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China's Factory Heartland Braces for Big Tariff Hit

Exporters in the Pearl River Delta region, the manufacturing hub, are seeking ways to adjust to tariffs by diversifying sales to other overseas markets and domestic consumers.

In China’s manufacturing heartland around the Pearl River Delta, the administrations 10% tariffs are causing little concern. The 25% duties that loom next year are another matter.

Ben Yang, a furniture maker producing contemporary designs out of his facility in Dongguan -- about 30 miles from Hong Kong -- says that if those higher charges materialize from January as planned, the U.S. share of exports from his Sunrise Furniture Co. could plunge from 90% to less than a third.

“Our major rival is Vietnam and 10% tariffs aren’t enough to make the difference,” said Yang, 48, who supplies retailers including Rooms To Go Inc. “But 25% tariffs are a worry. There will definitely be a short-term impact; Americans may have to accept higher prices.”

Yang’s situation mirrors that of the economy as a whole as it heads toward the close of 2018: The negative headlines that have dominated the year have not yet translated into a sharp contraction of output, but rather the gradual slowdown that had already been expected.

It’s what comes next that’s preoccupying business owners, as interviews with about a dozen manufacturers in the Delta over the past ten days showed. The region serves as both China’s traditional hub for manufacturing everything from toys to chemicals, as well as a higher-tech location that now hosts the headquarters of companies like Tencent Holdings Ltd. Exporters there are now seeking ways to adjust by diversifying sales to other overseas markets and domestic consumers.

“Going beyond 10%, the disruption increases exponentially,” says David Loevinger, a former China specialist at the U.S. Treasury and now an analyst at fund manager TCW Group Inc. in Los Angeles.

The government has effectively shelved its campaign to curb indebtedness and added limited stimulus measures, and the approach of tariffs has actually helped boost sales abroad as exporters rush to beat the higher charges.

The muted impact of the tariffs on China’s manufacturers so far is expected to be confirmed in third-quarter economic data scheduled for release on Oct. 19. The economy, in the throes of a policy-induced slowdown, is seen ticking down a notch with gross domestic product expanding 6.6% from a year earlier, according to the median estimate of economists in a Bloomberg survey.

That would be the slowest quarterly expansion in almost a decade. The economy expanded 6.7% in the second quarter and is seen hitting 6.6% -- just above the government’s target -- for this full year before slowing more sharply in 2019.

Economists see retail sales growth flat from the previous month at 9% year-on-year, industrial production edging down to 6% from 6.1%, and fixed-asset investment for the first three quarters flat-lining at 5.3% over the same period a year earlier.

Trump imposed 10% tariffs on a further $200 billion of Chinese products last month, including on furniture, and said those could rise to 25% from January. He’d already imposed 25% tariffs on $50 billion worth of goods. China has retaliated and Trump’s threatened to levy duties on all China’s exports.

The domestic slowdown and that rising external pressure is prompting Guangdong manufacturers to gird for a more difficult 2019.

Domestic furniture supplier Baker Perfect in Dongguan is facing tougher competition, with exporters turning to the domestic market just as it feels “a chill wind” from the slowing economy, says founder Li Shuiqing. The furniture industry is delaying expansion plans and refraining from new investment, he says.

“But it’s not a matter of survival, it’s just getting through a rough patch,” says Li, 37. “It’s about keeping money safe in bank deposits rather than investing in stocks or property. During difficult times you will be conservative, not expand or invest as much.”

There likely is worse to come. For the whole year, investment growth is seen slowing to 6.5% and to 6% in 2019, according to Bloomberg surveys.

That’s despite support measures being rolled out by the government that have included tax cuts, increased infrastructure spending, a recent cut in the required reserve ratio for banks, and faster bond issuance by local governments.

Guangdong’s government also announced in early September a slew of measures to help manufacturers, including tax cuts, reduced costs for land use, reductions in power and transportation charges, social security fees and financing costs.

New Orders Decline
In contrast to the robust exports this year, a gauge of new export orders based on a survey of manufacturing purchasing managers that the government published late last month fell to its lowest level in two years. That indicator tends to lead the official data on exports, and might indicate a coming slowdown, says Betty Wang, a senior economist at Australia and New Zealand Banking Group Ltd in Hong Kong.

Nevertheless, underpinning the confidence of Guangdong companies to ride out the storm is the dominance of China’s supply chain. Furniture, electronic components, appliances, and networking gear are among the products hit by tariffs where the U.S. relies most heavily on China, according to Panjiva Inc., a unit of S&P Global Market Intelligence that specializes in supply chain data and analysis.

"Supply chains are sticky, with China the hub of choice because of its scale, speed of delivery and also closeness to the Chinese market itself," said James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology in Sydney. "I don’t see U.S. tariffs, even at 25%, upending that proposition."

Shenzhen Garlant Technology Development Co. makes products including mobile phones and their accessories and does about a fifth of its $150 million in annual sales with the U.S. Founder Andy Yu, 39, has added Trump’s 10% tariffs onto the prices of his products and says he’ll do the same again with 25% tariffs in January even though U.S. sales declined 20% this year.

"The pain is short term,” said Yu. “We can adjust our sales strategy, and expand our businesses in Southeast Asia, Africa and Latin America. That can easily make up the loss."

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