Some China advice from the Chancellor of The Exchequer

There was an interesting interview with in The Telegraph the other day with Chancellor of the Exchequer George Osborne. The subject of course was China. Osborne first visited China some 20 years ago and has gone back over the years including his most recent trip this month. Even though he has seen the development of China first hand over the years, he was “astonished” by what he saw on this trip, especially the property development and the entrepreneurial spirit or the “ambition.” as he put it. It is a lengthy and very interesting interview (with video) and there are some valuable insights as follows:

1.) One should not have a view of China as just a country where labor is cheap and goods can be manufactured at low cost.

2.) China is a unique country with its own history.

3.) The Chinese should be treated as equals and not as “inferiors.”

These are all valid and very wise points. Let’s look at each as it applies to small business owners who want to source in China.

1.) Many people still have simplistic view of China as a country where there is an abundance of cheap labor and goods can be manufactured very cheaply. This is not the attitude to have when you want to do source in China. The goal should be good quality at a reasonable price, a price that will allow you to grow your business to your goals. The goal should never be good quality at a dirt-cheap price.

2.) People are quick to criticize the Chinese govt and society for what they perceive are shortcomings and fail to recognize that China has its own rich and very complex history. Some criticisms are valid. Others may not be. But you have to be careful about imposing your own standards on China. And you should always see the good with the bad. Sure China has its share of human rights abuses, corruption, and pollution etc. etc. But its economic miracle has also raised millions of people out of poverty. Not just in China but in countries all over the world where China has created jobs. Osborne makes the same point, a valid one I think.

3.) If you want to do business in China you must treat your China vendors as equals. Thirty years ago it would have been hard to see your China suppliers as equals. However, the reality of doing business in China in 2013 is that your supplier is every bit your equal and, in fact, if you go by the kind of car he/she drives, you would probably have to consider yourself the inferior. After all I do not know many small US business owners who drive a $ 200,000 BMW. In China one meets them all the time.

Here is the interview in full:

http://www.telegraph.co.uk/news/politics/10390326/Osborne-You-cannot-fail-to-be-staggered-by-China.html

China Sourcing: How to do it right

I get inquiries all the time from people who have ideas for products or businesses. But I often find out that they have not really thought these ideas through. For example, I got an email the other day from someone who wants an exercise product manufactured in China. He has well-formulated ideas about retail costs, margins and marketing on his side. But he has given very little thought about costs on the manufacturing side. Nor has he considered shipping costs. For example, he asked me if I would approach some vendors in China on his behalf but he did not have a target cost for me. I then had to explain what “target cost” is. My reply to him is below. I think it might be useful for other entrepreneurs out there who have product ideas and want to source in China.

By target costs I mean as follows:

What is the cost you need to pay the manufacturer in China that will allow you to turn a 31% profit on your product after all the other costs as you have detailed below have been taken into consideration. The idea here is that you really need to understand your own product and your business so as to reach a solid understanding about what your manufacturing costs need to be in order to meet your retail margins (31%). I suggest you really cost this thing out and come back with a target cost that I will be happy to pass on to a couple of vendors in China. But please note this cost has to be accurate. You cannot approach a vendor with a target cost of $ 10.00, for example, and then two weeks later come back to them and tell them you made a mistake that and that the new target cost is $ 8.00. If you do that you just can’t work with that vendor anymore.

You would probably ship these by air or LCL ( Less than Container Load) depending on volume. I have no idea of the rates but for LCL but I imagine shipping would add on $ 0.25 per pc. Just an estimate because I really do not understand your product yet. You also should look into working with a shipping agent there in London becuase shipping documentation is both essential and cumbersome.

Anyway, don’t get too far ahead of yourself. It sounds like you really need to do a lot more work as far as product design and cost goes. I won’t approach any vendors until I have some solid specs, as per what I sent to you as an example, and a firm, well thought-out target cost. The goal here is to come off as professional as possible so vendors want your business.

Ex China means before the product leaves China. When I say you need to inspect your product before it is EX-China, I simply mean before it leaves China.

Manufacturing cost plus shipping cost equals landed cost. And then you also need to figure in the costs for inspections. Just look at this thing from all angles.

The risks of sourcing in Asia vis a vis sourcing in your own country

There was a discussion on Linked In the other day about the risk of sourcing in Asia vis a vis the US. The opinion of the person who initiated the discussion was that for US companies at least it is far less risky to source in the US than in Asia. I totally agree with this and I always encourage people who come to me about sourcing in Asia to make sure there are no alternatives at home first, at least for some component parts or packaging.

I did take issue with one thing that someone said, namely that the only advantage to sourcing in the US is that there is no language barrier. In fact, there are more advantages than that and below was my response:

In some ways it really depends on your industry and what your product is but I think there is often a huge disconnect on assumptions about quality and management when manufacturing overseas. A lot of vendors, for example in the handicraft industry, do not understand the exacting QC standards of their overseas customers. You can spell everything out for them and train them over and over but sometimes they just cannot understand why that little speck of paint or that loose thread is not acceptable. Or the vendor might understand but some of his workers might not. This is not done out of negligence but simply results when foreign workers are not exposed to the sophisticated markets they are sometimes asked to make product for. This then is why it is so necessary to have a presence overseas if you are manufacturing there, especially when you have design driven products.. And this is why I advise companies I work with that they must spend time with their vendors. As I put it to them, the 10,000 people in rural China who are making the product that you will deliver to Williams Sonoma have never been in a Williams Sonoma store. This is the challenge. But as I said, I think it depends on your industry and product.

I would add as well that management style differs from country to country and often it is not the language of communication that is the issue but it is the very essence of the communication itself. In some countries when vendors meet with a problem they try to solve the problem on their own rather than communicate to the customer that there is a problem in the first place. They do not want to lose face. In the US when there is a problem, the customer most likely will be consulted immediately and vendors will not be allowed to choose their own solutions. “

Another person pointed out, and rightly so, that there are often a lot of costs associated with overseas sourcing if not done correctly. My response:

Regarding costs, I agree with you 100% on this. I always tell people that “there is a cost to low cost.” and they should know this before they get involved with overseas vendors. If they are prepared to invest all they need to in order to reduce the risk of sourcing overseas, by all means go for it. There are tremendous advantages to overseas sourcing, if done right. If they are not prepared to do this then in the end they may find that manufacturing overseas cost them far more than they had anticipated.

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