The move, which pushes China another step closer to complying with World Trade Organization regulations, will enable foreign companies to export products without first creating a separate relationship with a Chinese import/export agent. Already a major production center for IT equipment, analysts said the decision will accelerate China's integration into the global electronics supply chain by eliminating obstacles for OEMs and EMS providers eager to reduce their component costs.

"The Chinese government had the foot both on the gas and the brake," said Francis Bassolino, director at Alaris China, a procurement and manufacturing consulting firm based in Shanghai. "Removing the government agency will create a more efficient export channel and shorten the time to develop new products, qualify suppliers, and deliver higher quality goods.

"It also will lower costs because it is removing a step in the export process, getting the end customer closer to manufacturers," Bassolino said.

The new policy, which also pertains to Chinese companies exporting products, will be applied initially to the major Free Trade Zone centers of Beijing, Shanghai, and Shenzhen. Other cities could be added next year.

Several household names in the industrial and electronics sectors are gearing up to create their own independent purchasing offices (IPOs), including Dell, General Electric, Hewlett-Packard, Motorola, and Philips Electronics, according to a new report from iSuppli Corp., El Segundo, Calif.

"This new regulation undoubtedly will boost foreign companies' purchasing of electronic components in China," said Bryon Wu, an iSuppli analyst based in Shenzhen and author of the report. Wu noted that China was required to remove restrictions on foreign ownership of import and export businesses by December 2004 under the terms of its WTO membership.

Many electronics companies have already been plumbing the interior of China for components, using local export firms to handle the shipment of goods. IBM Corp., for example, bought $3.5 billion in finished goods and components in China last year, according to iSuppli.

The Miami office of SND Electronics Inc. buys finished computer products from a local factory in China that doesn't have an export license. Under the old regulatory guidelines, SND's orders had to be processed by a Beijing import/export company, which charged a fee.

"This [new] law will enable more foreign companies to trade directly with supply sources inside China," said Chris DeNisco, chief executive of the Greenwich, Conn., distributor. "It will make the goods more competitively priced because they won't go through export trading companies with licenses."

The cost for manufacturers to set up their own IPOs varies, but could be as high as $3.6 million to cover the expense of the export license and warehousing. Aside from the benefits of directly managing their procurement and export processes, foreign companies that take advantage of the new regulation would also enjoy a reduced Value Added Tax (VAT) rate on exports currently reserved for indigenous companies.

The legality of the VAT is being challenged, however. Last week, the Semiconductor Industry Association (SIA) again called attention to what it described as China's unfair taxation policy and asked for the elimination of the VAT imposed on chips imported into the country.

Considering that China still lacks western style legal and other structural facilities to support its integration into the global economy, some electronics executives warn that the implementation of the new export regulations may not be wrinkle free. Only a few well developed economic zones like Shenzhen may be able to support foreigners wishing to establish export businesses, they said.

"As with any new policy in China, it is good practice to quickly monitor how the Chinese legal and political system will actually administer the regulation and what additional amount of in-country oversight by the foreign entity will be required," said Glory Kamph, chief executive of Interliance LLC, Costa Mesa, Calif. "The policy's real benefits and hidden costs will only be known after it is put into practice."

By: DocMemory
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