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

Shanghai Defective Goods

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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Toy testing requirements for US importers – an overview

I had an email from a Chinese testing lab the other day that outlines all the testing requirements for Toys sold in the US. I thought it was a pretty good summary of where you need to be as far as product testing goes depending on your product and so I thought I would post it here this week (edited and posted below).  Just an FYI, under the Consumer Product Safety Improvement Act of 2008 all toys sold in the US must comply with certain product safety regulations. The section of the Act that covers toys is known as ASTM F963. ( American Society for Testing and Materials) If you are reaching out to Chinese manufacturers with a toy design make sure you know the testing requirements for your product and pass these on to your prospective supplier.

After reading the list below to see where your product falls, you should  spend some time on the ASTM website ASTM website to read more about the safety standards and see what you need to do to get your product in compliance.  Testing labs in China also know the standards ( since they are the ones testing the products) but it is  a good idea to make 100% sure you know as much as they do and that you neither overlook something you need to test for nor have superfluous and costly tests done.

Here is the overview:
ASTM F 963-11 Requirements
When you certify in a written Children’s Product Certificate that a product meets ASTM F 963-11, you must include the specific sections to which you are certifying compliance.

Also, toys may be subject to regulations enacted under the Federal Hazardous Substances Act (FHSA), such as requirements for small parts, pacifiers, rattles, etc., many of which are cited below. Check the list of products requiring third-party testing and regulated products to ensure that you are in compliance with all applicable regulations. Yes indicates the product must undergo testing; No means testing is not required.

Group 1: Sections Applicable to Most Toys

As mentioned above, the following requirements must be met for most toys. All toy manufacturers should review these sections to ensure that their products are in compliance.

Section Title Requires Testing at a CPSC-Accepted Laboratory

4.3.5.1 Heavy Elements: Paint and Similar Surface Coating Materials Yes
4.3.5.2 Heavy Elements: Substrate Materials (Note: Many toys intended for children under 6 and all toys intended to be mouthed or contact food and drink are subject to this requirement. See the standard for more.) Yes
4.3.6.3 Cleanliness of Liquids, Pastes, Putties, Gels, and Powders Yes
(Except for cosmetics and tests on formulations used to prevent microbial degradation.)
4.6 Small Objects  Yes
(Except no third party testing is required for labeling and/or instructional literature requirements)
4.7 Accessible Edges Yes
(Except no third party testing is required for labeling and/or instructional literature requirements)
4.9 Accessible Points Yes
(Except no third party testing is required for labeling and/or instructional literature requirements)
5 (Entire Section) Safety Labeling Requirements No
6 (Entire Section) Instructional Literature No
7 (Entire Section) Producer’s Markings No

Group 2: Sections Applicable to Specific Types of Toys 

The following set of requirements is for specific types of toys or toys with specific attributes. All toy manufacturers should review these sections to ensure that their products are in compliance.
Section Title Requires Testing at a CPSC-Accepted Laboratory
4.1 Material Quality No
4.2 Flammability Excluded by CPSIA No
4.4 Electrical/Thermal Energy** Electrical Toys. See 16 CFR 1505.
Yes, to 16 CFR 1505
4.5 Sound-Producing Toys Acoustic Toys Yes
4.8 Projections Sharp Points Yes
4.10 Wires & Rods Sharp Points Yes
4.11 Nails & Fasteners Sharp Points Yes
4.12 Plastic Film Yes
4.13 Folding Mechanisms & Hinges Enclosed/Hinged Toys Yes
4.14 Cords & Elastics in Toys Corded/Elastic toys Yes
4.15 Stability & Overload Requirements Ride-On Toys and Toy Seats Yes
4.16 Confined Spaces Enclosed/Hinged Toys Yes
4.17 Wheels, Tires, & Axles Yes
4.18 Holes, Clearance, & Accessibility of Mechanisms Enclosed/Hinged Toys Yes
4.19 Simulated Protective Devices Yes
4.20 Pacifiers Yes
4.21 Projectile Toys Projectiles Yes
4.22 Teethers & Teething Toys Yes
4.23 Rattles Yes
4.24 Squeeze Toys Non-Rigid Toys Yes
4.25 Battery-Operated Toys Yes
4.26 Toys Intended to Be Attached to a Crib or Playpen Infant toys Yes
4.27 Toy Chests (ASTM F 963-07e1) Enclosed/Hinged Toys Yes
4.27 Stuffed & Bean Bag-Type Toys Non-Rigid Toys Yes
4.28 Stroller and Carriage Toys Labeling requirements only No
4.30 Toy Gun Marking Projectiles Yes
4.31 Balloons No. Label in accordance with 16 CFR 1500.19 and 16 CFR 1500.20.
4.32 Certain toys with Nearly Spherical Ends* Spherical toys Yes
4.33 Marbles Spherical toys. No. Label in accordance with 16 CFR 1500.19 and 16 CFR 1500.20.
4.34 Balls Spherical toys. No. Label in accordance with 16 CFR 1500.19 and 16 CFR 1500.20.
4.35 Pom Poms Non-Rigid Toys Yes
4.36 Hemispherical-Shaped Objects Spherical toys Yes
4.37 Yo-Yo Elastic Tether Toys Corded/Elastic toys Yes
4.38 Magnets Magnets Yes
4.39 Jaw Entrapment in Handles and Steering Wheels Yes

Other Requirements
Section Title
4.29 Art Materials (16 CFR 1500.14(b)(8))
Yes, to 15 USC 1278a(Total Lead Content).
4.3.7 Stuffing Materials Yes. Stuffed toys with all new stuffing must meet 4.1, no testing at CPSC-accepted laboratory required to this section.

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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. .

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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All those stories about manufacturing coming back to the US from China ? Don’t believe it

I had someone run a new project by me the other day. This is a kids product and they had made some inquiries with US manufacturers before coming to me. In their email they wrote: “The truth of the matter is that we just can’t get some of these materials in the U.S. The companies I’ve contacted here either don’t have the production capacity for what I consider a small first run (5,000 sets),or prices are sky high even with a bulk order?! Or they’re totally unwilling to white label or co-brand with a startup.”

So all the stories you read nowadays about manufacturing coming back to the US from China, well obviously you have to take those stories with a grain of salt. The US is still a very expensive place to make any kind of consumer product. Just out of curiosity I looked up to see what the average manufacturing wage is between China and the US. The US Govt Bureau of Labor Statistics (BLS) keeps theses figures and is as good a source as any for this information. So that is where I went. According to the BLS, in 2012 the average hourly wage for a worker in the manufacturing industry in the US was $ 35,67. In Japan it was $ 35.34. Just to give you an idea of how expensive labor is in industrialized countries. But in fact, in some European countries e.g. Norway, Switzerland, the average hourly manufacturing wage approaches $ 70.00 per hour.

Probably because of doubts about validity of data and methodology China was not included in the primary BLS table of 33 countries. But there was a separate table for China in which the BLS estimates that China’s average manufacturing wage in 2012 was $ 1.74. Compare that to Taiwan where the average hourly wage in manufacturing in 2012 was $9,46 or in the Philippines where it was $ 2.10 per hour. In other words, China is still the cheapest place to manufacture. And by a lot.

Moral of the story, if you are making any kind of consumer product in any sizeable QTYs, you can certainly to look into doing some aspect of it domestically, maybe packaging, but your best bet for the bulk of your production is still China. And for many years to come.

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The grass in Vietnam is not greener

It is not uncommon nowadays tohear of companies that are leaving China and moving their production to Vietnam. Some very big companies have left China moving at least part, if not all, of their production to Vietnam. One of these companies is Coach who will move about 50% of their handbag production to Vietnam and other countries in SE Asia over the next several years. The oft-cited reason is, as I stated above, that costs in China are rising and these rising costs are cutting into profit margins.

Let’s say your China project is turning out to be more expensive than you thought and someone has told you that you can do your product for half the cost in Vietnam. For small companies does it even make sense to consider a country like Vietnam as a manufacturing base ? I asked this question to several individuals or companies I have known over the years and who have experience with both China and Vietnam. Here are some of the responses I got.

From a maker of popular kitchenware who has production in China and Vietnam.

“It really depends on what you’re manufacturing however I think there are more similarities than differences. Generally speaking China is more developed and tends to be better equipped (infrastructure and economy). If your clients have concerns about labor or corruption or environment, Vietnam is not the answer, they have the same issues. Either way, relationships need to be developed and training provided. The grass is definitely not greener on the other side.”

From a Beijing based China consultant:

“Some clients of mine went to Vietnam, some to India. Most of them came back to China. They said the problem was not productivity, They said in the end it wasn’t as cheap as they thought it would be”

From another consultant/friend who deals with both Vietnam and China:

“For sourcing, Vietnam is cheaper, particularly for low-end labor-intensive production (e.g. garments, shoes, some furniture, etc.), but the problem is capacity. They don’t have the capacity to handle all the overseas manufacturers who are looking for cheap sourcing, so inevitably a lot of companies end up going back to Chinese manufacturers (and for all the reasons you’ve listed). In some cases (e.g. for garments) I know people have tried to source in Vietnam to avoid the quota system that applied in China. But Vietnam has its own challenges. ”

In fact from everyone I talked to the consensus was that Vietnam really cannot compete with China because of size. It might be OK to do some small orders there that are design driven, not deadline driven. Still any savings by doing production in Vietnam, or other countries in SE Asia, will more than likely be offset by costs that accrue from other aspects of production there. The point is this, don’t just jump at the idea of doing something in Vietnam. Research it carefully, know your needs, and then decide if that is really the best option for you.

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Are Mexico and Latin America really an alternative to China ?

I have a project currently sourcing some home décor suppliers in Mexico and Latin America. And I must admit it has been harder than I thought it would be. The main reason I think is language. I have looked at the websites of 10-15 trade shows in Mexico and Latin America and I think only 2 or 3 had English versions. I was quite surprised by this because some of the shows look to be rather large in scope and are advertised as such, albeit in Spanish. And of the 50 or so websites of companies I visited I would say that only about 10% had English language versions of their websites. Nevertheless I learned the requisite Spanish to describe the product I am looking for and I emailed a handful of vendors in English assuming they would have someone who understood English and would get back to me but that so far has not been the case. The response has been nothing short of dismal. The response rate has been about 5%.

Of course this is just one project and just because vendors have not replied immediately does not mean I should cross them off my list. I do think there are probably some good suppliers for my client in Mexico or Latin America. But finding them will be far more difficult than were I looking in China. In China most companies have English versions of their websites and some staff who speak pretty good English. You will not find a big trade show in China that does not have an English language version of their site. And if I emailed 50 vendors out of the blue I think about 30 would get back to me within 48 hrs. And this is one reason why China has become a truly Global Player.

To source effectively in Mexico you probably have to spend a fair amount of time in the country visiting trade shows and suppliers and going back often to supervise production. Of course this is what I always preach to companies that want to source in China as well. However, I think the difference is that China vendors are far more responsive, just move a lot more quickly (obviously) and they somewhat understand the concept of Customer Service. For this reason, I think small to medium sized consumer goods importers in the US and Canada who are looking at Mexico and Latin America with the goal of shortening their supply chain probably need to stay with China a little bit longer.

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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.

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