It is time to write off China….once again

A lot of talk about China these days because of the drag the Chinese stock market is exerting on the global economy.  And there was a story last week on the front page of the NY Times about the waning fortunes of China’s low cost industrial sector in Dongguan, everything from furniture factories to a US automotive parts supplier who relocated from Alabama to Donguan several years ago. There is a nicely done video to accompany the piece.  It features a  group of disgruntled factory workers sitting around a streetside restaurant discussing labor conditions in Dongguan, and it also profiles a shoe factory worker who is returning to his home in Sichuan Province follow the closure of his factory in Dongguan.  I do not draw conclusions about the Chinese economy based on the grumblings of a few Chinese workers with a grievance against their boss, but having ridden my share of trains in China over the years,  I really enjoyed watching the video. Here is the link   China NY Times video

If you read this article or watch the video, it paints a pretty bleak picture of manufacturing in China nowadays, especially in the low cost south.  But when I think back to my first blog post six  years ago, on the industrial slump in Dongguan, which at that time looked very real as the entire world was reeling from the effects of the Global Economic Crisis, I realize that this is just another one of those periods where people are writing off China because Chinese GDP is down and/or there is a stock market crisis in China. There is a small element of China bashing in all of this.  In fact, I have talked with probably 200-300 small companies over the past 6 years, in a myriad of industries, and a great many of them currently have production in Dongguan or adjacent areas.   In other words, although many factories have shuttered, there are still many more to take their place.  Just for some perspective, here is that first blog post.  First blog post

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How to qualify your suppliers in China

Had an interesting conversation yesterday with a local company.  The guy I spoke with detailed some of the problems they have had with one of their major suppliers.  Apparently, the supplier consistently struggles to meet shipping deadlines because they do not have the capacity to handle the increasing order QTYs and they have to subcontract a lot of production.   It turns out that this supplier was selected without a qualifying audit. And this is one of the perils of giving an order to a vendor whose facility you have never visited.  In other words they may not be who they say they are.  A GOLDEN RULE of China sourcing is this: never give an order to a vendor you have not yet qualified.  And by qualified I mean visited with a checklist in hand.

When you do an audit you should have a checklist of things to look for.  Some of the following come to mind:

  • In the office: Make sure the vendor has an organized office. If they are as busy as they say they are they should have several computers.  If you go into an office and just see just one terminal and a fax machine that is not a good sign. What if that computer breaks down ?  You may not be able to get an answer to a question for several days. Ask to see your company file with a record of all sample orders, revisions etc etc.  Ask to see counter samples which you have approved, as all should be clearly labelled and dated.   All this tells you if the vendor is on top of things.   If you have concerns about order capacity, then ask the vendor to show you invoices from completed orders of other customers.  Are the QTYs big ?  Are there multiple invoices from the same customer indicating repeat orders and customer satisfaction ?  These are things the vendor should be more than willing to show you.  In short,  a quick tour of the office will show you how organized the vendor is.  And believe me you do not want to work with an unorganized China vendor, all the more so if you have a design driven product when record-tracking of details is very important.
  • Subcontractors: Since so many vendors in China use subcontractors it is vital to make sure those subcontractors have themselves been qualified by your vendor. Ask your vendor what procedures they have in place to qualify subcontractors.  In fact any visit to a factory in China will usually include a visit to that factory’s subcontractors.  If your vendor does not volunteer to do this then you should suggest it.  If they balk at the suggestion, then that means their subcontractors are scattered and probably not at a convenient distance to the factory, which is not good for you.
  • In the workshop. Are areas well lit?  Are instructions to the workers posted? Are QC and Production areas clean?  Does the factory look busy? Is there any evidence the factory  uses child labor ? Is the person showing you around knowledgeable about the orders?  I remember qualifying a vendor a few years back.  I went to the factory and I discovered that the person showing me around, who told me he owned the factory, knew nothing about any of the orders on the workshop floor.  And I mean nothing.   He was either a very hands-off manager or was simply a Trading Company Manager posing as a FTY manager (plenty of those in China). But in either case it was a warning that I delivered to my customer.  And there are just so many more questions to ask when you are thinking about giving a vendor an order.

 

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Establishing if your vendor is trustworthy

I had a discussion the other day with a consumer goods company which I found very interesting. This is an established company, a leader in its field, that makes packaging for some of the biggest retailers in the world.  The person I spoke with told me his company’s process for evaluating vendors in China, specifically how they decide who might be trustworthy and who not.  When they source new vendors in China they tell the vendor that they have a order from a large retail chain, one that the vendor has likely heard of e.g. Wal-Mart, IKEA et al.  They intentionally drop the name of the customer on the vendor. They then wait to see if the vendor contacts the customer directly. If the vendor contacts the customer, that tells the company that this is not a trustworthy vendor.  If the vendor does not contact the company, they then believe they are OK going forward with this vendor.

If you are a big company this is probably a good way to knock out a few unscrupulous vendors when you are sourcing a new vendor.  The strategy has worked for the company I talked to.  They have several vendors who they have been working well together with for years, and many more whom they have eliminated because the vendor approached the retail customer directly.

But if you are a small company is this a good way to select vendors ?  I think it all depends on your relationship with your retail customer.  If you have a solid relationship with your buyer then you can try this. Your customers have come to expect quality from you and it would be unlikely that they would seek to go direct to the factory in China, even if cost savings were substantial. The fact is that your retail buyers are paying you for the convenience of getting product made in China for them.  They have no interest in dealing directly with China vendors and resolving all the problems that usually come with a China order e.g. QC issues, cost increases, late delivery etc etc.  In fact, the company I talked to the other day told me as much.  He said that the number one reason companies pay him to source their products in China is that they have a much better chance of holding a US company accountable in case something goes wrong.  Makes sense as any kind of legal action in China is time-consuming and costly.

At the same time, if you are doing orders with a large retail chain but have not yet established yourself with the buyer(s) then I would not try this for the simple reason that if the retailer already has an overseas sourcing agent they might use your contact and place the order directly with the factory. Although I don’t think it happens often, I have worked in companies where it has happened.  And this is why most product development companies and wholesalers are very protective of their information.

In the end though, you have to remember that there really is simply no way to know which vendors are trustworthy and which are not. Just because a vendor does not contact a customer whose name you have dropped does not mean they will not act dishonorably later on.  Because of this when you source in China the bottom line should always be whether or not a vendor is helping you build your business.  As long as they are doing nothing illegal and your business is growing it should not bother you if they are sometimes dishonorable in their dealings with you.  A case in point, I used to work in an office of an American company in China. The owner of the company told me he knew some of the local employees were on the take with the factories.  But since he saw these employees as knowledgeable, hard-working and productive, and the business continued to grow, he simply chose to look the other way.  I think that was the smart thing to do.

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Why incentives from US companies are rarely effective in China

It seems that every company I have ever worked for has tried to implement an incentives program for vendors in an effort to get them to produce quality product and ship on time. I once worked for an American textile company, the owner of which had the idea to reward top performing vendors with trips to the US home office. What management of the textile company did not understand was that most of the vendors had absolutely no interest in getting on a plane and going to a country where the Chinese food in a five-star restaurant was probably inferior to the gruel they were accustomed to eating in their own factories. Not surprisingly, the incentive program was a failure. Another company I was employed by gave brass plaques to its top performing vendors, only to find that quality showed no improvement and, in some cases, got worse.  I mean what of what value is a brass plaque of recognition from an American company to a vendor far off in China ?  The answer is very little.

Providing vendors or workers with incentives is a classic example of a management program that works in the US but does not work in China. Why don’t these incentive programs work in China? I think there are a few  reasons:

1.) In China there is sometimes a tremendous degree of mistrust in personal and business relationships (perhaps the legacy of the Cultural Revolution when neighbors turned on neighbors). Most vendors regard incentives from US companies with a great deal of skepticism. They simply do not believe you will pay up, so to speak.

2.) More importantly, many vendors endured the bone-grinding poverty of pre-reform China and lost myriad career opportunities during the Cultural Revolution. For this reason, vendors have a “cash-in-now” mentality, and focus mainly on short-term gains. It never ceases to amaze me how few vendors in China look at relationships with American customers as long-term and mutually beneficial.  Of course incentives are part of a long-term program.

3.) To meet production goals requires vendors to invest more in production.  Yet vendors do not want to invest more in an order than is absolutely necessary.  No vendor in China is going to spend more out of their own pocket to get an order out on time simply because they covet that brass plaque you promised them.

More importantly offering incentives to your China vendor may in fact be counterproductive. If you give your vendor production or QA targets, he may feel he has reached these while you feel he has not. This just leads to conflict, an erosion of trust and you are soon looking for a new supplier. I have seen this happen.

For these reasons, it is probably best to avoid offering vendors any kind of special incentives. The best you can do is tell them they will get more business from you if the current order goes well, work closely with them on quality and hope they follow through accordingly. On your side, do everything you can to make those order QTYs bigger with each order.

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