5 questions you need to ask yourself before you source in China

The other day I read an interview with former GE CEO Jack Welch. In the interview he said of China “ China is a very difficult place to do business and you can’t just use simple Western techniques.” I love it when I read these things because as I like to say, if it is that difficult for GE to do business in China, imagine how difficult it is for your garden variety Main St. USA small business to do business there. You just cannot expect not to have problems in China if you do business there and that is why you have to ask yourself a lot of questions before you begin your China sourcing. Because, in fact, if you are not careful you may find that sourcing in China becomes far more expensive than you had anticipated and you put your business at risk. So some of the questions I think every start up or small business owner should ask themselves before they get involved in China are as follows:

  1. What is the true landed cost of my product ?  Landed cost is the cost of the production, inspection, and shipping.  When you consider all these costs your unit cost may go up considerably and well beyond your target cost. I think too many people look at product cost alone and think they have a business. I can remember working for a furniture company and pricing out some chairs for a large retail buyer.  The first cost ( the cost of the product alone) was very good but by the time we added in the shipping costs the project was not viable. The reason: Chairs are bulky, they damage easily and you need to pack them very well. Consequently it is very expensive to ship them from overseas.
  2. What are the packaging costs ?  When you get that quick quote on Alibaba, it does not include packaging.  Retail packaging can be expensive and you need to figure this into your final product cost. You may find that it costs you $0.50 to put packaging on a wholesale $ 3.00 item. Needless to say, that just does not seem worth it.
  3. Who is going to do my inspection in China? Am I prepared to travel to China to do my own inspections? And how much is this going to cost ?  The only way to minimize risk when you source in China is to check the product before the vendor loads it into the container.  Needless to say, if you have a 50,000 pc order and it costs you $ 10,000 to fly to China and inspect it yourself, you will have to add $0.20 to your product cost. So let’s say $ 0.20 for the inspection, $ 0.50 for your creative retail packaging and another $0.25 for shipping. Before you know it that $1.00 you thought it was going to cost you to get a product from China has quickly become $ 1.95, almost twice what you thought.
  4. How much is it going to cost to retain the services of a shipping agent?  International shipping is far too complex to do it on your own.  Any small business that wants to source overseas needs a logistics company or shipping agent. These are the guys who book the vessels and clear customs for you. They can save you a lot of money and you should see them as indispensable to your business.
  5. What product safety requirements does my product have and how much cost is this going to add to the product to have the vendor comply? This is a very important thing to consider. Vendors have different grade materials for different markets.  Usually the stricter the environmental/safety standards, the more expensive the product is.  Sometimes the cost of the product will double if the buyer requires a top grade material.  But if you are selling in a market with these regulations you need to meet them.

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How to choose a Trade Fair in China

This morning I received an email from an American, “Jake” living in Krygstan, a small Central Asia country bordering Kazakhstan and Uzbekistan . He and his wife have a business there selling women’s apparel. He has been buying product from China from a middleman there in Krygstan but he finds prices are too high and that he would be much better off going to China directly. I think he has the right idea. When I lived in China in the 1980s-90s the Silk Road was thriving. Whenever we would go to the wholesale markets in Shanghai we would see we would see traders from all over Central Asia including many of the Soviet Bloc countries (In those days the USSR was intact). And this is still the case today.

Jake told me he is going to Shanghai next month to attend a trade fair and that this will be his first time in China. He was asking me what advice I could give him. The name of the trade show he will be attending was not familiar to me and so my first piece of advice to him was that he should make sure he picks the right trade show, because there are a lot of shows in China, some good but many probably not worth attending. There are shows in China that are full of 3rd tier vendors, usually small cottage industry vendors, and these are probably not the kinds of vendors you want to deal with if you have a design driven product. Yet these shows are well-publicized and you can easily be led to believe you are attending one of the biggest shows in China. You show up in China to find a massive exhibition hall with just a couple hundred trade show booths and no foreign customers in sight. I have seen these shows many times. It is like seeing a watercolor exhibition in the Georgia Dome. So the first thing is to carefully research the fair you are thinking about attending. There are ways to research the fair, reading online reviews of trade fairs in China, asking about the fair in a Linked In Group specific to your industry, and sometimes just asking a handful of Alibaba vendors which shows they attend and see if the show you are interested comes up. It is also a good idea to call a local company that sources overseas and ask them which shows they attend. As long as you have a non-competitive product they should be perfectly willing to share their insights with you. A general rule is this, if you cannot find anyone who has been to the show you are thinking about attending, then don’t think about attending yourself.

I told Jake that he made a good decision to focus on Shanghai as Jiangsu Province, bordering Shanghai, is where so much textile production takes place. But he probably should have waited to attend Intertextile Shanghai, the biggest textile fair in China. The bigger and more established the show, the better vendors you will have a chance to meet, and the more likely it is that you are going to meet someone who can help you build your business. And this is the virtue of the Canton and Hong Kong sourcing fairs as well. These shows are well known in all corners of the world and although there are plenty of vendors you probably do not want to do business with, and although they may not be the best fairs if you have a high end product, you can usually find someone who can teach you a different way to look at your product and thereby help you grow your business.

In short going to a trade fair in China is a good first step. But research the show carefully and find the show that is best for your needs. Or as they say in China 量体裁衣. Cut the garment so that you can wear it.

Here are some more posts on Trade Fairs in China

Canton Fair 2012

Preparing for the Canton Fair

Don’t go unprepared to Trade Fairs in China

Canton Fair 2011

In China nowadays its the foreigners who are poor

I saw an interesting article online the other day in which it was said that Chinese consumers now regard Louis Vuitton as a pedestrian brand. In one way it did not surprise me, for there are a lot of Chinese nowadays with a lot of money. Most of my old colleagues at the Shanghai Textile company where I worked as Deputy GM 20 years ago, now have more money than I could dream of. One of those colleagues bought a home in Toronto several years back and paid 1 million dollars in cash. Another colleague has two villas in Shanghai each valued at over 2 million dollars. But when I read the article about Louis Vuitton bags in China I thought back to a project I had a few years ago helping a New Jersey company source leather handbags in China. The guy who hired me, Neal, had seen the bags when he was at the Canton Show but had a hard time following up with the vendor. Her email did not work, the phone number he had for her did not work, in other words the same old frustrating exercise trying to get in touch with a vendor in China. But Neal really wanted these bags so he asked me if I could help him.    I finally was able to get ahold of the vendor and requested a price list. What she sent me was a list with many bags whose FOB China cost was over $1000.00. I couldn’t believe it and when I expressed my surprise to Neal, he just kind of nonchalantly said “oh yeah, I forgot to tell you they are not cheap bags.”   Still for someone who lived in Shanghai in the early 1990s when an average salary for a college educated company employee was about $ 50.00 a month, and Adidas or Nike were prestigious brands that company employees saved months for, the thought of a $1000.00 bag was something to get used to. And judging by my reaction when I read the article about Louis Vuitton bags it is still something I am not used to.

But as my old friend and Shanghai resident for 25 years now, Andrew, said to me a few years back “It used to be that the foreigners had money and the Chinese were poor. Now the Chinese have money and the foreigners are poor.” Times have changed. And nowhere more so than in China.

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The 60 Minutes Lumber Liquidators story

Like so many people my mouth was agape watching the 60 Minutes story on Lumber Liquidators this past Sunday. Some of the things that somewhat shocked me are as follows:

  • 60 Minutes going undercover with cameras in factories in China. I thought those days were over. I guess not.  Although it was an interesting story I can’t help but see a little China bashing with this story. It just makes all Chinese factories look bad. Many of them are. But many are not.  And who is to say what was really going on here. Was the factory acting under their own initiative and mislabeling the lumber to cut costs and deceive Lumber Liquidators or were they under the direction of Lumber Liquidators to do so ? This was not clear in the story. Let’s just say that I am sure 60 Minutes will be persona non grata in China for a while.
  • The factory manager admitting that the plywood was not compliant with US standards.  Why he would do this, I don’t know. The Chinese are too smart to be so foolish and in fact I have never met anyone in China, not least a factory manager, who willingly admitted to wrongdoing. I mean why would a factory manager admit to a prospective new buyer (which is what the 60 Minutes team was posing as) that his factory was cheating an overseas customer?  If I were visiting a factory in China with the view to giving them an order and the manager admitted to me that he was engaging in duplicity with another customer that would be the end of my interest.  So I was a little skeptical about that part of the segment. Not to mention that a natural follow up question, namely, why the factory was doing this, was never asked or, if it was, the answer was not included in the segment.
  • The fact that Lumber Liquidators would not test orders before they shipped from China. It is standard to do so.  You pull a few pcs from production, send them to Intertek or SGS to make sure they are OK and if they pass you ship. If they were not doing this they were just not doing their Due Diligence.
  • That a publicly traded company like Lumber Liquidators would not have Western personnel monitoring their factories in China but would leave everything to the factories. I mean they certainly could have afforded this. If this is true, then they were just stupid beyond belief.

In case you missed it the entire 60 Minutes segment is published on you tube. It is worth watching. .

The McDonalds of China sourcing

A start up apparel company was running a project by me this week. They have their designs and want to start sourcing in China. Needless to say, they want to order in very small QTYs and they wondered if sourcing on Alibaba was a good way to go. In general I do not advise sourcing on Alibaba because you just never know who you are dealing with and I have never met anyone who sourced on Alibaba who was not looking for a new vendor after six months. I like to think of Alibaba as the McDonalds of China procurement, in other words good for a quick order but not a healthy solution over the long-term.

The value of Alibaba as I see it is that it can give you a general idea about cost, MOQs and vendor location. I use it sometimes as just that, a research tool. If for example I want to find out where denim vendors are in numbers then I can easily do so with an advanced search on Alibaba.

And when giving it some more thought this week, as I prepared my reply to the startup that had emailed me, I realized that Alibaba is good for this: if you want to bring a design to fruition and get an idea of costs you can always find someone on Alibaba to do some samples for you. In other words, if your goal is simply to get started Alibaba is OK. And that is what I advised this company. I wrote to them as follows:

“….if you are just starting out and don’t have the budget and simply want to take a product from rough sketch to prototype then Alibaba is a good place I think.  You can at least get some samples made and perhaps a small production lot that will shed new light on your product and or design and give you a good idea of how much it will cost you to make your product. And you may be able to fulfill a small number of customer orders. But I would not go into any Alibaba sourcing project thinking you are going to find a vendor who is going to fulfill large orders with exacting QC standards for you. When you know that you really have a business, and are selling to specialty stores, if not big retailers, then that is when you really need to hit target costs, get product delivered on time and keep QC issues to a minimum. And that is when you need to look beyond Alibaba to more long-term partners.”

Here are some other posts on Alibaba

Sourcing on Alibaba

Alibaba as research tool