I was thinking today about the conversation I had the other day with the NYC lady who, at the end of this month, is headed off to China for the first time. She certainly sounded nervous, knowing no Chinese as she does and feeling very panicky at the mere thought of getting lost over there, even though she will be staying in a reputable hotel and has already arranged her SIM card on arrival in China. I re-assured her as best I could. Guangzhou, after all, is a very modern city and boasts a very modern, user-friendly subway that would be the envy of most cities around the world. In addition Chinese people are very hospitable and one really does not have to worry about getting lost in a big Chinese city. There are always people who will help you and signs in English are everywhere. Let me put it this way: you are safer knowing no Chinese and getting lost in a major Chinese city than you are getting lost on your own turf, that is in a major American city. So she really has nothing to worry about, other than perhaps getting ripped off by an unscrupulous taxi driver. Even that though can be avoided by taking taxis stationed at the hotel where she is staying and having the hotel doorman quote the cab driver on the fare.
But I thought back to my first trip to China. Now that was scary. It was 1988, just ten years into Deng’s reforms. I flew over on a Canadian Airlines flight from SFO to Beijing. I remember the flight because NBC correspondent Keith Miller was on the same flight, flying coach, as well as the Canadian Olympic Basketball team. The plane landed in Beijing on a warm July evening. There was an enormous crowd of people at the gate coming out of Customs and not all of them were smiling. There were very few foreigners in China then and anti-American, anti-Western sentiment was palpable. To say I felt uncomfortable would be an understatement. My Chinese teacher in NYC had arranged for me to stay with her husband at their apt in Beijing but I had no idea what he looked like and all I had was a name and address. In those days most people in China did not have private telephones but used a communal phone so if for some reason we did not hook up I had no idea what I would do. Fortunately, after several minutes scanning the faces in the crowd (they were as curious to me as I was to them) I spotted my name on a piece of cardboard in a sea of arms and I knew that must be my contact. Needless to say I was very relieved.
Over the next few days going around Beijing I saw perhaps one or two foreigners, and that is all. Although a lot of people smiled at me, not everyone did, and on one occasion we were refused service in a restaurant because I was American. My host was embarrassed by this but in those days that was par for the course in China. It was not an easy place to be and I was very careful not to get lost. Nowadays when I go to China, I feel like I am home. Imagine that !
But I kind of chuckle when people come to me nowadays and tell me they are nervous because they are going to China for the first time. Believe, me, you have nothing to worry about !
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.”
The owner of a small company in Chicago called me this week. His company manufacturers a kitchen product and they have been in business for about 7 years. In that time they have gone from one employee to eight. They bring in 3-4 containers a month from China and they are showing up in a lot of major stores now including Pottery Barn and BBB. The owner, Randy, told me that he has some worries as his business begins to grow, his main concern being that he has no idea who in China is making his product, as an agent there in Chicago handles all of his orders. As he rather bluntly but succinctly put it to me, “if this guy gets hit by a bus tomorrow then my business is screwed.” He is correct there. The lack of transparency in your supply chain should be a big concern, and the bigger your volume the more you should worry. Randy told me his agent there in Chicago seems reluctant to divulge the name of the factory in China to him, something he is becoming more uncomfortable about. At the same time he has an offer from another Chicago-based agent to handle the business. This new agent is promising him NET 60 terms. The current agent requires a 25 % deposit and payment in full once orders have been received so this is another reason Randy is looking at alternatives now. He called me to ask what I thought he should do.
My advice to Randy was to suggest a trip to China with his current agent to look at his product, see the factory and maybe inspect an order. He has not been to China yet and it is time, after 7 years, that he went. I told him that he has every right to see where his product is being made and to meet the people who are making it. If his current agent balks at this suggestion then Randy should begin to look for a new agent ASAP or, better yet, consider finding a factory and going direct to China with his orders. He seemed to think this was a good idea. I emphasized that his current agent has helped him to build his business so he should appreciate that and give this agent a chance to work with him on making his supply chain more transparent and efficient. But Randy’s is a very reasonable concern and his agent should know this.
Regarding, the new agent who is offering Randy NET 60 terms, I told him I have never heard of anyone offering NET 60 out of China. Randy said he believed the agent had a relationship with the factory that allowed him to offer these terms. That is very possible because most agents in the US have close relationships with factories in China. In many cases the agent in the US is a relative of someone at the factory in China. Still it just seems too good to be true and I don’t think any factory in China is willing to take that risk. I mean the goods could sit in Randy’s warehouse for a month before he was asked to pay for them under a NET 60 arrangement. Anyway, I told Randy not to put much credence into this offer but it wouldn’t hurt to do a small order or two with this agent to see if he honored the terms and, more importantly, how quality held up.
Overall, Randy is thinking in the right direction. His business is changing and he sees the necessity to change the way he does business.
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:
They want a native English speaker with China experience to take them into China.
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.
A former client of mine sent me an email a couple of weeks ago asking me to help him with his trademark application in China. He applied for a trademark in China last year and he is just getting the results of his application now. But that is par for the course in China with trademark registrations, the process easily taking upwards of a year. This may sound like a long time but it really is not because the trademark bureau has to search quite a few filings to make sure there are not similar trademarks. China has the largest patent office in the world in terms of how many patent applications it receives per year, well over 500,000, and I imagine trademark applications are just as many.
The result of my client’s application was that some of his product has been approved and some of it has not. It seems there is a similar trade name on the market in China that the Trademark Bureau felt too closely resembled my client’s tradename. I looked at the report from the Trademark Bureau and I can see where they might have a problem with my client’s tradename. The law firm in Beijing that is handling my clients application said he could appeal if he wanted. But my client seems reluctant to spend more time and money on this. My advice to him was to consult an English speaking lawyer in the US or Canada as language seems to have been a bit of an obstacle in his correspondence with the law firm in Beijing. Although undecided about what to do, he says he is glad he has gone through this exercise and has acted in good faith to protect his name in China. I agree.
But I am impressed how far China has come in terms of protecting Intellectual Property. China’s first trademark law was implemented in the early 1950s but it was more a law in name than in practice given the communal nature of post revolutionary Chinese society and the suspension of many commercial laws during the Cultural Revolution. With the opening of China in the early 1980s the Chinese Government saw fit to establish a new Trademark Law and they did so in 1982. That law has been revised three times since, most recently this past May. It is evident that the Chinese Government, facing severe criticism from overseas firms doing business in China, has identified a need to catch up to international Patent and Trademark standards, and I at least see my client’s application as one example that they are doing a pretty good job of it. It is pretty amazing when you consider that 30 years ago trademarks and patents meant next to nothing in China. Now they are protected.
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.
A consultant who works out of Vietnam sent me a link to a download for a guide to sourcing in China and he asked me what I thought of it since the price is cheap, only $ 149.00. The guide is being marketed as guide to qualified suppliers in China. The company behind the guide promises that it can find one qualified suppliers, advise one on necessary inspections and testing and also on shipping rates. I looked over the website and the two people, self styled western “entrepreneurs” who are selling the guide have a combined seven years of experience in China. That is not a long time at all. My friend Andrew and I have a combined 50 years of experience in China. Anyway there are probably many people who are thinking about starting business and want to source in China and look at this and think “ wow, this looks great, and it is only $ 149.00” In fact the consultant who sent it to me I think had the same first impression and that is why he wanted to run it by me. So let’s look at it.
The company promises to find you qualified suppliers in 72 hours. Impossible. There are tens of thousands of suppliers over hundreds of industries in China. It takes a while to find qualified suppliers. It can take years. Even when you think a supplier is qualified you may do a few orders with them and find out they are not e.g. when your orders get bigger and they cannot handle them. The best way to find qualified suppliers is to do orders with vendors, visit them, build your relationships based on mutual benefit.
The company promises to confirm which regulations and or testing you need to do. Product testing and regulation can be a real minefield, not to mention that requirements vary from customer to customer. If you want to find out which tests you need to do you should discuss with your customer and the CPSIA or testing lab directly. Don’t rely on someone else to give you this info.
The company promises to figure the total cost of your order. Costs on a China order always seem to go up for some reason, usually because the vendor figures out they are not making as much money as they want to. Often what you think an order will cost is not what it ends up costing.
Anyway as I wrote to the person who sent me the link: “China is just a darned difficult place to do business. If someone tells you you can make it easy or eliminate risk by paying $ 149.00 for a “report” they are just misleading you.
POSTCRIPT: After I wrote this my Vietnam sourcing contact wrote me and told me that the company had lowered the price on the report to $ 99.00. I guess at $ 149.00 they had few takers.
Most if not all consumer products sold in the US and Canada have some product safety, labeling or testing requirements. Requirements are especially numerous for Children’s product because of CPSIA (Consumer Product Safety Improvement Act of 2008 ) but in fact almost all products have some sort of consumer product safety requirement. If you are a first time importer from China, therefore, you need to do your homework as far as testing requirements for your product are concerned. This is very important not only for the obvious reason, that you want your customers to be sure they are getting a safe product, but more importantly you need to pass on your product safety and testing requirements to your vendors very early on. Factories in China have customers from all over the world and the product safety requirements generally vary from country to country. If you don’t have this conversation early on with your vendor you may find out that the product cost you were quoted in the early stages of your negotiation and on which you based your business was based on a vendor cost for raw materials that will not allow your product to pass product safety tests in your country. The difference in cost between environmentally friendly raw material and raw material that has not been filtered to remove dangerous levels of chemicals is sometimes great. So before you approach any vendor with a request make sure you know what you need in terms of product safety compliance.
Also it is a good idea to work with your shipping agent (if you have one ) because they may know about certain import restrictions in place. I remember I had a customer once who wanted to import a decorative product made with feathers from China. When I checked the CPSC website I saw that there had been an import restriction in place on any product made with bird feathers because of the avian flu in China. Fortunately for my customer the ban had been lifted. But this is the kind of problem you need to anticipate.
There was an interesting and provocative op-ed in the NY Times a few days ago about China’s economic woes. The piece was written by Nobel Prize winning economist Paul Krugman. Krugman argues that China now faces a number of challenges, which he does not think it can overcome. These problems include an abnormally low rate of consumer consumption and lower returns on investments in domestic infrastructure.
All China’s current problems, Krugman argues, are owing to the end of the era of cheap labor, an era which catapulted China’s economy to global dominance. But the rise in wages has meant that growth is just that much more difficult to achieve. Investments in domestic projects no longer return as much because they cost more. As returns diminish so does purchasing power. And Krugman points out that the average Chinese has never really spent much anyway simply because they don’t have much to spend. The stories you read today about China’s consumers running wild generally describe the middle classes in major cosmopolitan cities like Shanghai, and Guangzhou. Yet 50 % of China is still rural and still mired in poverty. Krugman’s vision of China nowadays is nothing short of apocalyptic.
I have read many doomsdays scenarios about China over the last 25 years, all of which failed to materialize. But all those scenarios were cast when China alone was having problems. The rest of the world was doing OK and because of this China always seemed to pull through, largely becuase the demand for China’s exports was a constant. Now everyone seems to be hurting as the effects of the Global Economic Crisis menacingly linger five years on. In other words, this may be the one time the doomsday scenario written about China plays out. And this is Krugman’s point, that this time is different.
I really don’t know what to think. I have always seen China as more resilient than anything else. The Chinese always seem to get it done, no matter what the odds are. They are like the baseball team without any superstars that just seems to win games. And a lot of games. But I guess how I really feel is summed up by an article I saw in one of the China papers recently. The article was about a new wave of Chinese camera enthusiasts who are now paying big bucks for vintage Leica cameras. “Hmmm…the Chinese are buying vintage Leicas,” I think to myself as I read this. Wow. Or as Edgar Bergen used to say “Who woulda thunk it.”
So my gut feeling is that Krugman is wrong. The times are different now, yes. But the Chinese are different now too.
I had an email last month from a prospective client seeing if I could help him source some indigo yarn in China. He told me that he had a vendor lined up with whom he has had discussions over the past ten months. But he complained that the vendor would not give him a sample and also that the vendor had recently raised their prices by quite a bit. A few things came to mind quickly.
1.) No vendor should be unwilling to do samples. Even for yarns and fabrics most vendors can do strike-offs or hand looms. Of course there may be set-up and sample charges, even to do a strike off, but you should not do any business with a vendor who says that they cannot give you a sample. And do not give any vendor an order until you have approved a sample. Do not accept vendor reassurance that something will be corrected in production, even if it is a very minute problem. If you don’t want it in your production make sure it is not in your sample.
2.) It is unreasonable to expect vendors to hold costs over ten months (though some will do so). Many cotton yarn suppliers in China have to source yarn from other countries like India and Pakistan now because domestic cotton in China is about double the price of imported cotton. And many spinning mills have gone out of business simply because they do not have the channels to import cheap cotton from the US. In fact China’s importation of foreign yarn rost about 56 % from Sept to Nov last year. It is not realistic then to expect that the vendor would be able to hold prices.
3.) Sourcing a yarn supplier in Northern China does not seem like the way to go. When you source in China you should identify the areas where your vendors are in the greatest number. You will have more of a choice of vendors and lower MOQs. Costs may also be lower. Just as a test I went to alibaba and did a search for yarn vendors in China. Results returned 94 pages of yarn vendors. When I did an advanced search for Jiangsu Province (Eastern China) I got 54 pages. When I did the same for Shandong Province (North) I got one page. In all fairness to the person who emailed me, he told me that he was working with a vendor in the North because they have better environmental controls. Clean production t is definitely something you want to look for and emphasize with vendors. But I am sure there are other vendors in China who have the same controls and are in more strategically located areas. It is worth doing the research to find them.