When you do business in China you are helping more people than you are hurting

I am always amazed at the fervor of the anti-China sentiment that I see in online discussions in places like Linked In and Google plus. For example, if you join a furniture community on Linked In and initiate a discussion on China sourcing then chances are you will receive at least a couple of hostile anti China messages, usually from companies who have lost business to China.

Many people resent China because of the effect China’s rise has had on their own local economies, in the form of industry shut-downs and job losses. Yet, people who criticize China fail to realize that in spite of the problems it has created, China’s rise over the past generation has done more good than harm for the world. China’s remarkable growth has created far more jobs than it has lost and has pushed down costs on a lot of consumer goods, enabling more people to live better lives. In fact in a recent NY Times round table discussion, the same point was made.

NY Times Round Table

There is no better example about the irrationality of China bashing than in the Smithfield Foods story. Smithfield, America’s largest producer of pork has signed a tentative deal to sell the company to a Chinese pork manufacturer, Shuanghui Foods. If the deal, valued at over seven billion dollars, goes through it would be the largest ever takeover of a US company by a Chinese company. There are a lot of concerns now that the takeover would threaten the safety of the US food supply because China’s struggles with food safety are well publicized. This at least is what one reads in the headlines. However, since the US will not be importing pork from China under the deal these concerns are misplaced. The deal is more to allow Shuanghui to acquire the technology and additional supply it needs to fulfill consumer demand in China. China consumes more pork and has more pigs than any other country but this is still not enough to feed its demand. Pork consumption in America, however is declining, and for this reason the deal would ensure that Smithfield’s 46,000 employees could keep their jobs. In fact the deal would probably allow the company to add new jobs as it ratcheted up to meet growing demand from China for pork products. Make no mistake about it the deal would be beneficial to the US as well to China.

Just as a lot of China business is good for the US.

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The new EU Directive on Toy Safety

Just this past week the European Union implemented stricter testing requirements for toys imported into Europe. The requirements were actually drawn up in 2009 but they just came into effect this week. The requirements, known under the rubric 2009/48/EC Toy Safety Directive, aim to tighten the monitoring of the chemical and material content in toys as well as the design of some mechicanical and electronic toys. Carcinogenic chemicals and heavy metals like arsenic, cadmium and lead are big targets of the new directive. Arsenic, you might be surprised to learn, is found in a lot of toys but under the new directive the tolerance is much lower. Before the new directive 0.25 micrograms was the tolerance. Under the new directive any toy which shows more than 0.9 micrograms of arsenic will be banned.

The new regulations will be a big challenge for toy makers in China. In a Greenpeace study in 2011 it was found that about 30 % of toys purchased in five major Chinese cities contained excessive amounts of heavy metals. And in a more recent survey to determine the impact of 2998/48/EC on Chinese toy makers it was found that about 80% of toys sampled in Hangzhou, Zhejiang Province, failed to meet the new regulations. In other words, Chinese toy makers will have a lot of work to do to get into compliance with the new regulations. But they will have to do it or find that they will lose their second largest export market, the EU.

The Chinese government recognizing what is at stake here is organizing training sessions to help exporters get into compliance with the directive. The major testing labs in China, e.g. Intertex, SGS, BV are also working with manufacturers to help them understand, and pass, the new regulations. From my experience the difficult task will be for Chinese toy makers to qualify their subcontractors because so many raw materials are imported into China from overseas these days. It will be interesting to watch.

Still I think 2009/48/EC is good news for China and for importers. It is an opportunity for Chinese manufacturers to produce product in accordance with the strictest global standards and enhance their own reputations. And importers who source in China will also be assured that the products they are passing on to their customers are as safe as any in the world.

Finally, a good tip is this. Even if you are not importing into Europe, ask your prospective vendor if they are compliant with the new directive. If they are that tells you right there that this may be a vendor you want to work with.

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Is China on the brink ?

There was an interesting and provocative op-ed in the NY Times a few days ago about China’s economic woes. The piece was written by Nobel Prize winning economist Paul Krugman. Krugman argues that China now faces a number of challenges, which he does not think it can overcome. These problems include an abnormally low rate of consumer consumption and lower returns on investments in domestic infrastructure.

All China’s current problems, Krugman argues, are owing to the end of the era of cheap labor, an era which catapulted China’s economy to global dominance. But the rise in wages has meant that growth is just that much more difficult to achieve. Investments in domestic projects no longer return as much because they cost more. As returns diminish so does purchasing power. And Krugman points out that the average Chinese has never really spent much anyway simply because they don’t have much to spend. The stories you read today about China’s consumers running wild generally describe the middle classes in major cosmopolitan cities like Shanghai, and Guangzhou. Yet 50 % of China is still rural and still mired in poverty. Krugman’s vision of China nowadays is nothing short of apocalyptic.

I have read many doomsdays scenarios about China over the last 25 years, all of which failed to materialize. But all those scenarios were cast when China alone was having problems. The rest of the world was doing OK and because of this China always seemed to pull through, largely becuase the demand for China’s exports was a constant. Now everyone seems to be hurting as the effects of the Global Economic Crisis menacingly linger five years on. In other words, this may be the one time the doomsday scenario written about China plays out. And this is Krugman’s point, that this time is different.

I really don’t know what to think. I have always seen China as more resilient than anything else. The Chinese always seem to get it done, no matter what the odds are. They are like the baseball team without any superstars that just seems to win games. And a lot of games. But I guess how I really feel is summed up by an article I saw in one of the China papers recently. The article was about a new wave of Chinese camera enthusiasts who are now paying big bucks for vintage Leica cameras. “Hmmm…the Chinese are buying vintage Leicas,” I think to myself as I read this. Wow. Or as Edgar Bergen used to say “Who woulda thunk it.”

So my gut feeling is that Krugman is wrong. The times are different now, yes. But the Chinese are different now too.

Here is the link to NY Times piece.

Krugman op-ed

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Appreciating your vendors even when you don’t feel like it.

I have many small business owners or mompreneurs who come to me complaining about their China vendors. Most of the time quality is not the issue. It is cost. Costs gradually go up over time, and sometimes there is a big increase. The small business owner, with all the downward price pressures they face, feels helpless and approaches me to help them find a new vendor. Of course I am more than willing to help them but my advice very early in our conversations is always to stop for a minute, take a deep breath, and look more sympathetically at their current vendor. After all it is their current vendor who has helped them build their business to this point.

I have said this many times that just as there is no perfect spouse. there is no perfect vendor. If you have a vendor who has helped you build a business over the years, no matter what issues you have with that vendor, you have to see them as part of your family, so to speak, and appreciate them for that. That does not mean you can not look for a new vendor. You can and perhaps should. But don’t do, as so many who come to me are inclined to do, and look on those years you have spent with your current vendor as a waste of time.

If you do find a new vendor, make sure you spend time with that vendor before you leave your old vendor. Who knows the new vendor might be much worse than the old vendor. In fact, I just had a client say to me the other day, “ Geez, Vendor Y (her current vendor) is looking better all the time. “

The bottom line is growth. If your business is growing with your current vendor, is that so bad ? I don’t think so.

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The EAC junk email index of Chinese economic growth

As some measure of how slow China manufacturing is now, all I have to do is look at the number of unsolicited emails I get from vendors on a weekly basis. From the week of 7/9 -7/16. I received 20 unsolicited emails from vendors in China. These are emails from trading companies or factories advertising their products to me. In that same week I probably received about 20 emails from shipping or logistics companies. So figure about 40 unsolicited emails on average per week now.

If I go back to January of this year, picking a week at random, I see that from 1/14/13 to 1/21/13 I received just six unsolicited emails from vendors in China.

And if you go back further, to July last year, from 7/9/12 to 7/16/12 I received just two unsolicited emails from vendors in China – and both of those were vendors I had dealt with in the past.

The increase in the number of unsolicited emails I am receiving these days just makes a lot of sense when you consider the slump China manufacturing is mired in, all indicators way down from last year at this time. I find the emails from logistics companies alone fascinating because I read so many stories nowadays about the excess in container cargo space out of China. The big shipping companies are really struggling.

Still, I can’t say I mind all the emails because it just means that I have a much bigger pool of new vendors to consider. These are obviously vendors who want business. And that is very important in and of itself because you do not want to partner with a vendor who does not express enthusiasm for your business. Plenty of those unenthusiastic vendors out there as well, bad economy in China notwithstanding. Of course, I am sure there is a LOT of riff-raff among the companies who send me these emails but I am sure there are some diamonds in the rough as well.

I just wonder if we will ever get back to the “normal” few emails a week rate ? I kind of doubt it because China manufacturing is just different now.

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How to do an inspection in China

Doing an inspection in China is really nothing more than looking in cartons to figure out if what the vendor made is to spec. Depending on the size of your production order you can inspect 100 % of the order or a part of it. Usually however, the size of the order mandates that you inspect only a part of it. For example, it is simply not possible to inspect every piece of a 20,000 pc apparel order unless you have a few people helping you. And even then it would take at least a week. The trick then is looking at enough of production so that you really come to an idea as to overall quality of the production. If you look at too little of production then you may miss bad production lots, bad cartons and come away from your inspections thinking your product is better than it actually is. If you try to inspect too much fatigue will set in and you may start to miss bad product or just start passing everything. I have experienced the fatigue factor before on inspections and it really can slow you down.

Probably the best method for doing an inspection in China is AQL, which stands for Acceptance Quality Level. AQL is based on statistical sampling methods first implemented during WW2 to monitor procurement of wartime supplies. At that time 100% sampling of military supplies was found to be ineffective, costly and time-consuming. So AQL was devised as a means of verifying if a production lot was acceptable or not based on looking at a fixed number of pcs.

This is a very simplified version of how AQL works.

There are 3 levels of an inspection, 1, 2 and 3, 1 being the most lax and 3 the most rigorous. You determine the level of inspection you want based on your customer. If you are doing plastic promo items for a chain restaurant, for example, you probably don’t need a strict inspection and a level 1 inspection might suffice. If you are doing high-end décor for a well known retailer with severe chargeback penalties, on the other hand, you need the strictest, Level 3 inspection to ensure that your product is in compliance. At the same time if you are working with a vendor whose quality leaves something to be desired, and who was sure to fail a Level 3 inspection, then a Level 2 inspection might be the best. So as you can see there are a lot of subjective variables involved in determining the framework for your inspection. For this reason you need to be flexible with the results.

Your PO QTY then determines your sampling lot. For example if I had an order of 20,000 pcs for level 2 customer, I would pull 315 pcs from the order and inspect those. If among those 315 pcs I found 14 or more broken pcs and more than 21 pcs showing other “minor” problems then the inspection would fail. The vendor would then have to open up all the cartons and inspect and repair the whole order. Needless to say, this is why vendors do not like inspections.

The key to doing an AQL is, as I said above, flexibility. You cannot always just take a pass/fail for what it is. For example, if you pulled 315 pcs from production and 14 were broken but the rest of the sampling lot looked very good, then you might just want to accept the order especially if you only needed only 80 % to fulfill an important order on your end. It also depends on your vendor. If a good vendor fails an AQL inspection there may still be plenty of good product in the order and you may just have made a mistake in picking your sampling lot. If a bad vendor fails an AQL inspection then you will probably find more bad product.

Once again, this is a simplified version of AQL. There is a lot more involved, for example how to pick your sampling lot and establishing your own acceptable quality levels. But if you are going to do an inspection in China it is a good idea to familiarize yourself with the AQL. It will save you a lot of time, sweat and aggravation.

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In China sourcing, foresight is always better than hindsight

I was thinking today about small importers who are sometimes reluctant to undertake the cost of an inspection in China. Of course they do not want to do this because the cost of the inspection might be more than the nominal value of the PO. To conduct an inspection in China by yourself can easily cost 5K ( air fare, accommodations for a week and expenses). There are options, like hiring a China based inspection firm, but depending on your product this may or may not work. Inspection firms in China use local inspectors and they only have a superficial understanding of your company and product. If you have a design driven product then using a local inspection firm, I would argue, is only one step above asking the vendor to do the inspection, So in my mind there really is no substitute for doing the inspection yourself.

But it is uncanny how many people just do not want to do an inspection. Their thinking is simply, “Why do I want to spend 5 K to go inspect this order, when the value of the PO is only $20,000. If I go to China my overhead goes up $5,000 and that is a lot of money for me, a small business. I just cannot afford to do an inspection. And I don’t want to go to China anyway. It is too far away.” All this is fine and dandy until you consider what the real value of the order is: is it the monetary value of the PO you give to the vendor in China or is it the potential sales of the product to customers at home ? In other words, is it a $20,000 or a $40,000 ? I would argue that the real value is the value in potential sales. If you accept that you will see that it makes plenty of sense do an inspection in China even if your order is relatively small. Going back to my example, if you place an order in China for $ 20,000 worth of product but you don’t inspect it and the order comes in bad, then you lose potentially $ 40,000 in sales and even more in repeat sales. If you inspect the order and it comes in good, then you stand to gain $ 40,000 in sales, less the cost of your inspection visit (still you are doing well).

I would add that if you are doing an order in China for an important customer, – albeit a small order – it behooves you to inspect or risk losing your customer. Once again you have to ask yourself if significantly reducing the risk of losing an important customer is worth the cost of a trip to China to set up your production and make sure as best you can that it goes well ?

These are all things to keep in mind when you do that small China order. If you feel you can live without doing an inspection that is great. More power to you. But if you foresee significant lost sales, no matter how small the monetary value of the PO, then it is probably a good idea to book your ticket to China.

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Is China really cracking down on Foriegn companies ?

There was an article this morning in one of the Chinese newspapers about the increasing scrutiny global corporations face when they operate in China. And I have seen the same topic addressed recently in several popular China blogs. The obstacles come in the form of investigations into product safety, allegations of price-fixing, new labor laws. Some examples of big companies that have been under investigation are IKEA, KFC and Yummy Foods, Nestle and Danone, Tetra Pack, a Swedish food packaging company that has been in the headlines recently because it is acting as a monopoly. The Tetra Pak case is interesting. Tetra Pak has been in China since 1972. But even that pedigree has not protected it.

However, as you can see most of these are food related companies. Even IKEA’s problems in China were food-related. Some of its cafes were found to be selling expired product. In China food safety has become a much–debated issue and many Chinese consumers have come to favor international companies because they perceive that foreign companies have more reliable supply chains and deliver safer product. Infant formula and milk provide good examples. There have been several well-publicized product safety incidents involving Chinese manufacturers of infant formula and now many Chinese will go to great lengths to buy safe infant formula, including travelling to Hong Kong. Ditto with milk, where imported milk is one of the fastest growing items on the shelves in supermarkets throughout China. I am not sure but I suspect one reason the Chinese Govt has targeted some of these global food corporations is to show Chinese consumers that foreign companies also sell bad products. It is not just Chinese companies who are to blame for China’s food safety issues.

In any case, if you see headlines about problems foreign firms face in China now, don’t be too worried. Unless you deal in food or pharmetucials it shouldn’t concern you. Chinese vendors still want your business and the Government does too.

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China vendor communication is something you have to get used to

I had an email from someone yesterday who said they sent some money to a vendor in Shenzhen ten days ago and had yet to hear anything from the vendor. The money was for a sample and this person has just not been able to get a hold of the vendor, by email or skype. He told me he thought he had been “ripped off.” My advice to him was simply to give it a little more time. Chinese vendors are notorious for flakey communication. They will not reply to your emails, they will give you email addresses that don’t work, phone nos that don’t work. Sometimes you have to spend a lot of time tracking someone down. This is not by design but is just run-of-the mill chaos in China. In fact I have one client in the US who seems to call on me anytime he has tried but failed to reach a vendor. The funny thing is that these are all vendors he has met in person but yet he cannot seem to maintain contact with them for one reason or another. They disappear for a while without informing him, they change their contact info without informing him, they change their website etc etc. They are very hard to find sometimes but I usually find them and they are always very nice and a bit perplexed at my customer’s panic.

I also told the person who had emailed me that most Chinese businesses are honest and they are not in the habit of taking someone’s sample fee and disappearing. But that does not mean it does not happen sometimes. All the more reason to look at a company as closely as possible before you do anything with them, even if it is just a sample. If they do not look extremely professional, with a fairly standard website and a physcial contact address, then you need to think twice about giving them your money.

Needless to say, you should also appear very professional when you approach vendors in China. An unscrupolous vendor or individual in China might think twice about ripping off a company that appeared established, whereas they might not think anything of taking a sample fee from an indiviual who had simply approached them with a lone project. But, once again, these are just the unscrupulous ones. Most vendors in China are not out to steal your sample fees. Don’t worry.

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A first visit to China

My client from Toronto is back from his trip to China. This was his first trip to China, and in fact first ever visit to Asia. It sounded and looked like he had a great time ( from the glow he exuded on our skype call). And although he was less than enthusiastic about the vendor he had gone to see, he nevertheless regarded the trip as a success.

Regarding the vendor, my client said his impression was that this was a very big and a very busy vendor and that they probably regarded my client as a “small fry.” The vendor took my client to lunch twice but there was no official welcoming banquet and the head of the sales dept, who had approached my customer first at the NYC Gift Fair earlier this year, was absent for much of the two days my client was in Ningbo. Anyway, it certainly does not sound like they rolled out the red carpet for this father–son “delegation” who had travelled all the way from Toronto. I told my client that this was not a good sign. And in fact I have never heard of anything like this where a foreign guest was not taken to dinner by their hosts upon their arrival in China. But it may just be a sign of changing times in China where foreign importers are not accorded the same VIP treatment they have become accustomed to over the years. And many Chinese companies have overhead too. It may be that in these tough times extravagent, wastful banquets for customers are on the way out ( let’s hope not !).

Another couple of worrisome signs are that the vendor changed their pricing on my client’s product, telling him the very competitive prices he had given him before were based on a higher MOQ. My client seemed irritated by this but, as I had already warned him that something like this might happen, he seemed to be able to “process” it and move on. And the vendor also lengthened the lead time from 45 to 90 days. This is also very concerning. 90 days is a very long lead time for this product, most of which is automated product.

My client seemed to be at a loss about what to do. So I asked him what his gut feeling was. He said his gut feeling was that he wanted to give them an order. He likes their quality, their facility and they seem responsive and friendly enough. I told him that was fine and that these are definitely good points he does not want to ignore. But a first order should be as small as possible. See how it goes. If the service is good, then look at increasing your order. But he should anticipate that there will not be quick solutions to problems if they arise ( because they are big and he is small) and he should be very careful about the lead time. In China when a vendor gives you a lead time you should always tack on 2-4 weeks because China orders just always seem late for one reason for another. In other words, if he orders product with these guys and they have given him a 90 day lead time it may be 4-5 months before it rolls into his distribution center in the US.

Other interesting observations on his trip.

My client spent much of his career working in London but he said he found Shanghai much bigger and much more intense. He seemed overwhelmed by Shanghai. But having spent seven years there I can understand that. Shanghai is nothing short of overwhelming. I find it much more intense than Tokyo where I have spent the last three years. I would add that whereas the Tokyo energy just wears you down, the Shanghai energy invigorates you.

The train station in Ningbo was chaos. Yes, I believe that. Train Stations in China are very crowded and chaotic. You walk in the door and your heart sinks as you wonder how you are going to manage to buy a ticket. The experience can drain you in minutes. So always book your train tickets in advance ( preferably through a hotel concierge) and arrive at the station early because it may take you some time to find the right queue ( or what is supposed to be a queue).

The jet lag on his return really got to him. He travels a lot to Europe but the Toronto – China trip was just so much longer.

The food in China was wonderful. So true and one of the best things about travelling to China. Chinese food in China is an experience unlike any other. Westernized Chinese cuisine just does not cut it, no matter how “authentic” it is said to be. After eating Chinese food in China, you will return to your own country a Chinese food snob.

Haggling in the local markets was challenging and exhausting but fun. Yes, it is true. But if you go to China you definitely want to leave yourself a day to do this. It may be the highlight of your trip. And, as my client pointed out, the knock off LV bag you buy in China for next to nothing may be better quality than the original !

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