Don’t put all your eggs in one Chinese basket

It is never wise to put all your eggs in one basket and especially when you are doing business in China. The other day I had a conversation with the CEO of a small American company that makes kitchen apparel in Guangdong Province. Their products have been well received by US customers but the rise in cotton prices in China (between 30-40% over the last year) has really cut into their margins forcing them to raise prices and lose sales. The company has only one supplier of print fabric now and their option is just one: wait it out and hope the price of cotton drops (which it will do. The question is when ). From the tone of his voice I could tell the owner of the company is losing some major sleep over the direction of his business because of cotton prices. I also suspect that the Chinese supplier knows that the US company has no other options so it does not have to make concessions on its prices. In its cost negotiations with the US company it just has to point to the worldwide spike in cotton prices and the US company can do nothing.

Of course, cotton is expensive everywhere in China but that is not to say that a vendor with a favorable cost cannot be found. In my experience negotiating with suppliers I have found that some suppliers – depending on their size, their location and their current volume of business – can be drastically cheaper than a another supplier of the same product. When I worked in the furniture business I would routinely ask several vendors to cost and sample identical product and what I often received back was costing that differed greatly from one vendor to another, as much as 30 % in some cases. Of course one does not always go with the vendor who has the cheapest price. Sometimes the quality problems you are forced to address by going with the cheapest vendor offsets any savings on first cost. Still it is possible to find the vendor who has low first costs and who will cooperate with you about managing quality.

In fact, one of the worst things you can do in China when you are trying to grow a small business in the US is to rely on just one supplier. What you risk is bringing your business to a standstill in the event of a natural disaster or crisis like we are seeing now with cotton prices in China. The key is to have several vendors who are strategically located. This will not only help you get better first costs but you will find also that different vendors have a different range of product and this means you can offer more to your customer.

China: Not the monolith it seems

I read an article on auditing suppliers the other day written by a German businessman who has been importing electrical goods from China to EU countries for over two decades. The writer basically made some of the same points I have been making about doing factory audits, namely that it is important to come to some understanding about factory management, as well as knowing what QC processes the factory has in place and what kind of equipment they are using. After all the machinery, even if it is top-flight, is of no value if you have management that so focused on cutting costs that they don’t want to train people how to use the machines or burn the energy it takes to turn them on. The writer also mentioned that when evaluating a factory you should do the following:

1.) Make sure that you know who your factory’s subcontractors are.
2.) Confirm that rejected parts from these subcontractors are under lock and key ( one of the standards of ISO 9000).
3.) Confirm that the factory complies with China’s labor standard ( mainly the child labor laws).

The problem with the article I thought is that is leaves one with the impression that all factories in China are the same – large with management structure in place and at the point of ISO certification. However, the opposite is true. 60 % of China’s exports come from small businesses/factories and the great majority of these factories are located in rural parts of China where the factories operate pretty much at the whim of the owner. Child labor in these factories can be a problem and subcontractors are often local villagers that number in the thousands. In other words, there is no way to evaluate sub-contractors. Absolutely impossible. At most of these factories if you mentioned ISO9000 you would get a quizzical look from factory management.

You really need to remember that China, although it often comes across as one, is not a monolith. Just as there are regional varieties of Chinese cuisine, so business practices vary from Province to Province. What applies in Anhui Province, for example, may not necessarily apply in Guangdong Province. The same with factories. What is accepted as standard at a big electronics factory outside of Shanghai, would most likely be thrown out the window at a small furniture factory in Fujian. You have to keep this in mind at all time. Once again, do as much research on your own as possible before you enter into an agreement with a vendor or get on a plane to go to China to do a factory audit. It will save you much time and money.