taxes


Since the cuts in China export tax rebates was announced last week, there has been an immediate impact on the bamboo flooring industry.

For bamboo flooring, the export tax rebate has been reduced from 13% to just 5%. In a cut-throat and highly competitive industry, profit margins have been cut significantly overnight. So what changes should we expect as a result?

Firstly, many of the larger bamboo flooring manufacturers have temporarily stopped purchasing semi-products. Contrary to what they may say, many of the biggest manufacturers only do the tongue-and-groove milling and/or lacquering. The initial processing from bamboo poles to bamboo boards are outsourced to many smaller factories.

(Star Bamboo is a smaller player, so we can focus on quality and make the entire bamboo flooring in our own factory.)

There is now uncertainty in the market. Will the customers be willing to accept higher prices or would we have to bear the full burden of the tax cut?

No one is sure until the tax cuts take effect on 1 July, hence a temporary pause in production.

Secondly, those manufacturers that do continue buying semi-products have dropped their asking prices. This means that the big boys are attempting to pass on at least some of the lower margins to their supporting factories.

This will cause a cascading effect up the supply chain, and probably force many of the small factories to close down.

Consolidation is a good thing for us in the long term, as it eliminates many of our competitors.

I’ll have more updates for you as events continue to develop in China.

Cascading dominoes

China has announced yesterday that they will cut the export tax rebates for more than 2,800 products starting 1 July 2007. The purpose is to reduce trade surplus and cut waste.

Export tax rebates means exporters in China get a refund on the domestic taxes they pay. This means they are able to charge lower prices than competitors from other countries. The whole scheme was started in the 1980s to encourage foreign investment.

But the booming Chinese economy and a burgeoning trade surplus meant that it’s a matter of time before this export tax rebate system is scrapped. Already, the rebates levels have been gradually reduced for many categories of products. This latest round of cuts is hardly surprising.

In all, 553 product categories deemed to be resource-intensive and polluting will have their rebates eliminated. Another 2,268 will have their rebate levels lowered.

So where does bamboo flooring fit into this?

Well, the details aren’t out yet. But our product is not polluting so I expect us to fall into the latter category of rebate reduction.

Unfortunately the USA is one of the biggest markets for bamboo flooring, and also the economy with the greatest trade deficit with China. This probably means bamboo flooring will have one of the lower rebate levels.

It’s a significant factor in an industry with paper-thin margins, and I expect prices to be adjusted upwards by 5-8% across the board. For the time being, we are holding our prices.

I’ll post updates on this as more details emerge.