Before you ask your Chinese factory for a discount, make sure you won't be kidnapped and/or have your product cloned

A post called "The Right Way to Reduce Your China Product Costs" on China Law Blog (previously) sounds like pretty anodyne stuff, but it turns out to be a catalog of several technothrillers' worth of ultra-weird, real-world skullduggery and chicanery from the world of late-stage capitalism and trade war.

Background: Trump's tariffs have kneecapped Chinese manufacturing, and Chinese manufacturers are responding by slashing prices to their western customers. This has given rise to a wave of requests for discounts from those western companies, and Chinese manufacturers, already bleeding, are taking desperate steps to stay in business as customers leave or demand unrealistic discounts as a condition of staying.

The first one is plain old kidnapping (China Law Blog has written extensively about how kidnapping and ransom are a normal part of Chinese debt collection). Chinese manufacturers, working with local officials, have begun to kidnap representatives from western businesses, citing (possibly imaginary) debts or tax liabilities and holding those reps to ransom as a bargaining chip for keeping foreign business and/or extracting an exit payment from those that they lose.

Then there's product cloning: it's not merely that your Chinese manufacturer might steal your product dies and go into business cloning your product and selling it to your wholesalers (though that's happening!). It's also that your Chinese manufacturer might have taken out patents and trademarks on your business and its products. These don't just stop you from sourcing an alternative supplier after you part ways — some western companies have found that their products are being seized at the Chinese border as counterfeits after anonymous businesses (presumed to be their former manufacturing partners) made patent and trademark claims with customs officials.

There's also ways that Chinese manufacturers can blacklist their former customers in China, reporting them as fraudsters, which prevents you from going to a rival.

All of this is framed as advice for "If you're going to ask your supplier for a 10% discount, what is the worst-case scenario?" But as the writer Dan Harris says, "Despite all the risks, now is the ideal time to be looking at moving your supply chain out of China and/or trying to get your China suppliers to lower your product pricing." The Chinese state is offering all kinds of breaks to its manufacturers in order to keep them afloat, and western businesses know it, and are demanding a share of the windfall as a condition of staying in China.

What you need to know about the new realities of China factory pricing is that the Chinese government is doing whatever it can to prop up its factories. More than anything, the Communist Party does not want to see factories closing and jobs being lost and huge numbers of people marching in the streets, as is happening in Hong Kong.

So to avoid that, China has been doing the following (and more)

1. It has reduced income tax rates for Chinese export manufacturers, thereby reducing overall costs by about 4%.

2. China has reduced its VAT rates for the export of various (but not all) products, thereby reducing overall costs by roughly 4%.

3. China has pushed down the value of the RMB, thereby increasing by about 4% the amount of RMB Chinese export manufacturers get from their Dollar/Euro sales.

So right there we have about a 12% reduction in costs for China Factory. Note that the numbers above are rough calculations and individual valuations will vary. Note also that we are hearing rumors that Sinosure is now providing export insurance to Chinese factories at no cost and this is just one of many cost/expense subsidies/reductions of which we are hearing. But because we have not run down any of these rumors, we will ignore them for purposes of today's cost-cutting discussion.

The Right Way to Reduce Your China Product Costs [Dan Harris/China Law Blog]

(Image: Aaron Van Dike, CC BY, modified)

(via Naked Capitalism)