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Tax Rebate Cut Changes Textile Export Strategy
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The tax rebate of textile exports will be reduced to 11 percent from 13 percent from this month, which will mean a 25 percent profit drop to Fomo, a Beijing-based garments company.


Senior managers of this export-oriented clothing maker have held several meetings to discuss the impacts from and countermeasures to a new national policy. China decided to cut or do away with tax rebates for over 2,800 items from July 1 as an effort to reduce the mounting trade surplus and adjust the export mix.


It is the boldest move the government has ever made to rein in exports since it joined the World Trade Organization in 2001. The affected items account for 37 percent of all export products.


Industrial profits will decline by 4.6 percent when tax rebates fall one percentage point, according to 2006 statistics, said Wang Yu, vice chairman of the China Chamber of Commerce for Import and Export of Textiles.


This time the policy was announced just 10 days before it came into effect and manufacturers with full order books have little possibility of increasing production.


More than 900 young women are working on 20,000 black suits along a production line clipping, sewing and ironing inside a workshop of Fomo. The suits, to be exported to Japan in mid July, will be the company's first batch of products affected by the new policy, said Fomo's deputy general manager Liu Yuzhong, adding that the company has cut the price of the suits in order to win the contract and now it is impossible to raise the price.


Liu said due to the tax rebate adjustment, Fomo's aggregate export tax rebates will be reduced by no less than 5 million yuan (US$657,375) this year. Last year its export tax rebates were 2.5 million yuan.


Fomo is not alone as the policy affects the profit margins of many industries, textiles in particular.


The textile industry is a major contributor to China's big trade surplus. It saw a US$129.2 billion trade surplus last year, accounting for 71 percent of the nation's total. In the first quarter of 2007, the textile industry's trade surplus reached US$27.28 billion, accounting for nearly 60 percent of the total surplus. As a result, the textile industry will bear the brunt of the tax rebate adjustment.


Export mix adjustment


The move is an effort to adjust structure of the textile industry and help textiles and garment producers shift their focus to value-added exports from low-priced and low value-added goods, said Chen Ping, a vice director at Beijing Customs.


For quite a long time, China's textiles and garments exports have been successful due to large quantities and low prices. Low value-added products with similar designs and poor quality have intensified competition in recent years. With the appreciation of the yuan, and rising labor and material costs, the textile industry saw a slower growth, Chen said.


The industry's trade surplus was US$28.21 billion in the first four months of 2007, up 17.4 percent over the same period last year, compared to 25.1 percent in the first four months of 2006.


Small garments enterprises, which make low value-added and single products, face the risks of being squeezed out of the export market, as they mainly rely on tax rebates, Chen said.


A small clothing enterprise with an annual export value of about US$2 million in Hangzhou, East China's Zhejiang Province, will basically be unprofitable after the tax rebate change, the firm's owner said.


The fundamental way out is to transform the business model, optimize the export product mix, build brands, increase added value, diversify varieties and designs and improve packaging and marketing, said Wang Shenyang, chairman of the China Chamber of Commerce for Import and Export of Textiles.


Liu Hongyu, deputy general manager of Beijing-based Smart Garments Company, echoed Wang's view saying that higher technology and quality guarantee a higher profit.


Liu takes Smart's experience as an example. The company earns 50 cents from each piece made for Wal-Mart and Carrefour, the world's largest retail chain groups, and more than US$5 from an OEM (original equipment manufacturing) piece, while the profit might top US$100 when it is produced with Smart's own brand and design.


Smart, with 70 percent of its products exported to the Japanese, European and American markets, is shifting its business from doing OEM to products with its own brand, he said.


China's textile industry had entered a crucial phase of upgrading instead of simple expansion in quantity, said an industry expert. It is necessary to go through the course of selling cheap products to fine ones at reasonable or higher prices that they are worth.


The tax rebate cut may not affect those enterprises which exports high value-added products, said an official at a foreign economic and trade bureau in Zhejiang.


An official at Ningbo Shenzhou Textile Co Ltd, which has an annual export value of about US$345 million, said the tax rebate cut is acceptable for Shenzhou. Meanwhile, the adjustment reminds Shenzhou of strengthening its risk resistance by improving its technology and added value, added the official.


Setting its sights on mid-range and high-end markets, Shenzhou has become a major producer in China for the world's top sporting goods makers like Nike and Addidas.


Shenzhou has exported 45 million pieces of garments worth US$180 million in the first half of this year and the export value this year is expected to reach US$400 million.


(China Daily July 3, 2007)


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