When you ship out of China just think FOB

I had an email a couple of weeks ago from someone who wants to ship an order DDU out of China. DDU stands for Delivery Duty Unpaid. It is actually an outdated term having been replaced several years ago by DAP Delivery at Place. In a DAP transaction the seller is responsible for all costs up to the point where the product is delivered. If for example the goods are going from Shanghai to Columbus, Ohio the seller would be responsible for all costs up to delivery in Columbus, with the exception of Duty and administrative costs to get the goods from the port in the destination country to the final destination. This sounds a lot like CIF, the difference being that in a CIF transaction the seller is responsible for the cost to deliver the cargo to the destination port only. At that point the buyer takes over and assumes all costs up to the point of delivery.

Since I have never known anyone to ship an order out of China that was not FOB, and since I know that Chinese vendors do not want to assume risk, what a DAP transaction involves for a seller, I was a little skeptical when I heard about this order. I went online to do some reading about DDU transactions and realize that the only reason a Chinese vendor would consent to DAP is that it allows them to add costs to the project; the vendor selects the carriers and pays VAT and other charges up to the place of delivery. If the vendor is in cohoots with a forwarding company in the US then the charges to deliver the product from port to destination could be excessive. And if you don’t pay those charges they will not deliver your order. Of course, for a first time buyer out of China who has no logistics experience or agent to work with DAP might sound like a very easy solution. But in fact DAP could be both expensive and problematic.

In general anytime you order out of China you really should be looking for FOB terms FOB stands for Free on Board and the seller and buyer share responsibility equally, the seller up to the port of embarkation of and the buyer once the goods have been loaded on to the vessel designated by the buyer or their shipping agent. If you approach a vendor in China and they suggest other then FOB, be skeptical and do some research. Of course there are exceptions to FOB but they are rare for small importers.

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Sourcing effectively in China is about being smart and practical

A small startup in Houston called me last week. They are looking for a supplier in China and they wanted to sound me out about helping them. They are focused on two goals as follows:

  1. They want a native English speaker with China experience to take them into China.
  2. They want to be sure that there are no surprises when they receive their orders.

Let’s look at both of these:

I think they have the right idea in terms of wanting to work with an American who has experience in China. This will save them a lot of time for the cultural gap between China and the US is so vast that you can spend a lot of time trying to bridge that gap, sometimes with little or no success. It just makes a lot of sense to have someone on your team who understands both your business and the country where you are having your product made. I don’t think you can underestimate the value of this. Beyond the obvious there is the trust factor as well. There are very upstanding vendors in China but there are a lot of unscrupulous vendors as well and the latter far outnumbers the former. If you do business with a vendor in China you really have no way to check on them, all the self-promotion and Alibaba gold certifications notwithstanding. If on the other hand you work with a an agent or liaison from your own country you can easily check their references and you will feel confident about going into China. So I think there is a tremendous comfort factor in approaching China with a local on your team as this company from Houston is trying to do. Think about it this way: The best thing is to know you can trust your supplier. But this takes years, if you can reach this level of trust at all. The next best thing is to know you can trust the person taking you into China. This takes a few days.

Their second requirement that they want to be certain that what they order is what they get is wishful thinking. This really is an American way of thinking which has no practical application in China. I told them that the only way to ensure that you are getting what you order is to go to China and inspect everything before it goes into the container. Needless to say, for a small company or start up on a shoestring budget this is not realistic. Even for big companies with big orders 100% inspection is unrealistic. I emphasized that sourcing in China is all about reducing risk. But you can never eliminate that risk altogether ( unless as I said you inspect every piece). The goal should never be a perfect order but simply an order which allows you to meet the demand from your customers with ample stock on hand.

In short, sourcing effectively in China is about being smart, going into China with someone who has experience there and it is about being practical, not expecting perfection from your China partners.

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Looking for a bank to handle your China orders

Someone asked me the other day about setting up a bank account before they start sourcing in China. They wrote as follows: “Are there certain features or account types that are particularly useful to make transactions as efficient as possible?” This is a good question and the short answer is no. I told her that the main thing was to look for a major global bank that has an office in China e.g. Citibank, HSBC, etc. The reason is that there are often problems with international transfers and it is helpful if you have a bank in China to unravel the knots, so to speak, In fact, I would say about half the time that my clients send payment to China there is a problem with something, usually on the paperwork. For example, sometimes a SWIFT code or beneficiary address may be wrong and it can take a few days to straighten out. All the while your sample or production order sits on your vendor’s desk even though they have assured you they are working on it. In fact vendors never start on a project until they get paid. Even if they tell you they have started you can pretty much be sure they have not. So getting a payment to a vendor in China ASAP should be a priority.

So if you have a regional bank that you use for your business and you are thinking about sourcing in China it probably is a good idea to look for another bank that has more international reach and experience.

All banks charge wire transfer fees and you should not be too concerned about this but instead should see it as part of your overhead. I had a customer once who really balked at paying wire fees. She did not want to pay a $30.00 wire transfer fee on a 10 K order. I understand that overhead is a major concern for any small business owner. But considerations about overhead should never take sales off the table. Some banks may have more beneficial rates and a wider range of business services, but are they set up to handle your China business is a question you need to ask.

Another expense to consider is postage fees to get samples back and forth to China. The last four years of helping small businesses and startups source in China has taught me one valuable lesson, never rely on regular air-mail or express mail from the US or Canada to send samples to China. Half of the time they never get there. When sending samples, you should use a major international carrier like UPS, FEDEX or DHL. This is the only way to ensure that your package will reach its destination. Once again, the idea is to use someone who has reach in China. FEDEX does. USPS does not. One of my customers sent a fabric swatch to a vendor in China using USPS Express mail. It cost him $50.00 and it never got there.

Needless to say sourcing overseas can get expensive. These are all “hidden” costs but If you want to source in China, or another country, you have to absorb them.

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