VAT Rebate for Exporters in China: How Does It Work?

Most importers buy their goods under FOB terms and don’t need to worry about the export procedures, which are handled by their suppliers. But, in some cases, the Chinese exporter tells a story to justify a delay, and the purchaser needs to understand the mechanisms at play in order to understand what really happened.

So here is what I understood about the VAT (Value Added Tax) system, and the rebate that applies to exported products.

The VAT rate that applies to manufacturing activities is 17% in China. And the Chinese government give a VAT rebate to exporters — by the way, this is not unique to China, and many other countries collect no VAT on sales to foreign companies.

China gives full rebate (the whole 17%) on export sales of a few product categories. For other categories, the rebate is lower, or even 0%. It depends on what industries China wants to encourage.

To collect this rebate, the exporters need to show that they have paid the VAT on the parts they purchased, and that they have exported the finished products. From what I gathered, they typically get the refund several months later.

Can all exporters prove that they have paid VAT on the parts, before exporting products? Of course not. A friend tells me of many Africans who buy products on the market in Guangzhou and ship them to their country — they have to work with a freight forwarder who will sell them a “maidan chukou”. This document is, from my understanding, an authorization to export without the usual formalities.

Similarly, the manufacturers of electronics in Shenzhen who buy parts illegally from Hong Kong (without paying any VAT) have to work with a freight forwarder to get their goods shipped out “under the radar”. The forwarders, who often have an I/E (Import & Export) company on the side, monetize the rights to get shipments out in this manner. They typically have an export license with a very wide product scope, so they can handle many product categories.

What are the implications for foreign buyers?

  • In at least 95% of cases, the importer is better off buying under FOB terms, to avoid all these declarations.
  • Smart buyers will note that it is safer to work with a Chinese company that has an export license, rather than having one company take care of production and another one handle paperwork. What happens if the “paperwork” company gets into trouble with the government at the wrong time? Do all these intermediaries respect the confidentiality of your data?

Did I get this right? I am not the foremost expert on this topic!

What Does Quality Mean to Chinese Manufacturers?

I often ask potential hires “what is quality?” and it seems even people who’ve been in the quality assurance industry for 10 years don’t have a ready answer.

It seems like I am not the only one. Here are the most common responses gathered by the American Society for Quality during a recent survey:

quality definitions

I guess one could argue that there are several definitions, depending how high up in the sky we choose to be:

  • At the micro level: “meeting the customer’s specifications”
  • In a slightly less narrow view: “fitness for use” combined with “never stopping to improve processes”
  • In terms an accountant understands: “ensuring customers come back and products do not”
  • On a more macro level: “doing the right things in the right way through the practice of excellence”

Unfortunately, most Chinese companies are still at the micro level. Producing a quality product means complying with rules imposed by a customer. With that mindset, higher quality means extra inspectors, who cost more money.

I wrote about this in Is it expensive to increase the quality level in a factory?:

Importers use statistical quality control standards based on AQL limits. If a buyer sets a tolerance tighter than what is usually considered “normal” for general consumer goods, the supplier generally raises prices.

What is wrong with this mindset? It is 100% reactive, 0% proactive. There is no initiative to improve design & production processes.

Maybe some readers can propose a definition of quality that everyone can agree on?

Mobile Applications (on Tablets) for Quality Inspections

Over the past three years, I guess more than a dozen people have told me “tablets are a perfect fit for inspectors”. Yet I haven’t seen any company that developed a good application that works on iPad or Android, and that is suitable for quality inspections.

The truth is, it is complicated. We’ve been working for 4 months on an app and it is only starting to work nicely. And that’s without counting all the work on the IT system to be used in the office — that was another 8 months of development…

And yet, this is way to go for all inspectors. There is nothing that is currently done on paper or on a laptop that can’t be done on a tablet. But there are LOTS of things that can be done on a tablet and that are currently impossible for most inspectors.

A good tablet application brings a lot of benefits to quality control managers:
  • Statistics about suppliers and inspectorsŠ
  • History of inspector actions with exact time, to ensure they take the time necessary to do the job and to understand what sequence they follow
  • Assurance that right files will be available
  • Real-time information for urgent orders (contingent on internet connection inside the factory)
There are also benefits for the quality department¹s admin assistant:
  • Easier management of samples, tools, etc.
  • Many semi-automated actions (confirmation emails, requests for tools, etc.)
And, last but not least, the benefits for QC inspectors are tremendous:
  • Reporting, sending photos, etc. takes much less time (it is all automated)
  • They are guided step by step in a procedure (lower risk of forgetting something)
  • Claiming expenses takes less time
  • A tablet is lighter and cheaper than a laptop

So here you go… This is the future. And maybe Google Glass will be even more convenient. I’d be curious to head from readers who have already experimented with mobile applications.

(By the way, any self-promotional comments will be erased.)

Moving Tooling/Molds from one Chinese Factory to Another

Clients asked us several times to oversee a transfer of tools/molds from one factory to another. So we have written a checklist (see below).

Why move tooling from one factory to another?

  • Maybe the buyer selects one factory to make a mold and another one to do the injection. This is generally not advised, but sometimes the buyer has no choice.
  • Maybe the business stops with the original factory, which accepts to release the tooling (it doesn’t always happen, and a good contract certainly helps).

In this article we are making the assumption that the tooling is a mold for plastic injection, and that this mold needs to be moved from the toolmaker to the molding factory.

For those importers who want to minimize risks, the sequence to follow is as below:

1. BUYER: – All tooling should be signed off as complete and ready for use in production. Documentation should be in place showing the buyer has signed off each tool.

2. BUYER: – Tooling transfer plan including schedule should be generated and in place with all parties (the buyer, the toolmaker, and the receiving factory that will run the tools in mass production).

3. TOOLMAKER: – Tooling transfer documentation should include all tooling 2D drawings as well as 3D CAD data, release and transfer of tooling contract, preliminary settings for each tool as a guide.

4. BUYER/INSPECTION: – Buyer’s engineer or third party representative should check each tool against the transfer contract to ensure everything is correct and accountable for.

5. BUYER/TOOLMAKER: – Transfer readiness should include rust protection, general packaging protection, the correct shipping packaging (depending on shipping method, land, sea, or air). All this needs to be documented and checked during the packaging stage.

6. BUYER/TOOLMAKER: – Transfer of tools, depending on distance and method of transport. If local, the toolmaker may use their own truck, in which case the buyer’s engineer or third party representative should accompany the tools during transportation. If longer distances, the buyer is advised to arrange shipment through their own freight forwarder.

7. BUYER: – Ensure all documentation has been sent to the receiving factory ready for acceptance of transferred tools.

8. MOLDER/BUYER: – Upon receiving transferred tools, unpack tools and check off inventory to ensure everything has been delivered.

9. BUYER/INSPECTION: – Buyer’s engineer or third party representative should check each tool against the transfer contract to ensure everything is correct and accountable for.

10. MOLDER/BUYER: – Buyer’s engineer or third party representative should work with mold factory and run each tool in order to obtain samples for inspection.

11. BUYER: – Buyer’s engineer or third party representative should inspect initial sample and cross check against signed off samples from the toolmaker.

12. BUYER/MOLDER: – Once all tools have been accounted for, checked they are in good condition and are able to run in the factory’s machines, the buyer and the molding factory need to sign tool transfer contract. Through that contract they accept all tools, take responsibility for them, and acknowledge the buyer’s ownership rights (among other clauses).

13. BUYER: – Buyer’s engineer or third party representative should check storage facilities to ensure each tool will be stored correctly and safely and is easily retrievable when needed.

14. BUYER: – Buyer’s engineer or third party representative should check tool maintenance capabilities to ensure adequate skills and equipment are in-place to maintain the tools at the highest quality.

Now, what if the tools are moved from an old (and bad) supplier to a new supplier? The old supplier probably won’t be as cooperative, so some steps will have to be skipped. And the buyer is advised to arrange transportation through his freight forwarder, to avoid contact between the 2 suppliers.

Maybe some readers can offer a few more tips for this type of situation?

How to Use Statistical Tools to Improve Production Processes

In Limits of Statistical Process Control in China, experienced consultant Brad Pritts described his observations over the years. Below is his advice to use statistical tools to improve production processes.

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What I do when I work with companies, whether US or Chinese, is the following approach.  I learned most of this from books by Dr. Don Wheeler, a statistician and disciple of Deming.  I strongly recommend anything written by Wheeler to people who want to use statistics to improve quality.  While I am a skeptic about Xbar/R, I am an absolute believer in the value of statistics for process improvement.   Wheeler’s books do a good job of explaining variation without unnecessary complexity.

First, determine the capability of your measurement system.  This is done using gage repeatability and reproducibility studies, as well as determining bias and linearity.  No measurement system is perfect.  You need to know that your measurement system is effective relative to the degree of variation your process has, and the tolerances you need to achieve.

One mentor I worked with emphasized the importance of this point by stating emphatically that if you changed a manufacturing process based on unproven measurements, you were guilty of engineering malpractice — tinkering blindly.

Many times it’s necessary to spend quite a bit of work improving the measurement process before tackling the production process itself.

Second, determine whether your process is stable in the short run.  Take a sample of, say, 20 or 30 consecutive pieces.  Chart the characteristics as a simple run chart. Look for unnatural patterns in the data – trends up or down, sudden shifts, etc.  Calculate the short term process capability.

Often this step alone will show you where process improvement is needed. Sometimes it will be very simple things — tightening up loose fittings in a machine, making an adjustment to a fixture.  Other times it may be very difficult – for example, it may be necessary to redesign and rebuild a stamping die… or replace a machine with a better technology machine.  These may happen but only with major management commitment.

Third, use the knowledge of the process to establish inspection frequencies in the control plan. Highly capable processes may only need to be checked at first piece setup while troublesome processes may need 100% inspection.

Finally, where warranted, do ongoing longer term studies to see what is changing over the long haul — due to machine and tool wear, changes in operators, different batches of raw material, etc.

One amusing project I was involved with was an assembly operation. Simple statistical analysis helped us in an unusual way. This product had a 32 person assembly workforce.  Most of the workers had been newly recruited, as this operation was a new job to this company. Turnover was high.

We charted the defect and rework rates and found a striking pattern in defects which were clustered on occasional Mondays.  With a bit of discussion we found that the defects resulted from a practice of hiring several new workers at a time, and starting them all on the line on Monday mornings, overtaxing the supervisors’ abilities to train and monitor their work.  We changed the hiring practices to bring new people in on a staggered basis.  No new people on Monday morning!  Tuesday, bring in one new worker on a half-day shift (starting mid-day), then progressing to a full shift on Wednesday;  if multiple workers were needed a second new worker could be added Thursday in the same pattern.  Defects and customer complaints fell by about two thirds!

While I am proud of my education and experience with complex statistics, the fact is that many of my biggest success stories come from very simple, practical moves like the story above.

Conclusions:

  1. Reducing variability is a key to improving quality and profit.
  2. To understand and reduce variability, statistics are a powerful tool.
  3. Use the simplest statistics first — counts, totals, average measurements, run charts. Sometimes these are all that are needed, and you’ll have a much easier time explaining your results to others.
  4. Confirm (and if necessary, improve) your measurement processes first. Only then will you be able to effectively measure and improve the actual production process.
  5. Assess short term and long term process capability, and use this knowledge to set up your inspection program and improvement priorities.
  6. If ongoing Shewhart style x-bar and r charts are needed, either automate them, or plan on extensive supervisory and worker training, handholding, and management if you expect them to work.   

Particularly critical is establishing an environment where workers are willing to honestly report problems. This is difficult in many companies, American or Chinese.  If you can’t get to this situation don’t waste your time on SPC.