in almost every other business in the world people are fighting for the work. Again this is not likely to change any time soon.

Finally and fairly obviously, Oil prices have halved and the beneficial impact on shipping costs is huge. It is not suggested by pundits that the price of oil will return to the dizzying heights of a few months ago therefore once again no change likely here.

In summary, I see no reason why shipping rates will change significantly any time soon.

This is extremely good news for anyone importing bulky products from China and will go some way towards alleviating the damaging currency conditions. The Chinese Government have also acted swiftly to increase tax rebates from 5% to 13% on some household furniture items. Suddenly, products that may not have being economically viable to import due to their bulk in the past are viable now.

Expect to see lots of Chinese manufactured cheap, bulky, household furniture products in the shops any time soon.

]]> http://www.forsaleinchina.co.uk/blog/index.php/the-impact-of-the-massive-drop-in-china-shipping-rates/feed http://www.forsaleinchina.co.uk/blog/index.php/chinese-yuan-vs-british-pound-exchange-rates http://www.forsaleinchina.co.uk/blog/index.php/chinese-yuan-vs-british-pound-exchange-rates#comments Mon, 13 Oct 2008 09:03:51 +0000 Richard Kaye http://www.forsaleinchina.co.uk/blog/index.php/chinese-yuan-vs-british-pound-exchange-rates

The Chinese Yuan has strengthened nearly 25% against the British Pound since the beginning of 2008. For those traders buying in pounds, or to a lesser, yet still significant effect, in Euros, profit is being eroded or wiped out completely.

Is the trend of a strengthening Yuan likely to change in the near future. Yes……. but not significantly.

I expect to see the Yuan level at around 12.00 to the pound this week, however that is still a 20% drop on earlier this year……… I also then expect the Yuan….. over the course of the next year to strengthen by around 3%.

This is not necessarily as catastrophic as one might imagine. As the Yuan strengthens against the Pound and particularly the Euro, the cost of Chinese capital asset purchases from Europe will come down. Externally purchased raw materials, many of which also come from Europe, will come down. As the ‘value added’ in China is mainly labour of which this may only represent between 10% and 30% of the finished goods price the net effect of currency fluctuations may not be quite so dramatic.

It does of course take time for these anomalies to balance. Raw material purchases are often made well in advance of the eventual sale and there will not be any purchase gains made by Chinese companies on sales made today. However it is important that when negotiating your next order or contract that you factor in the likely savings to be made in China and pursue reductions accordingly.

The Chinese will not volunteer this information and will be happy to sit back and take the extra profit when it comes……. and why shouldn’t they?……… I would.

One final thing to consider is that China exports more goods to the USA than anywhere else in the world but its US imports are tiny by comparison. The Yuan, whilst not officially pegged to the US Dollar, follows it closely. It suits the US to have China buying its machines and raw materials more cheaply from Europe thus allowing China to sell its goods more cheaply to the US whilst still being politically expedient at home in not allowing the Dollar to strengthen appreciably against the Yuan.

Whilst ever China and the US are satisfied with the situation it is unlikely to change and as such I cannot see the exchange rates altering significantly any time soon.

Having just come off a conference call with some of my Chinese suppliers, discussing the impact the global financial meltdown was going to have on trade, I have to say that I detected a certain amount of arrogance and conceit rarely displayed.

China is fortunate to be still experiencing double digit growth this year and 9.1% predicted growth next year but now is not the time to remind me of that fact. And indeed much of this growth is linked in some way or other to foreign global trade.

Capitalism and free markets are not something many Chinese have much experience of and whilst at the moment they hardly seem defensible, they are what they are and they find their own level. The impact of the global financial crisis has not impacted China at the higher echelons just yet but is impacting shop floor workers who are losing jobs due to decreased demand for products. This will get worse not better and I have to wonder where all the growth will come from then.

I have a great deal of respect for Chinese business and practises and a great deal of time for the Chinese people but I would warn against an overt display of conceited arrogance at this troubling time.

The world is getting smaller and we are all in this together…….nobody will escape completely unscathed and we are yet to see who the biggest losers will be.

For at least the last 200 years trading companies have successfully linked Chinese manufacturers with worldwide consumers. They have provided a valuable link between buyer and seller, often drawing on connections, ‘Guanxi’ to maximise opportunities. In many cases trading companies have provided additional valuable services such as inspection, quality control and relationship management. Additionally, on large orders, traders may have drawn on their considerable contacts to consolidate a number of different suppliers and manufacturers to ensure supply. Let us not also forget that trading companies, most of which were Hong Kong based carried a little more trust and were under the jurisdiction of international trading laws.

What has changed?…………………… Attitude.

Buyers for large consumer companies are now very focussed on a number of additional areas. Whereas, in years past, the focus may have been centred mainly around quality and price there are today many more areas that the buyer has to consider. Powerful global brands must ensure they act responsibly in all areas of commerce. Attention is focussed on the social and working conditions of manufacturing staff. The brands consumers expect their brand to treat all contributing staff members equally whether they be in a low cost manufacturing environment or a well established western factory. Great damage to a brands image can occur if they are found to be allowing, whether knowingly or innocently, any inappropriate practise in any of their production establishments.

Here lies a problem. The relationship between a buyer, his trader and the manufacturer is often compartmentalised. The trader does not wish for the buyer to be introduced to the manufacturer for fear that this could eliminate him from future projects. The trader will often go to great lengths to ensure the buyer does not become privy to such knowledge. Understandably, for the reason quoted this is quite reasonable, however in some cases the reasons could be quite ulterior. Perhaps the trader is not applying the working practise principles the buyer has demanded or perhaps the environmental conditions imposed by the buyer are not being adhered to. Buyers nowadays are becoming more insistent on supplier factory visits as part of their risk management plan and traders are having to accommodate this without losing the continued opportunities in the future. There is much talk that trading companies will evolve into development, quality control, inspection and relationship management companies, but essentially these are activities that could be conducted by the buyers company themselves without the need for the trading company.

A significant value adding activity conducted by traders was using their networks and knowledge to match buyers and sellers but with the increasing use of the internet as a sales mechanism but more importantly a procurement tool there is a question mark over how long this benefit will last. The atmosphere among Western buyers these days is to get as close to the source as possible, to improve and protect quality, brand and reputation and of course, to eliminate any double margin.

The outcome may be that traders bite back………

Trading companies have a huge arsenal of products. All they have to do now is get those products to market and as discussed earlier the internet is an increasingly useful tools to do just that. If this happens all consumer companies need to beware. Trading companies are often very lean as they are accustomed to working on paper thin margins. A brand name will carry sway for many consumers but ultimately it is about the product and as we all know many different brands of differing price points come out of the same Chinese factories. A savvy internet consumer, able to access the right information, as is increasingly easy to do will make an informed choice and might just yet cut-out the Western retailer.

I was dismayed to read that the worst may be yet to come . My company is currently losing around £3000 sterling every week on the currency differences experienced over recent months. Couple this with the losses incurred over the previous 12 months and we are talking about a nett negative impact on profit of circa £300,000 sterling. No matter what size the business this is a serious hit and consideration has to be given to how best to mitigate this loss.

Hedge your currency sales?……… Yes, most sizeable companies do this, however this in itself is a drain on profitability and with the market volatility of late it makes you wonder whether you might be better served by betting red on the roulette table.

Pass it on?……… Fat chance. Right now it is hard enough to hold onto existing orders let alone up the price of already negotiated deals.

Ride the Storm?……… Ride it out, it will pass. Yes of course it will, but when and for how long and at what cost will that ride out be.

Getting down to basics it appears that the UK his having a pretty rough time of it at the moment for importing goods. However wherever there is a loser there has to be a winner and it is important to seek the winners out and find trade with them. For example, the Czech Republic has strengthened by some 30% against the pound over the last year and of course the Eurozone has strengthened by over 10%. Both these currencies have strengthened to a similar degree against the Dollar and particularly the Chinese RMB.

So the good news is that we have found it particularly easy to introduce Chinese manufactured products to these countries on a direct export basis from our factories in China.

What are the opportunities for UK companies……..? Exploit your strengths and don’t be held back by your weaknesses. It is virtually impossible to export mass produced products from the UK profitably so the alternative is to find yourselves Chinese manufacturers who you can trust and who will honour trade agreements to manufacture your products for you and you concentrate on creating markets for these products in countries where the exchange rates work in your favour. Manage the relationships from the UK and ship direct from China. The savings are huge the profit potential enormous and satisfaction that comes from running a slick operation immeasurable.

Why would it work?………… People trust the British. Right now it is quite Vogue to be British and we can take advantage of that fact. Language of course is a huge benefit in that the international language of business is our native tongue.

Success lies in choosing the right manufacturing/exporting partner.

Be Carefull…. Be Quick….. Be adaptive.

Good Luck.

Medicine? Engineering? Politics? Accountancy?………… Maybe Hospitality or Entertainment or possibly Hairdressing or Personal Grooming?

None of the above! What is clear, is that China is heading for a dramatic and fundamental shift in its thinking and when it comes the world had better watch out.

Why?………….For years Chinese have lived in and being educated in a system where individuality is discouraged. In times past it was much more than discouraged, it was often physically beaten out of people. It is little wonder that Mainland Chinese are very conformist by nature, keen to ‘fit in’ and of course keen to be seen to take the Government line on everything. Even Political hierarchy were keen not to be seen as an alternate thinker. Until very recently the Political elite was comprised almost entirely of qualified Engineers, as that was considered a safe degree for someone in Political office to possess. No Economists, no Lawyers, no Political Scientists and certainly no Businessmen. But the tide is turning and the Politicians are beginning to appear from differing backgrounds, many who may have had experience of some education in the West.

So what will be the ‘Best Job in China’. ………. The Entrepreneur …………….

On every street corner in China you see Entrepreneurs selling anything from food to clothes and fancy goods. The streets are literally bursting with small shops selling anything imaginable, but concentrating on a very limited scope of products. Every town is full of thousands if not tens of thousands of people or families trying to earn a living from their own devices. A true entrepreneurial spirit is alive and thriving in today’s China, but with one enormous drawback. The typical Chinese entrepreneur is not accustomed to operating in a market economy. It is almost as though there is a huge Cartel operating in China but without any of the economic benefits of such an operation. It appears that their are unwritten rules about who can trade in what and where. It appears that traders are happy to operate in this manner without the greed that a market economy would force.

Enter the Retail Entrepreneur …………Ten years from now I predict a huge shift in the way retailing in China will operate. Currently people shop locally, in small, inefficient, understocked outlets. Why? Transport! Either they do not possess their own vehicle or the public transport service is inadequate or expensive. This is an immediate barrier to Western shopping habits. However this is guaranteed to change in the next decade.

Local shops may have the captive audience but are not taking advantage by offering a variety of goods and maximising sales opportunities. In some towns where they do have what can loosely be described as Department Stores, you will find at least as many staff as customers and as a result prices that are beyond the reach of most Chinese. The future lies in giving the average Chinese shopper good access to fairly priced merchandise in adequate surrounds with efficient staff, properly trained to service the needs of the shopper. Everyone thinks of China as the Worlds mass producer …………but retail and shopping is one area where this simply does not apply. Everything is small scale and times past.

When China gets its transport infrastructure sorted, Western operators such as Argos, Wall-Mart and B&Q will be quick to pounce.

But in the meantime the Chinese Entrepreneur has time to act. Time to get a toehold in what will be a burgeoning retail market place. Time to establish a brand that will pay dividends or maybe just time to get started so when the big guys do want to spread their wings the Chinese Entrepreneur may be in a position to cash in by selling out.

I was introduced to the company that manufactures these about 18 months ago and arranged for them to meet an importer of this type of product. This company now does 70% of their export business with the UK.

But here’s the good bit…………lots of UK entrepreneurs making ‘that little bit extra’ at margins upto 70% which is unheard of in most retail circles. Obviously the lower down the ladder the less the margin.

The manufacturer is looking for contacts in other countries now, so if anyone is interested let me know and I will pass on your details. They also manufacture a range of other household ornaments and fancy goods but jewellery mannequins are by far the most popular product at the moment.

A friend of a friend in the UK, manufactures small injection moulded plastic pipe fittings. He is aware of my business dealings in China and asked if I could source a manufacturer for some component parts. I introduced one of his products to two different companies. As an example for you, company A’s tooling price was 310,000 YUAN and company B’s 274,000 YUAN, in sterling approx £21,000 and £18,500 respectively. The price for the production of the parts were roughly the same at 32 YUAN and 34 YUAN, approx £2 each.

The UK price on exactly the same product which he has been buying for over 3 years is nearly three times the price but get this……….the tooling cost which he had to pay for in full was £65,000. When he confronted his UK supplier he shrugged as though…..’whatever’, then reduced his price by 38%. What are these people on???… Suffice it to say he is now coming out to China with me next month to conclude negotiations and hopefully he will begin to put more of his business into a country that is keen for the work and even keener on price.

I do too, or so I thought, however lately I have come to realise just how powerful Guanxi really is.

Last year I began to negotiate the construction of my new factory. Chris Chan, my Chinese General Manager, conducted some exploratory investigations with Local Government officials and development teams and as things progressed I attended one of the meetings. The head of the local town was there and very fortunately we ‘got on’. It is obviously extremely difficult for Westerners to build a relationship with a Chinese as a fundamental disadvantage is the language barrier. Whilst I speak some Mandarin it is extremely basic and most Chinese Local Government Officials speak, at best, only rudimentary English. However we did ‘get on’ and this led to us doing business together.

Since that meeting our friend has made significant introductions to other businesses in the region. In some cases this has resulted in trade in others it may not have resulted in trade however it often results in further introductions which do. The weight that a mutual friend carries in Chinese business negotiations is immense and needs to be understood very clearly. A failed relationship in any part of this whole chain of people could result in a complete breakdown. A dangerous ‘house of cards’ situation if you like, which is often why Chinese, during negotiations and discussions, are very diplomatic, very cautious and very careful not to offend. It can be a little frustrating for Western ‘gunslingers’ but when you experience the enormously positive benefits of good Guanxi you understand the need to go to great lengths to preserve it.

In the UK we call it networking………………..something I have always been sceptical of and something I have never particularly taken part in. Why, because in the UK I think most ‘good’ networkers are not necessarily the kind of people you want to be around. They carry a ‘what’s in it for me’ mind set and whilst keen to feather their own nests are not necessarily keen to put themselves out for others. In China it is not so superficial and is fundamental to trade. Because of this and because of a belief and trust in reciprocal favours the Chinese are much more focused on trying to help the other party first. It is good for ‘face’ it is good for ‘trade’ and most importantly, it is good for ‘Guanxi’.

I read a book a long long time ago which had in it the line ‘help others to get what they want and you too will get whatever it is you want’. I liked it and adopted it as my own philosophy. In China they practise it as a business art and profit from it.

A word of caution. Whilst Guanxi works and is practised amongst indigenous Chinese it takes time to build and anybody looking to trade with China should apply the same caution as they would in any other business transaction. Remember the expression ‘a fool and his money are easily parted’, well the Chinese are extremely adept at parting lots of fools from lots of money.