Never let your guard down when you manufacture in China

There was an article in the Shanghai English Language paper recently about defective products being sold in Shanghai stores.  Apparently about 40% of the apparel sold in Shanghai area dept stores reveals defects, everything from excessive formaldehyde to misleading labels. A sweater, for example, was described as 100% wool but it turned out to have only about 20%  wool content. The same old China song and dance in other words.  Still I was a bit surprised to read this kind of story because over the years the quality of product made in China has gotten much better as overseas importers have imposed stricter requirements on their Chinese suppliers and as a growing and more affluent Chinese middle class has come to demand higher quality from domestic vendors.  The story illustrates however that the Made in China brand is still plagued by the quality problems that have been associated with Chinese products over the last 30 years.  In other words you can never take your guard down when you manufacture in China.   You still have to test your products at regular intervals and make sure your vendor knows your standards and is maintaining quality and safety standards.   Here is the link to the article

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FOB vs CIF

I had an inquiry today from someone who wants to move their CPG ( Consumer Packaged Good) production from the US to China.  They want to ship CIF which stands for Cost Insurance and Freight.  In a CIF transaction the supplier/exporter is responsible for assigning a carrier/vessel and insuring the cargo.  Once the vessel lands at the destination port the buyer/importer takes possession.  The main advantage to doing a China order CIF, as opposed to FOB ( Free on Board) is that the supplier handles all the shipping arrangements for you.  You simply have to pick up the cargo when it arrives and arrange for transportation to your warehouse. In theory CIF reduces the work load on the importer and may seem like the ideal arrangement for a first time importer who has no experience with international shipping, which can be quite complicated.  The downside to CIF however is considerable.  Your product will cost more because you are asking your supplier to bear more responsibility and not surprisingly most suppliers will look at a CIF proposal as an opportunity to pad their margins. In addition, you lose transparency on the real cost of your product.  The real cost of your product is what it costs to make and package your product.  Not what it costs to ship your product ( which is landed cost and which varies depending on a number of factors). You will also have no control over shipping.  If yours is not a time-sensitive order then CIF might be OK.  But if you need your product shipped on a timely basis, to fulfill orders, you will be taking a big risk because you will have no control over transit times and carriers.  In fact, your supplier may not choose the best carrier but the carrier who offers them the most preferential terms.  Your supplier will act in their best interests, not yours.

With an FOB order, on the other hand, the importer, working with a Logistics company, has complete control over shipping.  If problems arise you can work quickly with the carrier directly to resolve them.  The downside to FOB is that, yes, you need a Shipping or Logistics Company to help you arrange shipping. This is of course another cost, one of the hidden costs to overseas sourcing.  But you have to look at it as one of the necessary costs and you should be prepared to bear it.

In the end your expenditure will probably be the same, whether you allow your supplier to arrange shipping, resulting in a higher unit cost for your product, or whether you enlist the help of a Logistics company to help you arrange shipping and handle documentation.   It is when problems arise that you are far better off with your own shipping agent as opposed to trying to resolve problems with an anonymous shipping company that has been selected by your supplier.

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Check your orders before they leave China NOT after

I have had a lot of requests lately from people asking me to help them source in China, everything from kids clothing to electronic toys.  I do not take on just any product and usually if I am not interested in a project then I just point the person to a sourcing company in China who might be able to help them.   And the other day this was the case with a person who came to me asking me to help them source some smoking paraphernalia in China.  Not only am I opposed to smoking but I know nothing about it and for this reason I was not interested in accepting the project.  But the guy seemed nice enough and judging by the drawings he sent to me he is far along in his product development and is very serious about taking his product to market. So I gave him the name of my contact in China but I also gave him some parting advice. That advice was simply to inspect his orders BEFORE they left China.  This is the advice I give everyone but it occurred to me in that instant, when I was just thinking about one piece of useful advice I could offer someone who was about to start sourcing in China, that, yes, checking your orders before they ship from China is the only way you can guarantee that your vendor is delivering to you what you have paid for.  If you inspect an order in China and you don’t like what you see you can ask the vendor to redo the order or you can just walk away.   The most you stand to lose is your 30% deposit.  The analogy I always use when explaining this to people is the shoe analogy.  When you buy a pair of shoes the last thing you do at the register, before the sale is rung up and you take the shoes home, is to open the box to make sure the two shoes in the box are the same size, and that you have one left shoe and one right shoe.  And this is exactly what you have to do when you have an order shipping from China:  Verify.

The one caveat is that small companies or start ups operating on a budget do not have 5K to spend on a one week trip to China to inspect an order.  Or they may not see it as good business sense to spend 5K to go inspect an order, the value of which may be less than the cost of the trip to China itself. This is understandable until you figure that if that order goes badly then you will not only lose your investment but may lose customers and your business as well, assuming you have taken orders that you will not be able to fulfill.  I have one on and off client who got a bad order from China and four years later he is still selling off the defective product after repairing everything himself, piece by piece. I imagine it has also cost him a little money to warehouse the product, one container’s worth, in that time.  And this is what I mean when I tell people to take the broad view and to always see China sourcing as a long term strategy.  You may operate on razor thin margins at first or may even lose money but if this helps you get quality product to your customers and build your business it is probably worth it.

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Using mock-up prototypes when approaching new vendors

I had an email from a former client this past week.  She is the founder of a company that makes a popular line of kids bags and she is looking for new factories in China.  She had a strategy question for me as follows:

“I am sending samples for pricing from a factory that came highly recommended and of course they are asking how many SKUs etc. I have not actually revealed my brand as yet because I don’t want them to base their pricing by looking at our website prices. Do you think that this is wise? Or should I send them our catalog so they can see all of our SKUs and then give them target pricing ? Which do you think is a better strategy? “

This is a good question and I replied to her as follows:

“It is always a fine line to tread between being paranoid about things and being careful.  

I personally never recommend revealing your brand until it is absolutely necessary and I usually advise people to have mock ups without branding to submit to prospective vendors.  But if you feel they may know who you are already since you have been communicating with them or because you came recommended from someone else who has used them, then it is probably not a good idea to try to conceal who you are. 

But this leads me to a good point and that is that I think it is a good idea to have some mock ups made up from your current vendor so that in the future you can approach prospective vendors without revealing your company and retail pricing.   First costs from new vendors are important because those costs serve as the basis for your first few orders.  If they are high to begin with then when your vendor starts raising costs on your 2nd or 3rd orders ( as often happens) you may be priced out of doing business with them quickly.    If on the other hand you can negotiate a low first cost to begin with then even when the cost goes up you may still be able to hit your margins while you fulfill orders and look for a new vendor.  Making sure your vendor does not know your retail pricing goes a long way in keeping your first costs low. And mock-ups will help you achieve this.” 

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What should you budget for a first-time order from China ?

A woman emailed me recently asking me if I could help her with sourcing.  She has just started a company selling fashion accessories. In our email correspondence I sensed that she may not have given the business the thought that she needed to, in terms of how much it costs to get up and going with a China order, for there are hidden costs that people often ignore focusing only on the seductively low first costs that they see on alibaba or other popular sourcing websites.   Accordingly, here is what I think it would cost to get a first order from China.

Sample development.  You have to assume you will go through a couple of rounds of samples with a few vendors before deciding on a final vendor.  There will be sample charges and express courier fees ( you cannot send samples via regular air mail because they often get lost) .  Assuming you have a product that does not require a special mold, you are probably looking at $ 200-300.00 per vendor for sample charges and courier fees.  So figure $1000.00 just to get some good samples from a few prospective vendors.  If you have molds figure a few thousand dollars just to get samples from one vendor.

Testing:  If you sell any PCG (Packaged Consumer Goods) then you will most probably need some kind of testing for your product as per CPSIA ( Consumer Protection Safety Insurance Act).  Figure $500.00- 1000.00 for product testing.

Consultant:  If you are sourcing a product overseas it behooves you to retain a consultant or sourcing agent to help you get started.  Sourcing agents or consultants charge anywhere from $300.00 to 5K for a sourcing project.  So figure $500.00-1000.00 for a reasonably priced consultant/agent.

First Purchase Order:  Depending on the unit cost and MOQ ( Minimum Order Requirement) figure $3000-5000.00 for a first order.  Of course I am just throwing this number out there but a good rule of thumb is that China vendors are not really interested in orders under 5K.

Inspection:  To have an order inspected in China costs about $300.00 per day, not including expenses. But inspection is the only way you can make sure you are getting the quality you have paid for. Figure $1000.00 to have an order inspected.

Shipping:  Vendors quote you FOB which means they only deliver the goods to the port It is up to you to arrange shipping. You will need to use a shipping agent because the documentation is far too complicated to do on your own.  Figure $1000.00 to ship a small order from China going LCL.

When you add all this up you are looking at an initial investment, on the conservative side, of close to 10 K, just to get a first order out of China.  If you have a design oriented product for which the vendor will have to create special molds then figure 15-20K for that first order. And this does not include what it costs you to set up your website, establish your company, obtain product insurance and copyright your designs. That right there may cost you and additional 10 K.

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Some things to consider when you have a new product and need a mold

Someone came to me with a new product the other day, an artistic and fanciful light fixture that they want to have made in China. They have tried to find someone to manufacture the product here in the US but, as you would expect, the cost is prohibitive.  The person has had some rough molds and prototypes made here and suggested that he could send these to China and have someone there run some samples for him and then maybe a small production order.  Not a good idea, I said.  There are a few things to consider here.

  • The molds this person has made might not be compatible with machines in China In fact, I bet this would be China vendor response were he to send the molds to China.
  • Compatibility of machines notwithstanding, vendors in China stand to make a good profit if they make a mold for a customer and they do not want to forfeit this profit.  And this is why when you get quotes for molded products the mold costs can be all over the board, so to speak. If you ask three vendors to quote on a mold, chances are their quotes will be off by thousands of dollars, because someone is making a hefty profit from the mold. I had project a few years ago for which I needed a mold and the quotes, for the same mold, were anywhere from $3,000.00 to $20,000.00.
  • If you send a vendor in China a mold you may not be able to get the mold back. You never know who you are dealing with and the vendor may just take the mold and start using it themselves.

If you do get your mold made in China make sure you know who you are dealing with because sometimes a factory will claim they own the mold, even though it is your design and you have paid for the mold.  There have been so many disputes like this over the years between SME’s and vendors in China that you just have to expect it to happen.  Just go over to the China Law Blog for some stories. To protect yourself you should have everything spelled out clearly in writing, as to who owns the molds and when they will be returned to you, and you should also be sure you have legal rights to your design before you ask someone in China to make the mold for you.

Finally, really the best way to do a molded product would be to have the CAD work done here in the US, including drawings and 3-D renderings, and then to send these to China so a mold can be made for you. In this way, you can project to vendors in China that you are serious about your product, for drawings look official and will show all proprietary information. Should any dispute arise with them you will have a record of your designs, what you would not have if you asked the vendor to do both the CAD and mold for you.

Needless to say, these are all costs you have to expect to incur if you have a unique product that you want to have manufactured overseas.  But if you can do it, it is worth it.

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A letter from a small business owner about his frustrations sourcing in China

I finally found one thing more challenging than sourcing in China and that is taking care of a small child all summer. My daughter was out of school in early June and when it was apparent that the summer camps I had signed her up were not going to work out, it was my turn.  So I reluctantly turned down some projects and turned off my blog for two months. Now that school has started it is time to pick up where I left off.

Needless to say there is a lot of panic about China these days. The sharp downturn in the Shanghai Composite and the impact on global economies makes for good headlines but I am not too worried. As a long time China watcher said recently, the crisis is one in the stock market, a “trading event”  and not in the economy as a whole. GDP growth is still strong in China, anywhere from 5-7% (depending on whose figures you trust, the Chinese Govt or economists at UBS). and many areas of the economy show strength, most notably wages and consumer spending, both of which are up. So what I think we will see is more instability in the Shanghai Composite over the short run but nothing that will lead to widespread panic and crisis in China. All you have to do is look at images of crowded high-end boutiques in Shanghai to know that the days of Communist-like austerity programs and widespread instability are over.

In the meantime, back to sourcing.   I had a letter from a small business owner yesterday. He is frustrated by his suppliers in China, all of whom I believe he found on alibaba.  Here is what he wrote to me.

I came across your website when searching for small business sourcing options.  I manufacture custom craft beer tap handles for breweries and restaurants across the US and Canada.  I have gone through the process of sourcing my products myself through Alibaba and needless to say I’m tired of it and looking for help.  My order size is usually 100-600+ pieces and materials used are usually cast urethane/resin, metal, or wood.  My target price per piece is typically around $0.00 including shipping costs (by air). I’d like to find a factory that I can establish a relationship with and receive reliable quality, no price changes, no haggling, and easy communication.  Any insight you can offer would be greatly appreciated.  

Regarding his desire to find vendors in China who don’t suddenly increase prices, who maintain consistent quality and who are reliable with communication, I replied to him, “welcome to the club.”  My advice to him was blunt.  If you do not have big order QTYs you will have a hard time finding vendors who want to keep your business beyond an order or two.  The reason is this: so many small overseas importers come and go in China that vendors there seldom expect to retain small scale overseas customers after an order or two. The goal therefore  is to get a first order by quoting low prices and then once the customer has committed their production to the supplier, the supplier will increase the cost hoping to cash in on a second order with higher costs.

This is not to say that the vendor who will work with the small importer in a collaborative way with an eye to forging a long term relationship does not exist. They do. But you need to find them and then work with them, which usually means travelling to China 3-4 times a year. If you are not willing to do this, the best way to manage your business in China would be to work with a Chinese agent in your own city with whom you can build a relationship. And once you have established a strong working relationship with the agent, based on your same locale and perhaps some contacts in common or possibly common interests, that agent will hopefully work with the factory in China on your behalf to keep your prices and quality stable. You pay more for your product but if in the end you can run your business, it is worth it.

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5 assumptions NOT to make when you do business in China

There was an interview in the China Daily recently with the President of the American Chamber of commerce in China, Ken Jarrett. Jarrett was discussing the need for American companies that sell into China to adapt their product to local tastes. In Jarrett’s words “My advice for forthcoming US companies is to be aware of what is different about consumers here. You can’t assume that the product you have in the US has the same attraction here, so you need to adjust it,” There is a lot of wisdom in this statement and it should be applicable to companies that source in China as well. In other words, when you source in China you have to respect Chinese business customs and you need to be careful not to make the same assumptions about behavior that you make in your own country. Here are five assumptions that I have seen US companies make in China that just lead to problems.

  1. My production will be every bit as good as my sample. Not so. A sample should simply be regarded as an example of the vendor’s capabilities and nothing more.  If the vendor can do a sample to your liking that is big step forward. But there is a long way to go to ensure that your entire production looks like that sample.
  2. My vendor will implement my design changes. Although a vendor may tell you they will make the changes you suggest, they may not if these changes involve too much cost. It is very important to try to maintain a dialogue with your vendor about the cost of the project and reassure them if they see added costs.
  3. My vendor will inspect my order. Vendors put very little into inspections. They can sometimes be remarkably short-sighted in terms of making sure they deliver a good product to their customer.  Often, they want to ship the product ASAP and get paid, not caring if a subsequent order will materialize or not. The burden is on the buyer to inspect their own product, whether they do that on their own or through a third party inspection firm in China.
  4. My order will ship according to the date on the PO.  ALWAYS be prepared for the likelihood that your order will ship late.
  5. My vendor will do what they have promised.  A promise in China sometimes means very little. When a vendor promises you something don’t believe it. Instead keep talking about it and make sure they do it.

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When sourcing in China, find yourself a China expert

Most of the small businesses or micro businesses aka startups that come to me are on a budget. When I tell them what I charge for a sourcing project, a fraction of what other sourcing agencies charge, I am sure they are thinking “why should I pay this guy to put together a list of vendors for me when I can just go on Alibaba and find some vendors on my own. “ If I were starting a business that is probably how I would think as well, for Alibaba is just so easy to use when you are trying to find a supplier in China. In some ways I have no problem with this because when you are just starting out you need to be prepared to do everything yourself, to wear many hats as the expression goes. But let’s say I was sourcing something in Brazil. How confident would I be looking for a vendor in Brazil when I did not speak any Portuguese and could not even say so much as hello in Portuguese. The answer is not very. I would be limiting myself to a handful of vendors who spoke some English not to mention the fact that I would be doing business in a country whose language and culture I did not understand, which, common sense tells me, would lead to big problems sooner or later. I would have absolutely zero confidence placing an order with a vendor in Latin America without the expertise and advice of someone who had done business in Latin America. And figure that China is a hundred times more difficult a place to do business than Latin America. But I think the best analogy is buying a house. Buying a house is a complicated process and is often the single biggest investment in one’s life. And even if you know a lot about real estate it is probably not advisable to dispense with the services of a Real Estate agent when buying a new home. And most certainly not if you were a first-time home buyer. So if you want to start importing from China, find someone who knows China. It will cost you some money but it may end up saving you a lot of money over the long term.

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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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