FTA boosts expansion into member countries, and stabilizes imported raw material costs and supply.
Despite general uncertainty in the global trading environment, China manufacturers have one positive development going for them. Implemented at the start of 2010, the China and ASEAN Free Trade Area eliminated import tariffs for most articles exchanged between the countries.
The agreement affects more than 90 percent of China-made products, including white goods and furniture. The duty for split-type air-conditioning units with less than 4,000Btu cooling capacity, for instance, was 5 percent in 2009. In fact, taxes levied on the $1.03 billion worth of various export items to ASEAN member countries from January to November 2009 exceeded $73 million. With tariffs no longer in place, a company with annual ASEAN sales of $3 million can save more than $150,000 annually on duties.
This has encouraged many China suppliers to increase their focus on the ASEAN market. During the first two months of 2010, Shenzhen's furniture exports to member countries grew 307 percent to $250 million. Singapore is the top destination, accounting for almost half of overseas sales. Apart from the zero tariff, such markets are viable alternatives to the US, which now requires wooden furniture exports to come with FSC certificates. This prerequisite has made material sourcing more expensive and time-consuming for makers targeting the US, and is sufficient reason for some to boost their presence in ASEAN member countries.
Moreover, there are fewer safety and environmental standards that need to be met, which can translate to 5 to 10 percent savings in testing, research and management.
Lucrative export possibilities have even led several companies to establish factories that will furnish goods only for the ASEAN market. Computer products manufacturer Great Wall, for instance, set up a factory in Beihai, Guangxi province, to fabricate laptops targeting Southeast Asia. At present, Great Wall's monitors take one-sixth of total market share in Vietnam.
The FTA is also a means for businesses continuing to target the EU and the US to circumvent anti-dumping duties and trade barriers. These enterprises are building production facilities in ASEAN member countries. Not only do such suppliers avoid having to pay EU and US export tariffs, they also benefit from FTA agreements ASEAN has with countries such as Japan, South Korea and India. Lower land and labor costs, which are generally just two-fifths of worker expenses in China, are additional benefits.
In fact, despite having to bring in raw materials from China to Vietnam, candle manufacturer Aroma Consumer Products (Hangzhou) Co. Ltd, is able to save 20 to 40 percent in EU anti-dumping duties. This comes even while there is no well-developed supply chain, and insufficient machinery and skilled labor pool. The company currently operates a 50,000sqm factory with 600 employees in the ASEAN country.
Steady rubber stockpile
Southeast Asia is the largest source of rubber in the world, particularly Indonesia, Thailand, Vietnam and Malaysia. Each processing facility in Indonesia, for example, can produce between 20,000 and 60,000 tons annually. The quality of output from the region is good and stable as well.
China, on the other hand, can only turn out up to 10,000 tons per factory each year. But as the biggest global manufacturer of tires, the country needs more rubber than it produces. Major tire companies, for instance, each require more than 50 tons of the material annually. As such, at least 60 percent of natural rubber used for the industry is currently sourced overseas.
While the FTA does not eliminate import tariffs on rubber, it can help ensure stable cost and supply for China suppliers. The agreement can encourage suppliers from Thailand, Indonesia and Vietnam to set up distribution offices in China and sell directly to downstream manufacturers in the country.
Tire maker Kaifeng Group Co. Ltd (Tyre), for instance, purchases rubber in small quantities, typically less than 10 tons. As such, importing directly from providers is not a viable option for the company. Presently, similar small and midsize enterprises pool their requirements and direct orders via local traders. Having ASEAN rubber suppliers set up distribution centers in China would help the manufacturer streamline its sourcing strategies, and stabilize supply and lead time.
This article was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.