Hongting LIU

In this article, Hongting LIU (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022) studies the pricing advantages for American products in the Chinese market, focusing on factors like economies of scale, market competition, and supply chain efficiency. The author has worked on the consultancy of Global procurement for two years for IT equipment and here is the analysis of a phenomenon.

About the phenomenon

For at least 5 years, certain American brand products produced in the US (Cisco’s technological hardware, Fortinet, etc.) are cheaper in the Chinese market than in the US. How can a product become cheaper after all the transportation over the Pacific Ocean? This discrepancy can be attributed to economies of scale. Strong demand from China has led to substantial import volumes, reducing unit procurement costs. Many distributors buy a lot in stock then trade them like commodities. These products are treated like commodities in China, with prices dynamically adjusting to supply and demand.

According to China’s 2023 import-export trade statistics, the annual import value of American technological hardware (including communication and network equipment) reached $55 billion, representing a year-on-year increase of 8.3%.

Key reasons behind the phenomenon

Main reason: China has the Economies of Scale and Bargaining Power

Cisco’s 2023 annual report reveals that the Asia-Pacific region (mainly China) accounts for 30% of its international sales, with average bulk purchase discounts ranging from 15% to 20%. At the same time, such a big market is dominated by several huge distributors. In 2023, a major distributor captured 50% of the market share through cross-border sales across mainland China and Hong Kong, driving down overall product prices. We do not know exactly who is the distributor as the information of it is disclose. However, given the fact that there is such major distributors can dominate in such a big market, the scale they trade can be huge and their bargaining power will be high. A distributor with a dominant market share often has better economies of scale, allowing them to negotiate lower purchase prices from manufacturers

China has low cost in the warehouse solution and the labor compared to the US. Chinese international trade market, especially IT products, is concentrate in Guangdong area which is the nation’s top trading province for the 39th consecutive year. In 2024, Guangdong’s total foreign trade—encompassing both imports and exports—reached 9.11 trillion yuan, accounting for 20.8% of China’s overall foreign trade. At the same time, a significant portion of this trade comprises electromechanical products, which include a wide range of IT-related goods. In 2024, Guangdong exported electromechanical products worth 3.87 trillion yuan, accounting for 65.6% of its total exports. With the economies of scale, the overall cost of logistics solutions in the Guangdong area remains higher cost-efficient than in Southeast Asia, even though labor costs are higher. The region benefits from advanced automated warehouses, well-developed logistics processes, and multiple international ports. Additionally, its proximity to Hong Kong further strengthens its position as a hub for international business. Therefore, the logistic cost in China for IT products can keep low.

The price is more transparent and dynamic due to the high amount of real-time trading and global supply-demand dynamics

It is easy to access to suppliers and ask prices so the price is rather transparent. It can be hard to profit from the information gap. Data from Alibaba International Station shows that in October 2024, the wholesale price of Cisco network switches in China was approximately $650/unit, while the U.S. domestic price was $720/unit.

Also, The rapid growth in demand and the agility of the Asia-Pacific market significantly enhanced China’s bargaining power for these products during the global supply chain recovery after the pandemic, allowing for more dynamic supply-demand adjustments.

The Impact of USD Dominance on Trade

USD Exchange Rate Mechanisms

The dominance of the U.S. dollar as the primary currency for international trade directly influences import and export costs. When the dollar appreciates, the cost of imports priced in dollars rises, making it more expensive for countries to purchase goods and reducing export competitiveness. Conversely, when the dollar depreciates, import costs decrease, and export competitiveness improves, benefiting economies that rely on international trade.

Supporting Data

According to the IMF’s 2023 report, approximately 80% of global trade transactions are settled in U.S. dollars, highlighting the currency’s central role in international trade. Price-sensitive products, such as technological hardware, represented 40% of China’s total imports from the U.S. in 2023, demonstrating the impact of exchange rate fluctuations on critical industries. During the same period, the USD to CNY exchange rate rose from 6.45 to 7.31, leading to an estimated increase in import costs of 13.4%, further emphasizing the financial implications of currency movements.

Policy Implications and Strategies

Managing Exchange Rate Risks

To mitigate the risks associated with currency fluctuations, businesses can utilize forward exchange contracts, allowing them to lock in USD to CNY exchange rates and stabilize costs over time. Additionally, adopting multi-currency settlement can serve as a viable strategy, enabling companies to negotiate transactions in RMB or other relatively stable currencies, such as the euro, to diversify risk and reduce dependency on the U.S. dollar.

Optimizing Procurement Strategies

Proactively managing procurement strategies is essential in navigating USD fluctuations. Companies can monitor market prices in real-time, leveraging various platforms to access larger distributors with stronger negotiation power, ensuring more competitive pricing. Moreover, expanding supplier networks by balancing sourcing between American and international suppliers helps mitigate reliance on a single market, offering greater flexibility and resilience in global supply chains.

Leveraging Market Arbitrage Opportunities

Businesses can capitalize on market arbitrage opportunities by engaging in cross-border resale, where American products are distributed through third-country markets for profit. This strategy is particularly advantageous for regions with restricted access to U.S. goods. While this practice can be legally executed through proper procedures, it is crucial to remain compliant with both international and domestic regulations to avoid potential legal and policy violations.

Strengthening Supply Chain Collaboration

Enhancing supply chain collaboration plays a fundamental role in cost optimization and efficiency. Close cooperation with logistics providers allows companies to streamline transportation and warehousing, ultimately reducing procurement costs. Establishing long-term agreements with suppliers further ensures price stability and a consistent supply of goods, fostering a more secure and predictable trade environment.

Conclusion

The lower pricing of American products in the Chinese market results from economies of scale, market competition, supply chain efficiency, and dollar exchange rate fluctuations. People work in global procurement can take advantage of this phenomenon to optimize the procurement strategy.

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Useful resources

Cisco 2023 Annual Report

Alibaba International Station

2023 China Import-Export Trade Report

About the author

The article was written in January 2025 by Hongting LIU (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022).