New Changes in China May Affect Outsourcing
China has made many recent changes that have impacted U.S. businesses outsourcing to the country. Within the outsourcing industry, China has been well known for its low cost of labor, which attracted many companies wishing to outsource various functions. However, with China’s new regulations and economic changes, outsourcing to this location has become increasingly expensive.
Many environmentalists, economists and labor advocates are pleased with the changes that have been implemented by the Chinese government. Some experts feel though, that China’s moves may put a financial strain on smaller U.S. businesses that have been outsourcing to this country.
An article posted on CNNMoney.com titled, In China, Outsourcing is No Longer Cheap, examined these recent movements. Some of the key points of the article are summarized below.
New Labor Laws
A strict labor regulation went into effect on January 1, 2008 in China, which mandated employers to offer employment contracts, overtime pay and a social security program. It is believed that this law was the direct result of internal political dynamics. There had been a growing public outcry regarding low wages, insufficient labor rights and economic inequality. Recent studies have shown that the wages in China are increasing by 10 to 15 percent each year. That statistic, along with the tough labor law, has made many businesses nervous.
Auret van Heerden, President of the Fair Labor Association, was quoted in the article as saying, “There’s a feeling that this law might be too much, too soon. HR is a recent discipline and the courts are starting to get overwhelmed.”
Environmental Reform
China has been making great efforts at environmental reforms. In 2006, the Chinese government started a 5-year plan to increase the country’s energy efficiency by 20 percent between 2006 and 2010. China anticipates that by 2020, renewable energy will account for 15 percent of its national consumption. There has also been a greater enforcement of safety and cleanliness rules that had been in China’s plans for a while.
Last summer, China took emergency measures to address air pollution due to the Olympic Games. As a result, many factories were forced to stop or slow production. Some of the factories were later re-opened, but many were not.
Eliminating Tax Rebates
China had been allowing tax rebates for exporters since 1985, but recently these rebates were cut. Over the last few years, Beijing has drastically cut rebates on thousands of goods across a range of industries as a way to reduce China’s trade surplus. China charges a 17 percent value-added tax (VAT), which is placed on added value of goods and services that is incurred in any exchange. Exporters were usually given a full rebate on this tax, but that has changed. China will now only offer VAT refunds ranging from 5 to 17 percent. For goods that are considered to cause high pollution during the manufacturing process, the tax rebate has been cut all together.
Rising Chinese Yuan
The weakening U.S. dollar has also been compounding problems for many U.S. companies outsourcing to China. In 2007, the Chinese Yuan rose more than 10 percent against the dollar. Chinese vendors are typically paid in Yuan, which has placed a large financial strain on profits for many businesses in the United States.
Despite all of these changes, China still has a lot to offer a company looking to outsource. A&E Consulting offers valuable insight into the outsourcing industry and helps businesses in choosing the right location and vendor. The consulting firm will also oversee the first outsourced project to ensure a smooth transition.
Tags: China, global sourcing, outsourcing