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The introduction of a new 6% VAT charge in China this month will have a major affect on local Chinese forwarders, especially those who conduct a significant amount of CIF business, according to a range of small and medium-sized logistics providers in the country.

With Chinese growth slowing in the past 12 months as the general costs of manufacturing increase, Chinese forwarders will have to adapt to the changing conditions and new taxes if they are to survive.

“The new VAT tax will basically add 6% to the costs of all ocean and air freight and pre-payment shipments will become much more difficult. To mitigate this tax there will be a major change from CIF to FOB terms and this will make life much harder for local freight forwarders in China., says Billy Hu, President of Everok Group.”

Hu says that the tax plays into the hands of multinational global companies and that smaller local forwarders that do not have a large and reliable network of overseas partner agents will be unable to shift their CIF freight to FOB. “Although only about 30% of overall exports are based on CIF, this will be very significant for local forwarders that deal mainly in CIF shipments.”

Hu says that being a member of a major global network will help ease the problem for companies looking to help their shipper clients avoid the tax. “We will work with our overseas partners in countries all around the world and will make more co-operations on an FOB basis. Basically a close relationship with overseas partners will put you in a better position to do more FOB terms. I have already noticed that some smaller freight forwarders in China are already struggling, they cannot pass this VAT to the clients, but the carriers will charge them. With poor buying power, this segment of the industry could suffer as their primary focus is on CIF.”

Overseas importers and agents could suffer too. Overseas importers will certainly not be happy to pay an extra 6% and overseas independent agents will have to ensure that they have good cash flow if they want to cooperate with their Chinese partners and change to collect shipments.

Hu says that in his opinion the VAT policy is very poorly thought out and will directly affect Chinese exports at a time when growth is slowing and competition from neighbouring countries intensifying.

“DDP and EXW costs will be higher. You will need to charge your customer 6% more than before. This is not a good policy and the only benefit is increased taxes to the government. This could have been done in a much fairer way that impacted exports less. Foreign multinationals have many more opportunities and solutions to solve the problem. They can receive and charge overseas so will not pay more.”

Hu says that on the ocean freight side smaller forwarders are also facing a challenge as more and more beneficial cargo owners (BCOs) are signing contracts at very cheap rates. If you are large enough shipper or forwarder to negotiate good contract rates there is an advantage.

“With so much new capacity coming in such as Maersk’s new 18,000teu vessels the market is weak and contracts can be signed at low rates. They are compensating for this by trying hard to implement GRIs and Peak Season Surcharges (PSS). The contracts give the carriers the revenue base and smaller forwarders are disproportionately affected by paying PSSs on their shipments. At Everok we have changed our model to be competitive on behalf of our shippers and to not be subject to the PSS from the beginning. Our bigger clients in particular are looking to us to help ensure that they are not affected by these extra charges.”

Shen Tao, Chairman of Beijing-headquartered Harmony Shipping and Forwarding agrees that the VAT rule will have a negative impact on smaller forwarders but says that proactive companies can continue to prosper, if they adopt the right strategy.

“The economy is certainly slowing here and according to statistics this year’s trade volumes are actually lower than last year in several recent months. However, the Chinese government has made some steps to promote trade and we expect volumes to improve in the next 12 months. The recent government decision to delete the commercial inspection for over 100 kinds of commodities will help suppliers promote international trade with overseas buyers.”

Wu says that despite the difficult conditions it is still possible to continue to grow if the right strategies are adopted. “At Harmony we have focused on improving our sales and business development performance and this has helped us weather the slowdown. However, what is for sure is that the high cost of air freight is certainly triggered a modal shift to ocean. We have been active in finding new multimodal solutions and these are certainly growing. Sea-rail, truck-rail and air-rail services are becoming more popular.”

Hu adds that the air freight market from China has changed a lot in the last few years, as there has been no real peak season as before. He adds that the VAT issue will be particularly harmful to air freight as shippers continuously examine their costs and more often than not send freight on a pre-pay basis.

Shen is especially buoyant about the prospects of the Chinese domestic market and is looking to tap into these opportunities. “There is no doubt that the Chinese domestic market is emerging as a major engine of the Chinese economy. At Harmony we are increasingly involved in the domestic market and provide a range of logistics services to clients. E-commerce is also growing very fast in China and the associated logistics demands are increasingly rapidly. There are many opportunities for forward-thinking logistics companies in this exciting arena.”

As the whole nature of Chinese manufacturing changes, with an accelerating move of production to inland cities, Hu says that independent forwarders need to be reactive and close to the market to benefit. “I am watching export and import volumes grow by over 200 per cent annually in some inland locations and this provides great opportunities for forwarders with offices in those locations.”

Everok has set up operations in the Xian region and also has offices in Wuhan and Chongqing as it expands into the hinterland. “The infrastructure is getting better with improved feeder services to the ports. For instance there is now a reliable container rail service to Shanghai.”

Talking of rail services many forwarders are eyeing the opportunities offered by the new rail freight service to Germany. “They have commenced with a monthly service but in the future this will move to a weekly service and this will then become attractive to some clients. Although it is expensive compared to ocean freight it does provide much quicker transport times and may well be attractive for IT and other higher value products.” are other vital northern Chinese gateways.

According to Shen, Chinese manufacturing is not only changing geographically, but also in commodities. “In the past we used to handle a lot of garments and machinery. Now we are moving a lot more electronic products, IT goods and pharmaceuticals.”

Hu believes that there is some consolidation going on the in the logistics market in China and the opportunistic forwarders with a bad reputation are slowly being forced from the market. “As more shipments change to FOB, more of the poor companies will be forced out.”

First published in The Voice

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