10/10/2018 – Trends in Trade / US / China
Go East – US-China trade war opens doors for EU firms
With the US-China trade war in full swing and no end in sight, business consultant and author Stanley Chao says it’s a great time for European companies to go east and crack the Chinese market.
The Trump Administration recently announced a second round of tariffs, with China acting in kind – and if the two sides can’t come to terms in the next face-to-face meetings, we’ll be due a third round of tariffs in January. That could send this economic skirmish into a full-blown war with no short-term solution in sight. What does this mean for European companies doing business in China? It means they have the perfect opportunity to take advantage of a bad situation. So, if you’re in China already, double down on your investments. And if you’re thinking of going to China, what are you waiting for? Do it now!
EU goods just got cheaper in China
As things stand now, China will impose 5-25 per cent duties on about US$250bn worth of US imported goods. The list of goods is long – amounting to over 700 line items, including dairy products, fruits and vegetables, nuts, seafood, meats, coffee, pet food, auto parts, electric automobiles, industrial chemicals, and manufacturing equipment.
China has shied away from taxing the more important things that are vital to its economy and security, like high-tech components, aircraft parts, and semiconductor equipment – but if push comes to shove between the countries, these could easily be added to the tariff list.
With the increased prices to just about every American-made product, Chinese consumers and state-owned and private companies will be looking for other sources, and European companies seem the likely choice given that the EU is China’s second largest trading partner after the US. So, check to see if any of your products are on China’s tariff list and start making a bigger push into China. Your European-made goods are now 5–30 per cent cheaper in China.
New ‘regulatory’ harassment for US firms
Companies that don’t have products on the list should nonetheless also consider entering China now. The communist party’s propaganda police are spewing anti-Trump sentiment to its 1.4 billion consumers, and hinting that they should boycott all American products regardless of whether they’re on the tariff list or even made in the United States. So, China-made Nike shoes and Apple iPhones, alongside Starbucks and KFC stores in China, may all feel China’s wrath in the coming months.
On top of that, we’re starting to see ‘regulatory’ harassment from the Chinese. I recently spoke to a salmon distributor in Washington State that had about US$30,000 worth of salmon fillets spoil while waiting to clear Chinese customs. “This is the first time it’s ever happened in 10 years,” he told me. “I know it’s not a coincidence either.” Conversely, Norwegian salmon, French caviar, and Belgian pears, my sources tell me, are flying through customs in half the time it normally takes. Again, this is no coincidence.
Tier 2 and 3 – frontier cities for Europeans
If your business is already in China, look to expand your reach by seeking new distributors in new areas. Most foreign companies already have sales channels in tier 1 cities like Shanghai, Beijing and Shenzhen, although little reach in Western China or the tier 2 or 3 cities. There are literally dozens of cities in China – like Zibo, Hefei and Yantai – with populations of over five million that are unknown to Western companies. Those cities possess just as much spending power, consumer demand, and industrial might as the Shanghais and Beijings of China.
For those companies that have an appreciable amount of their annual revenue in China or feel that they’ve outgrown their China distribution channels, now would be an ideal time to investigate the possibility of establishing a China subsidiary. This could come in the form of a non-manufacturing WOFE (Wholly-Owned Foreign Enterprise) if sales support or after-sales service are paramount for your China business, or a manufacturing WOFE if reduced lead times, the need for engineers and scientists, or demand for China-specific products are required. At the very least, consider working with a Chinese manufacturing partner to have your half-finished or work-in-progress (WIP) products completed in China.
One Belt One Road…and over 70 markets
Besides just being a short-term remedy, this local manufacturing strategy has an unintended longer-term benefit. China’s implementation of its One Belt One Road program will give Chinese companies and ‘Made in China’ products access to over 70 countries participating in this new trade and infrastructure pact. Who would have thought that a change in your China strategy alone could open up markets in such faraway places as Nigeria, Uzbekistan, or Indonesia?
For those European companies not yet in China, plan a trip there to interview potential distributors and customers; visit a trade show related to your product; meet with your country’s trade representatives that typically reside in Shanghai or Beijing; and find a good lawyer who can guide you through the ins and outs of importing and selling your products in China. This stopover will allow you to gather information and perform a market study, but most of all you’ll leave China with a better feel, first-hand, for what China is all about – the energy, the flow of commerce, and the lightning speed of business. If done right, this information-gathering trip will enable you to come home knowing whether now is the optimal time to bring your business to China.
The bottom line: find out if your European-made products are now cheaper because of the tariffs, or if they have a logistical advantage due to China’s bureaucratic and regulatory treatment of US imports, or whether your products are likely to gain more popularity as the Chinese government ‘persuades’ its citizens to boycott American brands and companies. Though all this economic sabre-rattling may only be a short-term phenomenon, it could have longer-term windfalls for European companies. But time is of the essence. Do it now!
About the author
Stanley Chao is the author of ‘Selling to China: A Guide for Small and Medium-Sized Businesses’– recently updated and available to buy on Amazon. He is currently MD of All In Consulting (www.allinconsult.com) – an LA-based consulting firm assisting Western companies in their Asia and China business developments. Chao’s clients include: Intel, Emerson Electric, SPX, Kingston Technology, Baxter Healthcare, and dozens of small and medium-sized companies. Chao and his team have conducted over 200 projects in China, covering more than 12 different verticals – including the aviation, automotive, medical, IT, manufacturing and environmental engineering industries. Chao holds a BSEE degree from Columbia University, an MSEE from the University of Pennsylvania, and an MBA from the UCLA Anderson School of Business. His professional career includes stints at Philips Lighting (California and China); Kingston Technology (California and Japan); SoftBank (Japan), and Merrill Lynch (New York and Japan). He speaks fluent English, Mandarin and Japanese, and currently resides in Los Angeles.