CHINA
COUNTRY REPORT FASM 420: Global Sourcing Nicole Leung
COUNTRY OVERVIEW Officially known as the People’s Republic of China, China is the world’s third largest country, after Russia and Canada, dominating the map of eastern Asia. Holds the position of the world’s most populous country and its bordered by 14 countries; Korea, Vietnam, Laos, Burma, India, Bhutan, Nepal, Pakistan, Afghanistan, Tajikistan, Kyrgyzstan, Kazakhstan, Mongolia, and Russia.
COUNTRY TRAITS
China emerged as one of the world's earliest civilizations in the fertile basin of the Yellow River in the North China Plain. For millennia, China's political system was based on dynasties, beginning with the Xia dynasty, established by Yu the Great and started a period of family or clan control. Since then, China has expanded, fractured, and re-unified numerous times.
Asia along the coastline •LOCATION: Southeast of the Pacific Ocean. •GEOGRAPHIC SIZE: 9,596,961 sq km Chinese(northern •MAIN LANGUAGES:Mandarin China Cantonese(Guangdong region) an atheist country as 52.2% •RELIGIONS:Officially Gov. recognize: Han Folk, Buddhism, Taoism,
In 1912, the Republic of China (ROC) replaced the last dynasty and ruled Mainland China until it was defeated by the communist People’s Liberation Army in the Chinese Civil War in 1949. On September 21st 1949 the Communist Party established the People's Republic of China (PRC) in Beijing, while the Republic of China government retreated to Taiwan, creating two rival Chinese states, the PRC remaining on Mainland China and the ROC on Taiwan. After stagnating for decades under the strict autocratic socialism of Mao Zedong, China introduced the economic reforms in 1978 and since then, China’s economy has been one of the world’s fastest-growing. It has become a major overseas investor being recognized as the world’s largest exporter and second-largest importer of goods.
Han, 55 other ethnic •ETHNIC GROUP: 91.51% groups. 51.2%, •POPULATION: 1.379 Billion (male: female: 48.8%) years, •LIFE EXPECTANCY: 75.99 years(male:73.64 female:79.43 years) 36.2 years, •MEDIAN AGE: 37.1 years (male: female: 38.1 years) •POPULATION GROWTH RATE: 0.5% annual change •LITERACY RATE: 96.4%
Islam, and Christianity
COUNTRY OVERVIEW government •HEAD OF GOVERNMENT: Xi Jinping •GOVERNMENT: Communist •CAPITAL: Beijing •LARGEST CITY: Shanghai •REVENUES: $2.3 trillion •EXPENSES: $2.7 trillion
Membership of international groups/organisations: United Nations (including permanent membership of the UN Security Council); Asean Regional Forum (ARF); Asia-Pacific Economic Cooperation Forum (APEC); Asian Development Bank (ADB); Shanghai Cooperation Organisation; World Trade Organisation (WTO) Free trade agreements: Asean, Pakistan, Chile, New Zealand, Singapore, Peru, Costa Rica and Closer Economic Partnerships with Hong Kong and Macau
Economic Overview •CURRENCY: Renminbi (yuan) CNY •CURRENCY EXCHANGE RATE:6.63910 per US dollar • GROSS DOMESTIC PRODUCT: 11.2T USD •GDP GROWTH RATE: 6.7% annual change •INFLATION RATE: 1.8% •POVERTY: 1.9%
Main trading partners (all industries): US, Japan, Hong Kong, Taiwan, Germany, South Korea, Australia, Russia, Malaysia and Singapore Known for: Textiles and apparel of all levels, quality and prices Major holiday periods: Chinese Lunar New Year (January or February), National Day Golden Week (early October)
SWOT
Apparel and Textile Industry
China has been the biggest textile and apparel exporter in the world since 1994, occupying 40% of world exports in 2010. China dominates the global low to medium end market through mainly engaging in OEM manufacturing and processing while the EU continues to dominate global upmarket and high quality textiles, clothing and footwear.
Strength • • • • • • • •
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WEAKNESSES Accelerated economic growth Diverse product Skilled labor Able to carter large mass production Leads world in direct foreign investment Rich in natural resources Large consumer base as well as low labor cost factors Government commitments to economic growth
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Low cost to serve, low labor rates Growing efforts re garding environmental protection New applications of textile products Establish R&D centers in first tier cities for the development of new fibers, fabric and garment innovations Improve quality to stand out from compe- tition
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Opportunities
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Hard to control dis- tribution of products Slowly increasing of energy, transportation and important raw ma- terials. Railways, roads, com munications, and power supply are below stan dard Higher production cost from increase in raw materials and rising of labor cost
Cultural differences cause many business conflicts Intense competition in Chinese market, domes- tic and foreigner brands Unreliable supply of electricity Lack of transparency in regulatory environ- ment Lower education levels across population Overall inefficiency in lead times and clear- ance times at ports
Threats
Apparel and Textile Industry
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The Industry and Future Outlook
For the past several years, the market shares of Chinese textiles in the EU, the US and Japan steadily increased. China’s textile industry is experiencing declining growth. Growth dropped 6.4 percent in 2015. China attributes this decrease, both to declining overseas orders and to labor as well as other costs rising too fast. Increasing labor costs have also undermined the international competitive advantage of China’s textile industry. China’s textile industry has committed itself to improve basic research and development projects and to boost technical innovations. As a result, over the past decade, the Chinese technical textile industry has experienced rapid growth, growing at a much faster rate compared to the whole textile industry. Even though this industry developed relatively late in China, companies focused in technical textiles are growing rapidly by improving their technology. With significant support from the central government, many Chinese producers in the industry are now seeking to produce high end, high value-added products.
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GOvernment support
China launch in 2013 the Free Trade Zone of Shanghai, in March 2015 adopted three more areas in Guangdong, Tianjin and Fujian. The establishment of pilot free trade zones represents China’s major move to adopt a more proactive strategy of opening up in line with the new trend of global economic development. The Chinese government sees crucial free trade zones to boost trade and encourage investment. Pilot free zones operate on what they call ‘negative list’, ie specific investment sectors that are outside the scope of foreign investors. In January 2015, China announced that it would allow foreign investors entry with their own private e-commerce companies by giving them access to the Free Trade Area of Shanghai as part of a pilot plan.
Apparel and Textile Industry
China’s Clothing Exports to the United States China exports $1.47 trillion worth of goods each year and the US is its biggest single market. Exports to the US account for $337.8bn, of which $52bn is in apparel and footwear. Graph bellow shows China’s clothing exports to the United States for 1997 to 2006 from China’s perspective. For each year, total clothing exports are divided into its three HS chapters — knitted apparel (HS61), woven apparel (HS62) and miscellaneous articles made with textiles (HS63).
Textile and Apparel Sectors Textile •Fibres: Industrial Non-industrial •Yarns: Man-made Natural Synthetic •Fabrics: Woven Non-woven Knitted fabrics
Apparel •Apparel finished products: Men’s wear Women’s wear Children’s wear •Non-apparel products: Technical Household •Accessories Related Services: •Printing and Dyeing •Processing •Design and development •Logistics and distribution •Wholesale •Retail
Lead time of Production
Manufacturers in most industries, hesitate to set a production time shorter than 30 days because Chinese manufacturers maintain a minimum amount of materials and components. Purchases must be made from the subcontractors – which in turn may need to start production on their end. Then again, the production time varies greatly depending on the industry, and the volume ordered. In most cases, the production time is set somewhere between 30 to 60 days. In terms for quality assurance and compliance testing for mass production, many importers assign a quality inspector to check up on the goods, prior to delivery adding more time to its delivery. An inspection can be scheduled with short notice, often within 72 hours, the QC report and its photos may not be available until a day or two after the occasion. Delivery of reference samples, if required, may take up to a week, sometimes more, to arrive. All in all, it adds up. On average, goods from China takes around 14 days to reach the West Coast or 30 days to reach the East Coast. If there are any problems with the final goods delivered to the United States, or if a fast resupply becomes necessary, it can be difficult or impossible to receive a new shipment in time.
Lead Time Summary Tooling Production: 0 – 60 days General Production Time: 30 – 60 days QC & Compliance Testing: Quality Inspection: 3 – 5 days Compliance Testing: 7 – 20 days Shipping: Inland transportation 1 Transit time (Sea): 7 Transit time (Air): 4 Inland transportation 1
Total: 46 – 180 days
(China): – 3 days – 33 days – 10 days (Local): – 2 days
Trade Agreements with the United States
The US-China Trade Agreement China has bilateral investment agreements with over 100 countries and economies, including Austria, the Belgium-Luxembourg Economic Union, Canada, France, Germany, Italy, Japan, South Korea, Spain, Thailand, and the United Kingdom. China’s bilateral investment agreements cover expropriation, arbitration, most-favored-nation treatment, and repatriation of investment proceeds.
During the July 2017 meeting of the U.S.-China Comprehensive Economic Dialogue, the two countries discussed measures to expand opportunities for U.S. firms in China and made progress on important issues including credit ratings, bond clearing, electronic payments, commercial banking, and liquefied natural gas. Under the US-China trade agreement deal, china will lift its ban on US beef imports and accept US shipments of liquefied natural gas. In return, US agreed to allow Chinese cooked chicken into the US market as well as for Chinese banks. The trade also includes U.S. recognition of the importance of China’s OBOR initiative. The agreement covers a number of long-standing barriers in areas ranging from agriculture to energy to the operation of American financial firms in China. This trade agreement is a significant step to boost U.S exports and a step for America’s trade gap with China.
Business etiquette:
Business Mentality – Chinese business people will expect someone to be well prepared for the meeting. Note that presentation materials should be only in black and white, avoid colors. – Small talk is considered particularly important at the beginning of a meeting. – They prefer to establish a strong relationship before closing a deal, several meeting are taken before achieving any deal. – Regarding decision-making, the Chinese tend to extend negotiations far beyond the agreed deadline to gain some advantage – People in China usually enter the meeting room in hierarchical order.
Business Meetings and Meal – Punctuality is vital. Being late is a serious offence in the Chinese business culture. – Exchanging business cards is common practice, so its recommended to have many of this. – It is recommended to have business card printed on one side in English and the other in Simplified Chinese or Traditional Chinese. –Card must be given using two hands with the Chinese side facing the recipient; receive cards attentively and examine it for a few moments. – It’s not recommended to bring presents. The official policy in Chinese business etiquette forbids gifts. The gesture is considered bribery, which is illegal in the country. – If invited for drinks – never decline, as building a personal relationship (“guanxi”) during a business is very important. – Giving tips is generally considered an insult in China, implying the recipient needs money.
Conversation – Popular welcome topics are themes about China: art, scenery, landmarks, climate, and geography. – Political-related discussions are better to avoid, such as the Cultural Revolution or Chairman Mao, the “Tibet” and “Taiwan” questions, human rights, animal treatment. – Chinese people are very careful about strong negative statements. For instance, negative answers are considered impolite, so it’s better to find alternatives (“I’ll think about it”/”maybe”/”we’ll see”) instead of a blunt “no”.
Risks and Benefits and Conclusion Risks • • • • •
Falling external demand due to weakness of developed economies Growing trade protectionism Higher production costs from increase in raw materials and rising labor costs Fewer loans as monetary policy tightens Growth of environmental protection issues
benefits • •
Vertically integrated supply chain Upstream firms offer production of cotton, hemp, wool, silk and other fabrics • Downstream firms offer CAD, design, logistics and financial capabilities • Strong foreign investment • Strong economic fundamentals • Continued industrial upgrading • Large population and efficient workforce
Conclusion China is a flourishing market with the need for some changes, however their are notable determination for its eager to improve. Companies will benefit if they can understand the external macro-environment in which they function and will operate in the future. The rapid economic growth and stable political conditions make the e-commerce industry lucrative to investors.