What's "dumping?"Depends on whom you ask. It could be an intentional policy, or it could just be a matter of how manufacturers cost their products.
In the case of Chinese products entering the U.S. market at inexplicably low prices, costing methods are often less than ideally accurate, according to a recent study from the Institute of Management Accountants, but they do not result in prices that have been alleged to constitute dumping.
The study was undertaken after a meeting between the IMA and the Chinese Ministry of Commerce in 2005. It was determined by both parties that the Chinese needed a better understanding of costing policies, procedures and methods - not only to justify denials of dumping, but also to help Chinese companies better estimate the cost of their products.
"Their view was that they weren't doing anything wrong, that their costs were their costs, but they wanted somebody who could do an independent review and see how their accounting system worked and how much product pricing was related to the cost of the product," said James J. Gurowka, IMA director of international development. "If there were changes that had to be made, they wanted to change them, and if not, they wanted to publicize that they were doing O.K."
THE ROOTS OF THE PROBLEM
Assessing some 400 companies, the team, led by IMA director of research Dr. Rael Lawson, found that "a number of cost items [have] been inappropriately treated in the past per Chinese accounting regulations."
Some of those regulations reached back to the country's old, centrally planned economy, when accounting was basically a bookkeeping function. The 2006 adoption of the Accounting System for Business Enterprises, the study said, has converged financial reporting with International Financial Reporting Standards, and in so doing has addressed some of the costing problems.
Gary Cokins, a performance management solutions specialist for SAS, a provider of business intelligence and analytical software, said that the IMA study revealed pockets of best practices, but noted that companies have a long way to go.
"The existing management accounting practices in many Chinese companies are fairly basic, with an emphasis on expense reporting which is not adequate to support the quality of decision-making that Chinese companies now require to compete - both internationally and among companies within China," Cokins said. "The IMA study revealed some evidence of companies that are applying practices of the Western hemisphere, such as activity-based costing principles. These are increasingly needed because the managers of Chinese companies must now understand their source of profits, not just what they spent."
One of the problems that the study detected, and which has since been addressed by current accounting standards, was the difficulty of treating overhead costs and fringe benefits related to direct labor. Often, Gurowka said, these costs are not included in the cost of products, which results in apparent costs and consequent prices lower than they would be under U.S. accounting policies.
While cost of products was found to be the primary basis of prices, companies also applied other considerations, such as employment goals and the need to establish a global presence. Profit was not always a company's mission. Companies also tended to set performance goals years in the future, as opposed to the quarterly goals set in many U.S. companies.
The study found "a wide variety of cost management techniques and practices utilized by [Chinese] enterprises, ranging from relatively primitive to sophisticated," but that "this diversity of practice is similar to that in other countries."
Cokins said that the fundamental problem in China isn't technology or software but culture. "The universities are only now beginning to educate managers," he said, "and in a country where tradition is strong and making changes can include risks, managers will need to investigate and try modern managerial accounting methods."
Gurowka said that the IMA study should prove helpful not only to Chinese companies, but also to U.S. companies seeking Chinese partners. It will also be useful to those doing business in China that need to know how competitors cost and price their products. "Costing is certainly a concern when you're looking to partner with someone in China," he said, "because it's hard to understand if what you're looking at, how accurate it is. If they say they're making so much margin on their products, you have no idea how correct they are."
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