Before And After "No. 44": The Migration Journey Of Processing Trade Into And Out Of The Shoe Making Family

In August 23, 2011, the Ministry of Commerce and the General Administration of customs and other ministries jointly issued the "guiding opinions on the pformation and upgrading of the processing trade in the Pearl River Delta". It put forward the idea of striving to complete the initial pformation of the processing trade in the Pearl River Delta demonstration area in 3 years.

Close to the interpretation of the Ministry of Commerce, this behind the expression means that Guangdong has been three years of pition, in the past three years, spontaneous processing trade pformation and upgrading, and the central government will not put pressure on the policy side.

"Under the pressure of energy saving and emission reduction, the catalogue of prohibited categories of processing trade may be slightly expanded, but the big policy faces are temporarily difficult to adjust."

This person told reporters.

Zhou Shijian, a commentator of the Ministry of Commerce and a researcher at the Sino US relations research center of Tsinghua University, said that processing trade has contributed to the first twenty years of China's reform and opening up, promoting employment and increasing taxes, and introducing advanced management and technology.

An earlier study on processing trade by the Ministry of science and technology showed that in 1991 -2003, China's processing trade increased by one percentage point each time, and GDP increased by 0.761 percentage points, of which the contribution rate of processing trade imports was 47%, and the contribution rate of processing trade imports was 53%.

However, the characteristics of the two sides of processing trade also blow up a seemingly exuberant, actually "bloated" Chinese foreign trade.

Since 2005, China's high foreign trade surplus has frequently attracted international pressure, and the renminbi has to rise on the road of appreciation.

In fact, if the surplus arising from processing trade is deducted, China's foreign trade will suffer a large trade deficit.

The impeding pformation brought about by the thirty year's foreign trade structure is the direct reason for the adjustment of processing trade policy.

Zhang Hanwen is processing in mainland China.

Zhang is the first president of the National Association of Taiwanese businessmen and chairman of the Dongguan Association of Taiwanese businessmen. His first factory in the mainland is a leather shoe foundry.

Like most Hong Kong and Taiwan funded enterprises in the Pearl River Delta, the development of factories has benefited from preferential policies for processing trade at the beginning of reform and opening up.

Foreign customers provide leather and other materials, and then export them to the customers according to the design samples they provide, and then export them to the customers. The whole process has no customs duties. What the enterprise needs to do is promise to export all these shoes and not sell them domestically.

The government eliminates the value added tax of 17% of the imports of materials, so that enterprises can make simple profits instead of labor costs, without considering the problems of raw material procurement, R & D design, late channel or even RMB appreciation, and the adjustment of export tax rebate policy. As long as there are machines, factories, cheap labor, processing trade rights and orders from foreign customers, the business can be comfortably carried out.

Zhang Hanwen was born in Taiwan's shoemaking family. When she first set up the first mainland factory in Dongguan in 1991 and opened the first production line, she already had 5 production lines in Taiwan, holding orders for large customers such as Nike and Adidas all the year round.

His attempt to set up a factory in Dongguan was very successful. The cheap labor and preferential policies made the profit rate as high as 40%. In 1994, Zhang Hanwen's shoe production line in Taiwan had been pferred to Dongguan.

In the early 90s of the last century, Zhangmu head in Dongguan, in Zhang Hanwen's words, was all small hills, roads and other infrastructures were not complete, even taxis were not available. The only means of pportation was "model car".

Today, Dongguan, where OEM workers have gathered, has become the world's factory. There is also a saying that "Dongguan traffic jam and the world is out of stock".

Zhang Hanwen's Fu Hua shoes industry has also developed from one production line to more than 10 production lines in such a change. The small factory of 200-300 people has expanded to a large number of thousands of people, and the export volume of leather shoes has been raised to about 100 million dollars from the early 10 million dollars or so.

However, such a good day seems to have ended.

Zhang Hanwen said frankly, the current environment has not been compared with the original one.

Buyers are increasingly demanding orders, labor is no longer so cheap, instability of the RMB exchange rate and how long the processing trade policy can last. It has become the sword of Damour and Chris hanging on the top of the enterprise.

What we can see is that the high profits of the past 40% have not been able to continue. At present, the net profit level of most OEM shoe factories is only 1%. The profit margins of Fuhua shoes industry are 5% higher because of the functional footwear products of OEM.

According to the most pessimistic situation, if the processing trade is abolished or the footwear products are included in the prohibited catalogue of processing trade, then Zhang Hanwen's business to continue the current shoe making business will have to switch to general trade, and then 17% of the value added tax will be required when importing raw materials.

According to the current export tax rebate rate of 15%, the 2% tax revenue will be the cost that Zhang Hanwen needs to pay more after the policy adjustment.

What we have to consider is that if the export tax rebate rate will be lowered again in the future, the burden will continue to increase.

If the footwear is included in the restricted catalogue of processing trade, Zhang Hanwen will need to deposit a considerable amount of deposit in the customs designated account when he imports the material, and it will be able to get the deposit after the cancellation of the export verification. This short listed "real account pfer" measure actually restraints the capital flow of the processing trade enterprise.

It is estimated that only 20 billion yuan will be required for processing trade enterprises in textile, clothing, shoes, hats, bags and other textile industries.

The shortage of labor is also an important reason for business failure.

Nanhai golden shoe, Taiwan capital

Liu Kun has no additional investment in mainland China, and chooses to keep current orders and factories. Zhang Hanwen also chooses to continue to stay in Dongguan after assessing the risks of relocation.

But there are factories that choose to move on.

Since the end of 1980 to the Pearl River Delta in Taiwan, the number of factories in Guangdong has already exceeded 4 million pairs of monthly production capacity. Although the output of Guangdong's factories is still ranked first, there has been almost no increase this year, and the output of factories in Jiangxi, Hunan, Vietnam and Indonesia has increased significantly.

Through processing trade such a way of trade, entrenched in the Pearl River Delta in the past 20 years, the company has firmly clutched Nike and Adidas such quality buyers.

Before and after 2006, the domestic and foreign trade policies were tightened, the export tax rebate rate was reduced and the renminbi appreciated. The most important thing is that the gradual growth of the processing trade pattern on the Taiwan funded footwear industry is increasing.

At that time, the Pearl River Delta was also eager to move out factories such as shoemaking and garment making, leaving room for capital intensive and technology intensive industries.

Comply with this policy guidance pfer, in 2007, Yong Jing group set up its first inland factory in Jiangxi, set a monthly capacity of 700 thousand {page_break}

This wait-and-see and exploratory arrangement has not seen much success for the time being.

Today, most of the capacity of the company is still concentrated in Guangzhou, Qingyuan and other regions. "The production capacity of factories in Guangdong is close to 4 million pairs per month. The most important thing is that the products with a little complicated technology can only be processed in Guangdong."

The company said.

In fact, such capacity migration and adjustment date back to 2004.

At that time,

The price of labor in Southeast Asia is generally lower than that in the PRD. The average monthly cost of employing an ordinary worker in Guangdong is around 2000 yuan (covering social security, provident fund and other costs), while the cost of employment in Indonesia is less than 1000 yuan.

However, buyers have found that factories, such as Southeast Asia, are still inferior to PRD factories in terms of production efficiency and technological level, while the latter still have an advantage in high-end product manufacturing.

Let factory owners in PRD operate and manage factories in Vietnam and other places, and this idea began to ferment among buyers.

After years of accumulated experience and in-depth analysis of the procurement experience, these large multinational buyers began to promote Taiwanese investment enterprises such as Yong Jing to invest and build factories in Southeast Asia.

"There are two main ways to participate in cooperation or to fully purchase local suppliers."

According to the foregoing people, most of these factories have been supplying the purchasers for several years. The background that they have been rooted in for many years makes the factory owners of the Pearl River Delta who are new to the world do not have to worry too much about local connections, policy environment and so on.

The original consideration of Nike was to help local suppliers improve their technology and efficiency. The changes in the trade environment before and after 2006, especially the gradual increase in labor costs, enabled more capacity to move out of the PRD.

Take Yong Jing's factory as an example, although he still has nearly 4 million pairs of monthly capacity in Guangdong, but after five or six years of development, his capacity in Southeast Asia has been basically close to this figure.

However, "buyers are not at ease to produce complex products in inland or Southeast Asia."

According to the foregoing people, the migration routes of factories depend on the degree of mastery of complex processes and the next change in labour costs in these areas.

In fact, it is hard to say that the current Southeast Asia has more advantages than the comprehensive cost of the two places.

The above said, the total cost of a pair of shoes is the largest material cost. The price of each region is basically the same. The price and efficiency of labor and the comprehensive management and operation cost have become the competitive points of various regions.

The migration journey of shoemaking families

The first tightening of processing trade policy was in September 2006.

The Ministry of Commerce, the Ministry of Finance and other five ministries and commissions issued the notice on adjusting the export tax rebate rate of some commodities and the catalogue of prohibited products in processing trade. The number of raw materials imported from processing trade will be increased from 80 to 400.

This adjustment has caused many Hong Kong businessmen to mess up, and some of the Hong Kong enterprises have stopped working. Other Taiwanese funded enterprises and factories with American capital in the mainland have also been affected.

According to a survey conducted by the Hongkong Federation of industry, zinc industry, aluminum alloy, raw fur and watts paper have the strongest reaction.

Liu Zhanhao, vice chairman of the association and vice chairman of the Pearl River Delta Industrial Association, estimates that the expansion of prohibited catalogues will affect more than 10000 Hong Kong funded factories.

Subsequently, Hongkong's major chambers of Commerce, the DAB and Dongguan Association of foreign invested enterprises continued to show their gratitude to the China Liaison Office, the Hong Kong government's Guangdong Economic and trade office and the relevant departments in the mainland.

It is rumoured that the four major chambers of Commerce in Hongkong have sent a letter to the top government officials to reflect the situation. When the chief executive Donald Tsang went to Beijing to take office, he also reflected the worries of the Hong Kong businessmen to the high level.

The announcement and rush of the Hong Kong enterprises in exchange for the subsequent Announcement No. 82, a slight loosening of the aforementioned policy, and the decision making layer agreed to give the enterprise a one year pition period.

Signs of tighter policy have since become increasingly evident.

In addition to the continuous expansion of prohibited catalogues, the famous "No. 44" issue was released in July 2007 in the adjustment of processing trade policy. The Ministry of Commerce and the General Administration of Customs jointly published a catalogue of processing trade restriction.

It mainly deals with plastic (9105, -245.00, -2.62%) raw materials and products, textile yarns, cloth, furniture and other labor-intensive industries, with a total of 1853 ten commodity tax codes, accounting for 15% of all customs commodity codes.

In the case of Restricted Commodities, all the enterprises involved in the East are required to import a considerable amount of margin into customs designated accounts when they are required for import processing trade.

The capital flow of the enterprises involved is therefore not a small blow.

The survey of Guangdong, a major processing trade city, shows that in 2007, the import and export volume of processing trade impacted by "No. 44" in the Province amounted to US $19 billion 80 million, which involved a total margin of 15 billion 530 million yuan. In addition, the policy increased the export cost of Guangdong related foreign trade enterprises by 13 billion yuan in 2007.

What worries Guangdong's foreign trade system is that such a policy adjustment is far from over.

An official from the Guangdong foreign trade system revealed that according to the information received at that time, some ministries and commissions have proposed to the Central Committee the proposal to abolish the processing trade policy completely.

The tightening of processing trade policy will seriously attack Guangdong, which occupies half of the processing trade. Guangdong then proposed to the central government that it hoped to give Guangdong 5-10 years of pition to adjust and pform spontaneously.

The above official said that according to the information disclosed by the central ministries and commissions in the local investigation before the publication of Article 44, the restricted catalogue of processing trade will be related to the 90 article of the export tax rebate rate that was widely reduced in the current year, while the commodity involved in Article 44 accounted for 15% of the total commodity number in the customs tariff, and 90 in the number 90.

This also means that the restricted catalogue will continue to expand. According to the prevailing wind, clothing, shoes and hats, bags, toys, ceramics and some low value-added electromechanical products will be included in this catalogue, and less than 10% of value-added products may be included in the category.

However, the outbreak of the financial crisis in 2008 disrupted such a storm adjustment.

Before and after 2009, the policy of restricted accounts was cancelled, and many commodities were removed from prohibited catalogues and restricted categories.

The foregoing foreign trade officials said that the timing of such a rigid policy structure adjustment was not appropriate. The concentrated fermentation of policies and the weakening of external demand caused by the financial crisis had a major blow to China's exports.

This lesson has also become a concern about the adjustment of foreign trade policies, including the processing trade policy.

"How to find a balance between steady growth and structural adjustment is a difficult problem for policymakers."

He said.

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"Bloated" foreign trade

Zhou Shijian, a researcher at the Sino US Relations Research Center at Tsinghua University, said that imports of US $100 in processing trade and exports of US $120 finished the import and export volume of US $220, but the actual added value in China was only $20.

How low is China's real added value? The two most famous cases are Bobbi dolls of MATTEL group and iPad of Apple Corp.

Zhou Shijian said that the retail price of dolls in the United States was US $9.9, while the actual export price in China was US $2. After deducting the cost of imported raw materials, the Chinese factory actually earned only 0.35 US dollars in processing fees.

A iPad in the US, which sells for $299, exports at a price of US $150, of which only US $4 comes from China.

Robert Koopman, chief economist of the US International Trade Commission, reckon that China's exports to the US amounted to US $201 billion in 2006, according to China Customs. However, 113 billion of its exports came from other countries, and only 88 billion US dollars were created in China.

In the United States, the pressure of trade imbalance has been pressing on China. At the same time, the processing trade policy which lasted more than 20 years has been pushed to the cusp of the storm.

Officials of Guangdong's foreign trade system have admitted that the technology spillover effect of processing trade has not been obvious for decades, and the key technologies are still controlled by foreign capital.

The multinationals of the processing trade investors are mostly foreign capitals. The early stage of R & D and design were sold overseas, and the Chinese side did not benefit much. Therefore, many people sneer at the fact that China's foreign trade is just "making two handmade money".

There is a saying in the foreign trade circles that if the profit of the whole industrial chain is 100%, then the processing trade will only get 10% of China's profits, while the earlier stage R & D and later channels can take 90% of the profits.

Zhou Shijian said that the processing trade was also criticized because its driving effect on the related economic chain was less than that of general trade.

If a company is engaged in general trade, many enterprises will prefer to reduce costs through domestic procurement because of importing raw materials from abroad. This will promote the development of related industries in China, and even lead more R & D centers and core technologies to China.

The profit of general trade is much more than that of processing trade.

Guangdong has successfully pformed into a large garment enterprise with general trade. The cost of fabric occupies 70% of the total cost. Transformation to general trade enables enterprises to purchase fabrics and accessories by themselves, and the profits gained from this link alone exceed the processing cost.

However, the urgency of the pformation of processing trade comes from the current situation of labor market changes.

Statistics show that in the 10 years before 2005, the monthly wages of the workers in China's processing trade enterprises increased by only 26 yuan, while the Panyu jewelry Association estimated that the labor cost of enterprises increased by about 50% since the implementation of the new labor contract law in 2007.

Zhang Yansheng, director of the Foreign Economic Research Institute of the national development and Reform Commission, said there is an estimate that there are still about 100 million of the labor force in China's rural areas not pferred. "According to this figure, the pition period to China's foreign trade is only 10 years."

Zhou Shijian also said that the change of Nike procurement is the best case.

In 1951, Nike was established in the United States, and began to purchase in Japan in 1959. In the mid 1970s, procurement began to shift to South Korea and Taiwan. After 1985, it turned to Guangdong and Fujian of China. After 2000, it gradually turned to Vietnam and Indonesia.

In 2005, Nike had 70% of its value purchase in mainland China, and in May 2011 only 34% remained in mainland China.

Who will lead the pformation?

Xiao Hefei, deputy director of the international economic and Trade Research Center of Guangdong University of Foreign Studies, said that the relocation of the Pearl River Delta from the export to domestic sales, from simple foundry to upstream research and development, is the three pformation path in front of the foundries.

In fact, the pformation and upgrading measures of various processing trade in Guangdong are more aimed at the intermediate group of foundry enterprises in the Pearl River Delta.

The above officials in Guangdong said that the top of the OEM enterprises was the production links of large multinational corporations in the Pearl River Delta. Some of these enterprises rely on China's cheap labor resources. "Such enterprises can not lead the pformation. Our train of thought is to classify and guide them, so that they can gradually put R & D links into China."

He said that Guangdong's series of measures to promote the pformation of the main body, in fact, Hong Kong, Macao, Taiwan and private capital processing trade enterprises, such enterprises can complete the pformation from low-end to low-end products production is crucial.

Zhang Yansheng introduced that the research of Hong Kong, Macao and Taiwan foundry enterprises in the Pearl River Delta found that 20% of the enterprises could successfully complete the pformation, and 20% of the enterprises would be eliminated in the process of pformation.

The question is, how will the remaining 60% enterprises turn?

He reminded us that Guangdong's policy thinking to promote processing trade enterprises to the East and West wings and mountain areas in northern Guangdong is more of a government's choice than a business choice.

He said that after years of over consumption of labor force, how to change the international division of labor system formed by multinational corporations in the first 30 years and form a trade system that can take root in China is the core issue facing the pformation of processing trade.

Mei Xinyu, an expert in the Ministry of Commerce, reminded that the goal of the pformation of processing trade is to increase China's share in the international division of labor rather than hand over its existing share to its rivals.

He analyzed that the pformation of processing trade can be divided into three levels: first, the upgrading of product and industrial level; secondly, the upgrading of processing trade, from the processing of raw materials with less income from international division of labor to the processing of higher income; the main body of processing trade should turn from foreign capital to domestic enterprises.