China sourcing is not like India sourcing

A former client of mine who does a lot of business in India is just getting into China and he already feels China is a little difficult vis a vis India. His first China order did not go well. He had received good samples from the China vendor but when he received his production order quality left much to be desired. He has done some things right, in terms of starting out with a very small order. And some things he obviously overlooked, e.g. the necessity to inspect the order before it left China. I had advised him to do this but he admitted that he did not want to inspect the order because the monetary value of the PO was not large. And he has built his business sourcing in India and pretty much letting the India vendors do their own QC and ship to him. I think he just assumed what worked for him in India would work for him in China.

However, I explained to him that China and India are very different. I have worked with vendors from both countries and although India vendors can be difficult they generally are easier to work with. I think this is because India is an open democracy built on the shoulders of a longstanding British colonial presence, not to mention the fact and most educated people in India speak near fluent English. Dealing with India vendors is sometimes very easy. When there are problems they will talk to you about them.

China vendors on the other hand can be very difficult. When problems come up their tendency is to look the other way and their response can be extremely slow as it happens to be in the case of my client who has yet to hear back from the vendor after he had emailed them detailing all the problems with the order. That is when he came to me.

This is a good lesson though. Never make assumptions when you go from country to country. Always have a game plan in place that has been based on a LOT of research. Try to talk to as many people as possible to get valuable feedback. And never look just at the monetary value of your POs. Consider always what a failed order will cost you in terms of lost sales and frustrated customers. Inspect your orders before they are shipped to you.

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Trademark protection in China. Go local if that is your only option.

My views on trademark protection have evolved somewhat over the past year. I used to advise small companies that were sourcing in China not to worry about their IP because I know their budgets, know how expensive IP protection can be and I know that most trademark squatters in China set their sights on big companies, not small companies who do not have established brands and who, in many cases, are just starting out.

But now whenever I speak to a prospective or current client I always qualify my advice not to worry about IP protection with the caveat that they should seek trademark protection in China as soon as they can afford it. In doing this, I sound like my old dentist Dr. P who always told me not to worry about the problem tooth he had identified but to get it fixed as soon as I had the means. So for two years I didn’t do anything, had no problems with the tooth and then I got it fixed as soon as my budget allowed it. No regrets and I sleep better at nights now.

Usually I encourage companies to use a western IP law firm if they decide to register their trademarks in China. The reasons are two:

1.) Trademark registration can be tricky and if not done correctly your trademark may still be exposed even after you have registered it. For this reason you want to use a law firm where there are no language and or cultural barriers ( never to be discounted in China).

2.) It is possible to do due diligence on a law firm in your own country. Using a firm in China might be risky simply because you really have no way of knowing if they are reputable or not.

So up until now I have not advised clients to use local Chinese law firms for IP protection in China. But recently I have changed my view, thanks to one of my clients.

My client filed his trademarks in China and he chose to go through a law firm in Beijing, against my advice. The cost he paid was about one-third of what he would have had to pay had he gone through a western law firm. He just got notification stating that his trademark application has been filed in China. NB this is simply notification of the filing and not the acceptance, notification of which can take up to two years. I reviewed the documents sent to him by the law firm and they look legit, seals and all ( though I am no expert on this by any means). And my thought after looking at everything was The fact that he did this and now has some documentation in China for his trademark is a good thing. If something should happen later and ownership of his trademark is disputed then at least he will have documentation to show that he acted in good faith

So the advice I am giving now is to register your trademarks if you can afford to do so. That has not changed. But if you cannot afford a Western IP law firm that handles these filings in China regularly, then look into using a Chinese law firm. Just try to learn a little about them before you do anything.

But doing something is better than doing nothing.

Here are some more posts on protecting your IP in China

Non Disclosure Agreements NDAs
Protecting your IP
The cost to register a patent in China

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How to negotiate with your China vendor

I saw a discussion in an online small business community the other day about what the best negotiating tactics are.

Some of the suggestions that people had are as follows:

1.) Build trust by listening to others and acknowledging problems

2.) Never negotiate under pressure

3.) Lay out the result you want and ask them how to get there.

4.) Make an emotional connection.

Although these may be good negotiating tactics in the US or other western cultures, let’s see how they apply to China. I will go through 1-4 as per the above:

1.) In China it takes years to build trust. You do not establish trust in negotiations with a first time vendor. Do you listen to and acknowledge your vendor when they tell you about production limitations or why they can’t reach your target cost? Of course but that does not mean you should believe them. So always be nice but ask questions to give your vendor the idea that you are no pushover and will question everything they do.

2.) This is a good rule. Never negotiate with a vendor when you are in a rush to find a supplier. They will sense it and you will not win. Always project the attitude to the vendor that you have plenty of time to find a supplier and that you will go elsewhere if they cannot meet your target costs.

3.) This is very good advice. Tell the vendor your target cost. If they say they cannot give you the product you want at the price you want, then ask them what changes they can make to the product to get the price down.

4.) This is good advice and can be a very effective tactic when you do business in China. But to do so you have to speak pretty good Chinese. You are not going to make an emotional connection with anyone in China if you speak English only.

Finally, although I do use some of the tactics listed above, this is generally how I see negotiation in China in a nutshell:

The key is to know the true cost of your product and build your target costs around this. If you meet with a lot of resistance when you tell a vendor your target cost, then don’t waste time with that vendor. The reason is this: Even if the vendor finally agrees to your costs, at some point they will try to recover what they may have given up in negotiations, by cutting corners in production or throwing a price increase at you late in the game. So my negotiation advice is always to lay out for the vendor what you need and if they really don’t seem willing to accommodate you then look for someone else who wants your business on your terms.

Finally, the Chinese negotiating method is often characterized – in articles and books about doing business in China – as a long drawn out process whereby the Chinese try to wear down their opponent into making concessions favorable to the Chinese side. There is some truth to this. When in the 18th Century Great Britain wanted to establish formal trading relations with China it sent Lord McCartney to Peking to negotiate on its behalf. Negotiations took over two months. But, remember, you are simply negotiating a cost of a product and not bi-lateral trade agreement. Negotiations should not take long and if they start to it means that you would do best to move on, just as maybe Lord McCartney should have. In the end he returned with nothing.

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The Siren Song of China

Yet another behemoth global retailer has fallen in China. Tesco, the 3rd largest retailer in the world has announced that it is pulling out of China.This is the highest profile retailer to leave China since Home Depot announced it was closing all of its stores and rethinking its strategy in China. Tesco leaves China

Whenever I see a story like this I immediately think of the millions of dollars of that was probably spent on feasibility and marketing studies, the end result being that the research was just wrong. The reality is often different than what is on paper I like to say. I have been going to China for 25 years now and I could have told Tesco it wouldn’t work for them in China for a fraction of what they probably paid their own consultants. All you have to do is know China’s history. In his book On China, Henry Kissinger describes China in the early modern period

China traded with foreigners and occasionally adopted ideas and inventions from abroad. But more often the Chinese believed that the most valuable possessions and intellectual achievements were to be found within China.

Since China opened its doors to the world in 1978 the refrain has been that China will be a big market for foreign companies. This has become a platitude. With a few big exceptions, mainly Global corporations like Coca Cola and GM that have a long history in China ( Coca Cola first sold its product in China in 1928 and GM in the 1930s) and that can go into any country and succeed because of their sheer size overseas companies that have tried to sell into China have not fared well. China is like Anthemusa, the island where the Sirens lived. The Sirens were beautiful creatures, part woman, part bird but to reach them was impossible because of the rocky shores and cliffs surrounding Anthemusa. The coast of Anthemusa, it was said, was littered with shipwrecks – those who had heard the sirens song and who had tried to go ashore but had perished in the attempt.

China’s rapidly growing middle class consumer market is a Siren’s Song. Government regulations and bureaucracy, extensive language and cultural barriers, latent nationalism and xenophobia, of which Kissinger speaks, rampant corruption are the crags and cliffs that ultimately result in shipwreck for many companies, big and small, that try to go ashore in China.

So the next time you hear about how China’s grwoing middle class means opportunity for you, do as Odysseus did. Plug your ears with beeswax and focus on growing your business where it counts most, in your own country.

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Considering the cost of an inspection – in China and in the US

When you do an order in China, don’t forget that it WILL be inspected at some point. The four possibilities are as follows:

1.) The vendor inspects the order.
2.) You inspect the order in China or at your warehouse.
3.) You have a third party do the inspection in China.
4.) If no one inspects the order ultimately it will be your customer who does the inspection.

# 4 is obviously what you want to avoid at all costs.

# 1 is also not a good option because most vendors cannot be counted on to do a good job of inspecting orders. They often do not understand the quality standards of the markets they are exporting to and they are interested in shipping an order ASAP so they can get paid.

So basically it comes down to # 2 or # 3. Let’s look at both.

# 2 – If you inspect the order you can do so when it gets to your warehouse or you can inspect at the factory in China. There are costs associated with each. If you inspect the order at your warehouse you have to pay and in some cases train workers to do the inspection and then you have to pay them to repair defective units. So if, for example, you get a 10,000 pc order from China and you have to inspect it and repair a significant amount of product you are looking at major costs. Not to mention the costs you will incur from lost sales and frustrated customers. I have one customer who has spent hundreds of hours over the last year repairing a big order he received from China. It seems the vendor forgot to trim a part of the product so my customer has to do this himself. I imagine that whenever he has a spare moment he goes into his warehouse and does a few more pcs. I cannot put a price on his time but I am sure it has cost him thousands of dollars to do this.

If you inspect the order in China, you simply need to pay your travel expenses to China. The factory will repair all defective units on site and will not charge you for these repairs. You may end up hanging around the factory for a week but you will be able to sleep at night knowing that what is going to be delivered to you is what you ordered.

# 3 – In some ways using an inspection company is a good alternative to making the trip to China to inspect yourself. Most inspection companies charge $ 150.00 – $ 300, 00 per day per inspector. The only caveat with an inspection company is that they really do not understand your product like you do. For any design-driven product, using an inspection company is probably not the way to go.

When all things are considered there is much to be said for just hopping on a plane and going to China to do the inspection yourself.

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Maersk is still bullish on China. Very bullish.

Even though these are tough times for shipping companies as China’s exports are way down from years past, some companies still seem bullish on China. Maersk is one of them. Maersk has just built the worlds largest container ship. The ship, called the “Triple E “ vessel is astounding in size. It can hold 18,000 20 foot containers, twice the number of containers that the largest ship in 1996 held. To give you an idea of how many containers that is, if you put 18,000 containers on a train, the train would stretch for 110 KM or about 68 miles. Each ship is about 400 meters long and an equally amazing fact is the number of crew needed to operate each vessel, a crew of between 13-22 deemed sufficient.

Maersk entered into an agreement with Korea Daewoo in 2011 to build 20 Triple E vessels, most of these to position a Maersk for growth in China. I am sure Maersk executives have to be a little nervous now with month after month of gloomy economic news out of China and ports full of empty containers. Right now they are dealing with the lack of demand by raising rates. And one wonders what things will look like in 2015 when the last of the Triple E vessels is scheduled to be completed ? If I were a betting man I would bet on Maersk, all the current doomsday predictions about China’s economy notwithstanding. Because I cannot believe that right in the middle of the Global Economic Crisis Maersk would order 20 ships at 185 million dollars per ship if they did not know that the demand would be there.

So they must know something.

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Whatever you do, don’t rush when you do business in China

I was talking with a client today about his China strategy. He is anticipating placing an order in China this fall although he has not decided on the order QTYs ( it depends on his sales of course) and we have not yet settled on a vendor (we have several candidates). A little background: His company sells to major drugstore chains in the US and he came to me last year because he was not happy with his current vendor and wanted a change. So we have found a few vendors and gotten some samples, some of which look very good. Pricing so far is also good. I can sense my client is very enthusiastic about his product and very optimistic about the growth of the company, He should be because he has a good product and has added some wonderfully innovative packaging. Yet, I thought it was useful to remind him of a few of things as follows:

1.) He should give himself plenty of time on getting set up in China. He should not rush into any relationship with an untested vendor. I must have said that five times during our call. Don’t rush.

2.) Do not promise your customers delivery dates without first confirming these with the vendor. There is a mentality among sales people who think they must have a “can do” attitude with buyers in order to get orders. Buyers exploit this mentality by asking for short lead times. Sales people say “sure, no problem” and then the battle is on with the factory in China to get the order out ASAP. And this is why problems happen. So I advised my client to check with the vendor before he promises his customers any delivery dates and then to add on a couple “safety weeks” to the vendor’s lead time. But my client is fortunate in that his product is in use all year around and he does not have to worry about hitting seasonal sales periods.

3.) Audit the vendor. I have not visited the facility of any of the vendors I have found for my client. They are as unknown to me as they are to my client. But I think it is essential to visit the main candidates before giving anyone an order. My customer is hesitant to do this because it is of course costly. He asked me if there were other ways to get an idea about the vendor, maybe using google maps. I told him credit reports, questionnaires, and photos may help give him an idea but the problem is you have no way to validate anything. It is simply risky giving an order to a vendor you had never visited. I suggested alternatives, namely hiring an inspection company or auditor in Hong Kong to visit the vendor or even asking a friend of mine in Shanghai, a China manufacturing consultant with 25 years experience in China, to go down and look at the factory. I am just trying to think of anything. My client said he would think these over. I hope he comes around because I see this as an absolutely necessary step when you do an order in China.

So once again, when you do business in China it comes down to patience, patience, and more patience. And when you have exhausted your patience, you need to be patient still.

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