Required reading for anyone thinking about sourcing in China

I was thinking this morning how many times over the years people have told me how they were cheated when they sourced in China. One of the better articles I have read on this subject appeared in 2013 in Inc Magazine.  The article describes the trials and tribulations of one entrepreneur from Ann Arbor Mi who learned the hard way that doing business in China is not easy. It is such Ona good article, in fact voted one of the best business articles in 2013, that I usually send the link to prospective clients who are approaching me to help them.  I see it as required reading for anyone who is thinking of doing business in China. INC Magazine article

 

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An American CEO who is jaded by China

I sat down yesterday with a local entrepreneur. He owns a chemical products company that he established ten years ago and the company has grown from 5 to 10 employees over the last year.   He wanted to talk to me about China or, more aptly put, he wanted to complain about China.  He detailed for me some of the challenges he has faced there over the last ten years.  Among the things he told me:

  • He hired a Chinese employee only to have that employ take his formulas and set up his own company in China. And then this ex-employee had the gall to approach his former boss and offer to be a supplier. Because the prices were good the American could not resist and he is now buying his own product from someone who stole that product from him!  I have heard these outrageous but true stories so many times before.   There is no way to avoid situations like this but by making sure you vett the people you are employing as thoroughly as possible. I should have asked about his hiring process but I didn’t. But a good tip is this if you are protective of your IP you should never hire anyone but a US citizen or permanent resident who can be held accountable under terms of an NDA.
  • As a side venture the entrepreneur tried to export California wine to China, under private label, only to find that he had to register his designs with the Chinese govt. and was forced to have a Joint Venture (JV) partner. He seemed to think this was just opening the door to getting ripped off again. Of course it is. But as I explained to him if you are making a good profit off of China, it shouldn’t bother you if your JV partner in China is making a good profit off of you.
  • He attempted to learn Chinese believing that it is very important to speak the language of the country where you are doing business. I couldn’t agree more.  He mentioned what a hard language it was to learn.   But he said that he was forced to give up his studies when the SARS epidemic broke out, believing that he would not be able to spend time in China to practice. I don’t know what to say here but it does not sound like he made a sustained effort.  And that is what it takes to learn Chinese, a sustained effort. It is a hard language. He is correct.
  • He wanted to know how I had avoided becoming jaded when dealing with China over the years. I told him about George Kates, an American antiquarian who lived in China in the 1930s and wrote a book about his experience entitled “The Years That Were Fat.” George Kates, The Years That Were Fat  Kates spent seven years in China and he said that in order to live in China the one thing that is most important is patience. So, yes, patience is the most important thing when you do business in China.  Another key to succeeding in China is that you have to like China.  If you don’t like China, don’t like the food, the people, the history or culture, it is probably not a place you should locate your business. You will get jaded quickly as I sense he has.

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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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When you do business in China, leave your Nationality at home

I was watching an interesting program on NHK, the Japanese network, the other night.  The program, broadcast weekly, is entitled “Professionals” and shows people engaged in various professions in Japan, everyone from, say, a violinist with the NHK Philharmonic to a waiter in a non-descript udon restaurant.  The installment the other night featured a well-known female civil engineer, Reiko Abe, who has faced considerable discrimination in Japan because she works in a male-dominated profession, tunnel engineering.  Her solution to the problem is to work for a Tokyo based project management firm that stations her abroad, in countries in need of expertise from Japan e.g. India and Indonesia.  Two of the projects she has worked on in recent years are the subway system in Jakarta and the bullet train in India. Denied upward mobility in Japan, she is now regarded as one of the top tunnel engineers in the world.

It was an interesting program not only because it shows the depths of discrimination that women still face in Japan but also for one revealing line Ms. Abe uttered when asked how to explain her success in a country like Indonesia, where building standards and a sometimes feudal mentality among workers are barriers to modernization.  Abe said the key to her success on overseas projects is that she always “throws away Japan before going abroad.”   I thought that was an interesting way to put it, in other words, that Ms. Abe gives her national identity all the value of an empty can when she is working abroad.   But this is what she does when she goes overseas.  And this is why she is in such demand now for high-profile international projects. In a foreign country, she obviously knows how to adapt and get things done.

And this is what you have to do when you do business in China.  Adapt. You cannot be weighed down by your own customs and flummoxed by unfamiliarity.  A case in point is former colleague of mine.  Whenever she visited China she would insist on being driven back to her hotel everytime she had to use the bathroom. She just refused to use the bathroom in the office or factory.  The exact opposite of Ms. Abe.  Needless to say, the Chinese did not enjoy working with her and her projects never went smoothly.

So the next time you are about to get on a plane to China and you see the bin where you have to dispose of all the things that are prohibited on board, make an additional imaginary bin in your mind that says Items Prohibited Beyond This Point:  Your Nationality.  

Here is a story and interview with Ms. Abe from Bloomberg. Reiko Abe feature

 

 

Is there any way around MOQs ? Unfortunately not.

One issue that small companies and start ups grapple with all the time when they source overseas is MOQ (Minimum Order Quantity).  I don’t think a week goes by when I don’t get an inquiry from a small company that wants to source a product in China but in very small QTYs, in many cases just a few hundred units. For example, a few weeks back a London based women’s apparel start-up emailed me.  They have 20 designs and want to order between 100-200 pcs per design.  They want good quality and a low cost.  I told them that I saw this as a very challenging project and I suggested that the only way to do this would be to reduce the number of designs and increase the order QTY per design. Only in that way could they think of meeting the fabric MOQs that vendors in China would likely be facing were they to take this order.  Like many small companies that hold steadfast to their designs, this company said they didn’t want to eliminate any designs and that was the last I heard from them.  I imagine they are back on alibaba looking for suppliers.

Although there are suppliers in China that will accept small orders, these are generally not reputable suppliers and if you do place an order with a vendor like this you might just be throwing away your money. The vendor makes a small profit and sends you an order you cannot sell.  I have seen it happen many times.

Just out of curiosity I went online to see how other sourcing consultants handle the issue of MOQ. In other words is there any way around MOQ ?   Some of the advice I saw is as follows:  limit product customization; negotiate a lower MOQ; pay a higher unit cost; streamline material usage; focus on buying from small suppliers etc etc. Let’s look at these strategies:

  • Simplifying product design. Conceivably, the only way this would get you around an MOQ would be if you were simplifying design to cut unit cost so you could order more of a product to meet an MOQ.  It sounds good in theory but I have never in fact seen a company do this.  Companies that change a design do so to lower costs, not to increase their costs.  I would add that modifications to a product design, unless major, usually result in very insignificant cost reductions.  But, as I said, I have never heard of a company doing this.
  • Negotiate a lower MOQ. I think this only works with vendors with whom you have had a longstanding relationship. They want to maintain the relationship and therefore will sometimes waive MOQ requirements.  This happens all the time. On the other hand, if you negotiate a lower MOQ with with a first time vendor, they will just seek to cut costs in your production and you may end up with goods you can’t sell.  I always advise companies not to get into protracted negotiations with first time suppliers because it just sends the relationship in the wrong direction from the get-go.  But OK if you are trying to get around an MOQ with a longstanding vendor.  It never hurts to ask.
  • Pay a higher unit cost. What you will have to do if you want to order less than the MOQ. If you have target costs this may make your project untenable. It also locks you into a higher price as your orders get bigger. Yet this is what many companies have to do to get around MOQ.
  • Streamline material usage: Not realistic unless you have a product you can do this with. Most small companies don’t.
  • Buy from small suppliers. Small suppliers are usually not reputable suppliers.  If you have any kind of strict design requirements, you will not have success with small suppliers who simply do not have the expertise to handle challenging designs/orders.

In fact, the only thing I advise small companies to do when they are inquiring with a China vendor about MOQ is NOT to ask the vendor first what their MOQ is but instead to give the vendor 3 QTYs to quote on, one for the minimum they think they can order and then in increments accordingly. For example if I wanted to make a wooden picture frame in China I might reach out to vendors and tell them that I am interested in QTYs of 1000/2500/5000 and ask them to quote on each QTY accordingly.  If the vendor really wants my business, they will quote me on my terms and will not mention their own MOQ, even though they may in fact have one.  I think this is really the only way to get around MOQ. But even this strategy has its limits because many vendors will just come back to you and tell you that they have an MOQ.

In short, this is why overseas sourcing is so challenging, because no matter how cheap the unit price is, you are not going to get that unit price unless you order a far bigger QTY of product than you might be able to sell.

 

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The Shanghai Friendship Store

While I was writing my blog post for last week my thoughts suddenly went back to my early days in Shanghai when there was only one store which sold overseas products, The Shanghai Friendship Store, located on Beijing Rd. just off The Bund. The store was established in the 1950s to cater to overseas diplomats and their families who wanted imported goods while living in China. And when I lived there in the early 1990s it was the one store in Shanghai where you could buy a pair of Nike shoes, for example, or a Sony transistor radio, some Gilette razors or just a jar of Skippy Peanut Butter.  The Friendship store also sold a lot of touristy Chinese chachkies and it was a popular stop with large tourist groups who came to China in those early days.

The name, Friendship Store, was hardly eponymous because the service was atrocious, and the clerks glared more than they smiled. But in those days, people in China were not as friendly as they are now.  Yet, the Friendship Store, in spite of its dreary Soviet –era demeanor, mustiness and sulky, sometimes downright unfriendly service had all the cachet of a Saks Fifth Avenue among the Ex-Pats living in Shanghai. If you shopped at the Friendship store, you had money.

You needed a foreign passport to enter the store and there were always guards out front checking passports and making sure that no locals slipped past the large Foo Dogs placed at the entrance.  There was probably as much security outside the Friendship store as there was outside the US Consulate on Huai-Hai Rd.  Of course nowadays you can go down any street in Shanghai and find a Tiffany’s or Wayfair, or a Coach outlet store or a McDonalds.  But this is all recent and up until the mid 1990s many foreign goods were simply not available in China. Unless you found them at the Friendship Store.

The Friendship store only accepted Foreign Exchange Certificates (FEC), the currency issued to foreigners living in or visiting China. Up until 1995 foreigners, unless they possessed a Chinese ID or work card, were not allowed to spend the local currency, the RMB, even in Chinese stores. They had to shop only at select establishments that accepted FEC like the Friendship Store or KFC.  If all you had on hand was FEC but wanted some RMB, so you could shop in the local stores with your ID, the first place you would go would be the Friendship Store.  There out front you would find no shortage of money changers who wanted your FEC so they could buy luxury goods.

While writing this I went on Google to see if I could find any images of the old Friendship store. I could not find even one.  Instead I found images of  the new breed of Friendship stores, in Beijing, Shanghai and Guangzhou, glitzy, high end type shopping malls. Everyone is now welcome and all the clerks are smiling.  In other words, the Friendship Stores are now actually promoting friendship.

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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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Never think you are a big fish when you source in China

If you are sourcing in China you have to remember one very important thing:  that your product may not be a priority for the vendor with whom you have placed an order.  Most factories in China, big and small, have a myriad of production orders going at any one time.  Walk into any workshop in China and you will likely see orders from all over the world, from the US, from South America, from Africa etc etc. I am always amazed at the global scope of production when I visit factories in China.  And some of these orders can be huge, tens of thousands of pcs depending on the product. You might think your 5,000 pc PO is a big deal but for your vendor it may only be a small order when compared with all the other orders he/she is doing at the moment.  I remember working on an apparel project a few years back.  The company that had retained me sent me to China to do an inspection of a 20,000 pc order.  For my client it was major order.  But when I showed up at the factory I realized that my client’s order was the smallest of several orders going at the same time.  The vendor told me that 20,000 pcs was not a big order and as such I could clearly see that it was not being given priority by the workers or management.  They told me a big order was over 100,000 pcs.  I was surprised and wondered if my client knew this as well.  I can’t remember but I don’t think they did.

Can you fault the vendor in this case ?  Not really.  They have to prioritize their orders and their business. It is only natural that they are not going to give a small order priority over a large one.  Ideally they should communicate this to their customer but in China it does not work that way.  Vendors can be pretty lacking in communication and that is one of the big challenges to sourcing in China. Can I fault my client ?  Somewhat I think because they failed to acknowledge that the vendor had other orders at the same time, even though they had been to the factory, just a few weeks before I was there, and had seen the other orders in process.  They simply believed that their order counted most. So when it came time to get the order out and the vendor was behind my client just pushed the vendor, the end result being that the relationship turned sour.   Had my client anticipated a delay and built some extra time into the production and delivery schedule to accommodate for the low priority their order was given things might have proceeded more smoothly.

So how can you know if the vendor is prioritizing your order or not ?   Well the first step is before you do business with a China vendor, ask them about the size of their orders and what they regard as a small order, what they regard as a big order etc etc.  They will probably inflate these numbers wanting to lead you to believe they have and can do big orders.  But their reply will nevertheless give you a very rough idea of what to expect when you place an order with that particular vendor. For example, if you meet a vendor at the Canton Fair who makes shoes and s/he tells you that an average order for him is 5000 pairs of shoes and that a big order is 20,000 pairs, you will know that if you give them an order for 1000 pairs, it will likely not be a priority order for them.   You might even ask a vendor to show you a hard copy of an order for a large QTY.  You can tell them that you just want to verify that they can do what they say they can do.  And ask a vendor before you place an order what other orders you are going to be competing with ?  For some reason this is not a question that most importers are in the habit of asking their vendors, their thinking being that only their order counts.  But I don’t think it is a bad idea to try to find out what are going to be the challenges and potential delays once you place your order.

Finally, if you can, make a trip to China to inspect your order in process.  Simply by walking around a workshop while your order is in process will give you a very good idea of how a vendor is prioritizing things.  If only a little space is being devoted to your product, well, you know you have a problem in spite of your vendor’s reassurances.

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When you put your vendor on a pedestal it is time for a reality check

I am working on a project now with a vendor in China that I have known for about four years. I met this vendor at the Canton Fair and I have run a few sourcing projects by them over the last few years. They have always proven very reliable in terms of making sure they understand my clients’ product designs and getting me quotes and/or samples in a very timely fashion. And this project has been no different. However recently I sent them an email asking them to send in samples and it was about ten days before I heard anything back from them. I called and left a message as well. But to no avail. When they finally did get back to me there was no apology or explanation for the delay. They may simply have been busy with another order or perhaps they were preparing for the Canton Fair. Fortunately it was only a sample order but, boy, was it frustrating for both me and my client. At one point I was even questioning myself about how well I knew this vendor and I was preparing to reach out to alternative vendors. The lesson here is never to take anything for granted when you source in China. That seemingly trustworthy vendor you have known and done business with for the last few years may suddenly turn out to be completely unreliable. I have seen it happen many times before and it could easily have happened this time as well, had the vendor decided they were tired of working on projects with me that as yet had not resulted in any sizeable orders for them. So always have backups no matter how well things are going and when you start to put your vendor on a pedestal it is time to give yourself a reality check. I have written on this before but it bears remembering. Even I, who have doing business in China for 25 years, have to remember this sometimes.

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