"How to Use The New China Tariffs to REDUCE Your China Manufacturing Costs"

Can the dream of turning compliance into a profit center be far behind?*

From China Law Blog, November 27:

Yesterday, in Trump’s New Tariffs and Their Impact on U.S. Trade with China, Mexico, and Canada, I analyzed the new tariffs President-Elect Trump has talked about enacting against China, Mexico, and Canada. In that post, I explored the potential impacts of the proposed tariffs, including the broader implications for companies that import products from China for sale in the United States. Additionally, I predicted that the tariffs against China are very likely to be implemented, whereas those against Mexico and Canada are much less likely to take effect.

In this post, I will delve into the specifics of leveraging the threat of tariffs on China to negotiate reduced costs with your Chinese manufacturer. Additionally, I will discuss the risks associated with this approach and provide strategies to mitigate them.

Chinese Manufacturers Are VERY Worried
China’s producer prices have been falling for 24 straight months. I repeat. China’s factory prices have been declining for 24 straight months. Two years.

Needless to say, this trend has caused considerable consternation among Chinese factories, a reality I witness daily in my work. Pre-Covid, approximately 75 percent of the manufacturing agreements we drafted—including China NNN Agreements, China Manufacturing Agreements, China Product Development Agreements, and China Mold Ownership and Protection Agreements—were signed without any revisions from the Chinese side. Today, that percentage has increased to about 95 percent, and any revisions typically come from large Chinese companies producing hard-to-source products.

In other words, Chinese factories realize they have lost leverage.

Desperate Chinese factories are lowering their prices, and most Chinese factories are desperate right now. My firm’s international manufacturing lawyers have observed a trend consistent with these findings: a significant number of Chinese factories are reducing their prices in a bid to remain competitive. This reflects a broader state of urgency within China’s manufacturing sector and, indeed, in China’s economy at large. See today’s CNBC story, China’s industrial profits fall by 10% in October as deflation worries linger.

It’s bad out there. Really bad.

Not every Chinese factory is in a dire situation, but a substantial number are compelled to negotiate lower prices due to economic pressures. Many of our clients sourcing products from these factories have successfully negotiated meaningful reductions in costs. This high success rate underscores a widespread willingness among Chinese manufacturers to adjust prices, reflecting their response to an increasingly tough economic environment and their own levels of desperation.

China Product Prices Have Been Falling for 24 Straight Months
China’s plunging producer prices and profit margins are putting industrial output and jobs at risk. This downturn is exacerbating other economic challenges, including a property and debt crisis. There is no denying the depth of China’s economic troubles or its high and rising unemployment rate. In response, the Chinese Communist Party (CCP) has reverted to a familiar strategy in times of economic weakness: increasing subsidies to manufacturers to help them stay in business and prevent layoffs.

With it becoming increasingly easy for foreign product buyers to shift their purchasing outside China, and with Chinese factories also relocating their production overseas, the Chinese government’s subsidies have reached unprecedented levels. These subsidies are enabling significant price reductions. We have clients who have successfully negotiated discounts of 25-50% (yes 50%) with their Chinese suppliers by proposing increased purchase volumes or by extending contract terms. We have other clients that have secured substantial price reductions unconditionally, with Chinese manufacturers readily agreeing to cuts of 15% to 25% without demanding further commitments. 

Now Add in Trump’s China Tariff 

President Trump’s plan to impose an additional 10% tariff on goods imported from China has intensified the climate of uncertainty and fear among Chinese manufacturers. These manufacturers are well aware that tariff increases will lead to a reduction in orders from U.S. companies seeking cheaper manufacturing alternatives elsewhere.

This situation gives you unprecedented leverage in product pricing negotiations. The threat of losing business to competitors in more cost-effective regions compels Chinese manufacturers to accommodate their existing U.S. product buyers.

I know from the tariffs President Trump enacted during his first administration exactly how companies can and must leverage this fear to their advantage.

You currently have a strategic advantage, and you should approach your Chinese manufacturers with a proposal to “share” in dealing with the tariff challenges. Framing the conversation around the need to share in the costs of the tariffs is a non-confrontational/face-saving/win-win way to get Chinese manufacturers to reduce their prices in both parties’ best interests. It’s far better to present this as a “partnership” strategy than as demand or an ultimatum.

Again, I know this from what I saw during the last round of China tariffs.

It also benefits you to frame these negotiations as an opportunity for your Chinese manufacturer to secure a long-term relationship with your company, ensuring stability for them in an unpredictable market. Consistently emphasize “long-term” in your discussions, but do NOT commit to any legally binding long-term agreements. This is surprisingly easy to achieve....

....MUCH MORE

*Opportunity is where you find it.

From April 6, 2018:

Artificial Intelligence For Compliance

Some years ago I was peddling a personal investment for Merrill brokers with billion dollar books-o-business, back when a billion was real money. This led to a couple scenes that I think of from time to time.
After doing the paperwork with one of these retail titans I asked if I should send a copy to his compliance officer. He got a sincerely confused look on his face and said: "I own compliance."

Since then it has been a dream to capitalize on various prime broker functions. Here's one example:

Artificial Intelligence in Risk Management: Looking for Risk in All the Wrong Places
Opportunity is where you find it, turn your risk manager into a profit center....

And while the following link doesn't address the dream directly, I'm sure there's an edge in here in other ways.....