This is another episode of the adventures of sourcing overseas. This time, it’s all about logistics – ocean freight, to be exact. There is already enough pitfalls and dangers to watch out for with the physical sourcing to foreign factories, now add nuisance from the logistics companies. Don’t forget, overseas sourcing is 50% sourcing and 50% logistics. No matter how good you think you are in your respective industry, and you can do sourcing with your eyes closed and hands tied behind your back, there is always the logistics side that will take you a while to learn and get comfortable with.
In our China opeartions, we refer to anybody and everybody in logistics as “white collar pirates.” These pirates don’t physically sail the sea, but their deeds are no less devious. Take for example, a recent event that landed in my inbox.
Of the many freight forwarders that we choose to work with in China, C.H. Robinsons takes the honor for being the pirate under the spotlight. For those who are not familiar with C.H. Robinsons, it is one of the biggest freight forwarders in the U.S. It has recently acquired Phoenix International, a smaller and Asia-based freight forwarding competitor. The acquisition supposed to make sense because Phoenix’s strength is supposed to be in the greater China region where C.H. Robinson does not have a foothold.
C.H. Robinsons, and it’s recently acquired Phoenix International, has been put on a trial relationship with our China operations a few months back. That relationship ended because, while C.H. Robinson is a huge logistics company, it’s services in China (Asia) is very weak despite the acquisition of Phoenix. Or, maybe because of Phoenix. C.H. Robinson has been rated as #1 in the 2012 Drewry Financial Rankings with an annual sales of $8.388 billion! So, we are not talking about some guy in shacked up in a run-down office here. These are supposed to be the top professionals in the industry.
The story began with an email, a notification, in fact. This is from a rep in C.H. Robinson, and it has the following content:
Please kindly find new VAT regulation information for import/export from China below for your reference.
Effective date is 08/01/2013
China Value Added Tax (VAT) Reform
Starting August 1st, China’s new VAT will take effect nationwide. This basically means a 6% rise on shipping costs for all freight and related charges payable in China by international shippers importing and exporting from and to China.
• Who will immediately be affected by this increase?
The shippers who sell their items on an CIF, DDU, DDP basis will all be affected as they will have to start paying this fee.
• Who will be ultimately affected by the VAT changes?
Ultimately the shippers will add such fees to their cost and customers buying under the CIF, DDU, DDP method will ultimately bear the responsibility.
• Who will NOT be affected the VAT?
It appears that customers buying under FOB terms will NOT be affected.
• What is the best course of action now?
Evaluate what percentage of your business is currently being shipped to you by CIF, DDU, DDP and consider the pros and cons of switching to FOB
At first reading, my heart start to race… With the non-stop cost increases and exchange rate already making China less competitive, now this… The second thought that came across was if this is another trick by a Chinese scam. But then I realized I’m in the U.S. office, and the email is supposedly from the reputable C.H. Robinson, an American company. I then forwarded this information to my controller in China to see if she can verify this.
After some investigation, we found out that our China company was not notified of the same news by Phoenix (C.H. Robinson’s child company operatin in China), or were we notified of this news by any other freight forwarder we have a relationship with. Furthermore, we were able to find the exact official Chinese legislature that dictated this VAT reform.
It turns out C.H. Robinson was only telling half of the truth; the other half was nicely masked for their own benefit. So, a deception, or misdirection. It really boils down to an excuse to increase its fees. This is a very typical tactic by a Chinese company, but I don’t think an U.S. company would sink so low…
The actual Chinese legislature dictated that the new law will become effective on August 1st, 2013. It has a 6% VAT for service-oriented company, such as ocean freight companies such as C.H. Robinson. It also has another component that eliminates the 5% general business tax. This elimination of the business tax is a huge deal, and it is the component nicely tugged away by C.H. Robinson so it can later substantiate a claim to increase its service fees.
For those who is not familiar with the Chinese taxation system, the two taxes mentioned above happens to be absent in our taxation system here in the U.S. A business tax in China used to be levied on the total revenue of each business. So whatever you bring in, profitable or not, you’ll have to pay a 5% tax on it. Ouch! On the other hand, VAT (Value Added Tax) is
