Renminbi (RMB) valuation and why vendors sometimes do not want your orders

I have always said that one of the best times to look for new vendors in China is when things are slow there. My reasoning is simple: When things are slow, vendors want your business and they will show more enthusiasm and a greater willingness to work with you. And overall I think this is true.

Having said that, there are times when vendors need the business but they are less than enthusiastic for an order. Why? Because the vendor’s perception may be that the margins for the order are too low and if something goes wrong they may have to absorb a loss.

This is kind of what is happening in China as we begin 2014. Many 2nd and 3rd tier vendors are struggling and need orders. But they are turning down orders because they are worried about RMB valuation. The higher the value of the RMB the lower the value of the USD, the currency used for their orders. In other words when a vendor takes an order in January and delivers the order in April they may lose money if the value of the RMB against the USD has appreciated substantially in that time. Just so you know, vendors get paid in USD but they have no use for those dollars because all their expenses, overhead etc etc are payable in the local Chinese currency. So vendors exchange the dollars for RMB with the Bank of China.

At the beginning of 2013 the RMB was trading at 6.3 to 1 USD. Now as we begin 2014 it is at 6.06 per USD, an all time high. And it will probably continue to rise. For this reason vendors are very worried about quoting on projects, and especially those with long lead times. And when vendors give you a quote on an product it does not mean they will honor that quote. If the RMB appreciates significantly some vendors, though not all, will more often than not attempt to pass the increase on to you as at some time during production. This is SOP and not something you should be alarmed about. You just have to anticipate this sort of thing happening and make allowance for the increase in your own margins when you plan your orders.

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