Chinese companies flee overseas to avoid US tariffs

Chinese factories making everything from bikes to tires, plastics and textiles are moving assembly lines abroad. (AFP)
Updated 11 September 2018
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Chinese companies flee overseas to avoid US tariffs

  • The world’s two largest economies have been locked in a months-long trade fight
  • Supply chains have already begun relocating out of China in recent years

BEIJING: A growing number of Chinese companies are adopting a crafty way to evade US President Donald Trump’s tariffs: remove the “Made in China” label by shifting production to countries such as Vietnam, Serbia and Mexico.
The world’s two largest economies have been locked in a months-long trade fight after Trump imposed 25 percent customs duties on $50 billion worth of Chinese goods this summer, triggering a swift tit-for-tat response from Beijing.
Chinese factories making everything from bikes to tires, plastics and textiles are moving assembly lines abroad to skirt higher customs taxes on their exports to the United States and elsewhere, according to public filings.
Hl Corp, a Shenzhen-listed bike parts maker, made clear to investors last month that tariffs were in mind when it decided to move production to Vietnam.
The factory will “reduce and evade” the impact of tariffs, management wrote, noting Trump hit e-bikes in August, with new border taxes planned for bicycles and their parts.
Trump warned last week those tariffs — targeting $200 billion in Chinese imports — could come “very soon.”
“It’s inevitable that the new duties will lead companies to review their supply chains globally — overnight they will become 25 percent less competitive than they were,” said Christopher Rogers, a supply chain expert at trade data firm Panjiva.
Supply chains have already begun relocating out of China in recent years as its rising labor and environmental protection costs have made the country less attractive.
Tariffs are adding fuel to the fire, experts and companies say.
“China-US trade frictions are accelerating the trend of the global value chain changing shape,” said Cui Fan, research director at the China Society of WTO Studies, a think tank affiliated with the commerce ministry.
“The shifting abroad of labor-intensive assembly could bring unemployment problems and this needs to be closely watched,” Cui said, adding the shift would not help the US’s overall trade deficit.
The growing list of foreign firms moving supply chains away from China — toy company Hasbro, camera maker Olympus, shoe brands Deckers and Steve Madden, among many others — already has Beijing worried.
Less discussed are the Chinese factories doing the same.
Zhejiang Hailide New Material ships much of its industrial yarns, tire cord fabric, and printing materials from its plant in eastern Zhejiang province to the US and other countries.
Trump’s first wave of tariffs on $50 billion in goods this summer hit some of its exports; the next round of $200 billion looks like it will hit several more.
“Currently all of our company’s production is in China. To better evade the risks of anti-dumping cases and tariff hikes, our company has after lengthy investigation decided to set up a factory in Vietnam,” executives told investors last month.
“We hope to speed up its construction, and hope in the future it can handle production for the American market,” a company vice president said of the $155 million investment that will ramp up production by 50 percent.
Other moves abroad spurred on by tariff risks include a garment maker going to Myanmar, a mattress company opening a plant in Thailand and an electronic motor producer acquiring a Mexico-based factory, according to public filings from the firms.
Linglong Tyre is relying mostly on low cost credit to build a $994 million plant in Serbia.
The entire tire industry faces a “grim trade friction situation,” Linglong told investors last month, citing “one after another” anti-dumping cases against China.
“Building a factory abroad allows ‘indirect growth,’ by evading international trade barriers.”
China’s bike industry faces a similar pivotal moment. The center of manufacturing will shift away from China in the future, bike part maker H1 Corp. told investors when announcing its Vietnam factory.
Some of Hl’s customers started moving production — especially of e-bikes — to Vietnam, said Alex Lee, in charge of global sales at Hl Corp.
“First of all there is no anti-dumping tax on Vietnam,” Lee said, adding labor costs were lower there as well.
China’s growing e-bike industry faces duties not only from the US but also the European Union, which slapped provisional anti-dumping tariffs of 22 to 84 percent on Chinese-made e-bikes in July, alleging Chinese companies benefited from cut-rate aluminum and other state subsidies.
The state support Chinese companies receive is key to the Trump administration’s case in taxing Chinese goods, but Hl shows how companies may continue to benefit even after shifting some of their production overseas.
Government subsidies, including millions of yuan to “enhance company competitiveness,” eclipsed H1’s profit during the first six months of the year, its filings show.
Still the company went ahead and bought an operating factory in Vietnam.
Lee noted they had transferred mass production of aluminum forks and steering parts to the new plant from their factory in Tianjin.
He did not know if it would lead to job cuts in China.


SABIC prepares to meet investors to offer bond

Updated 25 September 2018
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SABIC prepares to meet investors to offer bond

  • The Kingdom’s petrochemical giant will be meeting investors in London, New York, Los Angeles and Boston from Sept. 25
  • SABIC has also confirmed the appointment of BNP Paribas and Citigroup as global coordinators on the sale

LONDON: Saudi Basic Industries Corp. (SABIC) is preparing to offer its dollar-denominated unsecured bond to the global market with investor meetings due to start this week.
The Kingdom’s petrochemical giant will be meeting investors in London, New York, Los Angeles and Boston from Sept. 25, according to a filing on the Saudi stock exchange on Tuesday.
The Saudi company is likely to be keen to tap into the heightened international interest in the Kingdom’s financial markets following the lifting of some restrictions on foreign investors’ activities at the start of the year.
SABIC has also confirmed the appointment of BNP Paribas and Citigroup as global coordinators on the sale, alongside HSBC Bank, Mitsubishi UFG Securities EMEA and Standard Chartered Bank acting as joint lead managers, in its Tadawul note.
The proposed issuance has been well-received so far by analysts with ratings agency Moody’s Investor Service assigning an ‘A1’ rating to the proposed senior unsecured notes to be issued by the financial vehicle, referred to as SABIC Capital II, and guaranteed by SABIC itself.
“SABIC’s A1 rating reflects its strong business position in the chemical sector and its ability to weather industry volatility, particularly given its healthy operational cash flows and conservative liquidity profile,” said Rehan Akbar, a senior analyst at Moody’s, in a note on Monday.

 

The bond is anticipated to be used in part to refinance an existing SR11.3 billion ($3 billion) one-year bridge loan raised in January this year to fund the company’s 24.99 percent stake in the Swiss chemical company Clariant, according to the Moody’s note. All regulatory requirements were completed on this acquisition earlier this month.
Cash proceeds from the bond may also be used to repay a $1 billion bond due on Oct. 3, according to Moody’s.
On Tuesday SABIC confirmed that the bond will be used mainly to refinance “outstanding financial obligations” of the company and its subsidiaries.
Analysts at rating agency S&P Global were also upbeat about SABIC’s outlook, with research published on Monday stating that the company has “strong profitability” via its KSA operations and a “strong” liquidity position.
“The debt issuance is helpful for the credit profile in the sense that it extends the company’s debt maturity profile and strengthens its liquidity position,” said Tommy Trask, corporate and infrastructure credit analyst at S&P Global.
The agency currently assigns the petrochemical firm an ‘A Minus’ rating, with a “stable outlook,” which it said reflects its “view on the sovereign as well as its expectations that SABIC will maintain high profitability under current benign industry conditions.”
S&P Global’s report said margins in the global chemical industry will “largely stabilize in 2018 following several years of improvement, attributable to the increase in commodity chemical capacity.”
However, it also warned that a key risk to credit quality is
the trend for mergers and acquisitions within the sector and the “potential negative impact on credit metrics from funding them with debt.”

FACTOID

SABIC operates in more than 50 countries across the world.