Challenges at home overshadow troubles with the exchange rate. But there is anxiety over possible repercussions if the depreciation extends to the second half.
The lower value of euro is not a major concern for China suppliers, but it will be if the currency's decline continues in H2 2010.
Most companies exporting to the EU do not feel the falling rate of the euro against the US dollar is as big a problem as escalating production costs. Although manufacturers are dealing with requests for discounts and cancellations, the scale and magnitude are still at a manageable level.
Due to higher expenses, suppliers are hesitant to reduce quotes, with most preferring to offer promotions and rebates instead. Those experiencing difficulties negotiating prices with their EU buyers are now working on expanding their business to other markets. Speaker-maker Guangzhou Wowetech Co. Ltd, for instance, will look for new buyers in Australia and Africa starting July this year.
Moreover, the euro is declining against the Vietnam dong and India's rupee. This means China's products remain cost-competitive and that customers from the EU are not likely to look for alternative sourcing hubs.
Compared with the cumulative effect of rising raw material and labor costs, and the persistent worker shortage, the weaker euro is a minor setback. But most makers agree that if the currency continues to fall against the US dollar, exports to the EU might be affected significantly during the second half of this year.
Suppliers are worried there will be fewer orders in H2 2010 if the euro does not recover before buyers finish restocking their inventories. At that stage, customers might not have a sufficient revolving fund and are likely to negotiate for a longer payment term or place smaller transactions. Either way, companies would be forced to reduce prices to attract more clients.
Dealing with a depreciating euro
The US dollar is the most commonly used currency between China and its trading partners, including the EU. But there are a few exporters that settle transactions in the euro. Such businesses are the ones facing the most pressure from the current situation. Many have actually begun negotiating with their EU buyers to revert to the US dollar.
In the meantime, these companies now prefer to take on smaller-quantity orders or split larger ones. Fujian Yawin Mechanical and Electrical Equipment Imp. & Exp. Co. Ltd, for instance, accepts only transactions that can be finished quickly or fit in one container load. Doing so minimizes currency losses incurred from the fluctuation in the exchange rate.
Financial instruments such as currency hedging are sometimes employed by suppliers to mitigate risk as well.
The euro has fallen roughly 17 percent against the US dollar, from 1.44 at the start of 2010 to about 1.19 in early June. Compared with other markets, the EU does not seem to have recovered fully from the global financial downturn. During Q1 2010, exports of garments and textiles to the area rose 17 percent to $8.1 billion. In contrast, the US absorbed 22 percent more than it did a year ago, importing $5.6 billion worth.
Even so, the EU remains one of China's major markets. In fact, it was the country's biggest trading partner in 2009, with total transactions amounting to $364 billion. Exports to the EU reached $236 billion, accounting for approximately 20 percent of China's total overseas sales last year.
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.