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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How to get started in China sourcing

I had a call yesterday from an old client of mine, a company that sells a very popular line of kids bags ( I see them all around town here). The woman who started the company sent me to China several years ago to attend the Canton Fair on her behalf and now her husband, Richard, has joined the company. This company is typical of many small companies and start ups I have met over the years. They start their business with the aid of a China sourcing agent and the scope is small for the first few years. But then as the product starts to take off the company becomes more sensitive to quality and cost and they begin to outgrow their sourcing agent. And it sounds like this is what is happening with this company.

Richard will be in charge of sourcing and vendor management and he called to pick my brain on China. He said that that the company now uses just one supplier and although that supplier has been pretty good in terms of quality and pricing, there have been issues. One issue is they really know very little about the supplier as the orders are handled by a middleman. I sensed in listening to Richard that this was a typical scenario as I have outlined above; the company is growing and wants to have more control over pricing as their orders get bigger. Using a middleman, however, means they have less control. Still, I advised Richard not to bite the hand that feeds you. This middleman has helped grow the business to what it is now, a very successful company that is on the verge of national brand recognition. But, I said, if the frustrations are growing in the relationship it is time to start looking for other vendors. There is nothing wrong in doing this and, in fact, you never want to limit yourself to one supplier or one agent.

Richard asked me if it was a good idea to put together a list of vendors in China and to make a trip there. This sounds good but it would be hard to make such a list using alibaba and global sources. These sites really don’t tell you much about vendors and you really have no way of distinguishing who is a manufacturer and who is a trading company. I would add that unless you really know China I think it would be hard to draw up an itinerary for a sourcing trip where you are visiting vendors for the first time. One vendor might be in location A and another in Location B. The distance on the map may look close but in fact it may take a full day to get from A to B because of traffic and poor roads. I speak from experience. I used to make itineraries for China trips but they seldom went as planned. There was always the unexpected to deal with, a road that was under construction forcing you to take a lengthy detour, an un-scheduled power outage, the unannounced unavailability of a vendor you had gone to visit, inclement weather esp in the summer. When you travel to China to visit more than one vendor, you should give yourself plenty of time, building in at least 2-3 days per vendor visit, not including travel days. For a first trip to China putting together a list of potential vendors and attempting to visit them would not be the way to go.

Instead I told Richard that he should go to the Canton Fair or the Hong Kong Sourcing fair which are held concurrently twice a year, in April and October. These fairs are the best introduction to sourcing in China for small businesses. The value in attending the Canton Fair, for example, is that you don’t have to trapise all over China to meet vendors. They are all right there in Guangzhou for you. Of course there are many vendors to avoid at these fairs, vendors you just do not want to deal with. But there are good vendors as well. At the very least you get a lot of feedback on your product and you will arrive at a truer understanding of your product design and cost by virtue of talking to so many knowledgeable people about it. You will also be able to see many other products on display which will aid your company’s own product development.

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If you are confused when you hear OEM, you are not the only one.

One of the more confusing terms you hear when you start to source in China is OEM. OEM stands for Original Equipment Manufacturer. It was first used widely in the computer and automotive industries where component parts (numbering in the thousands) were supplied by many different manufacturers and these manufacturers were referred to as OEM suppliers. OEM was simply a term coined to designate the manufacturer of the component part as opposed to the manufacturer of the  product as a whole. Apple Computers for example, manufactures computers made up of thousands of parts. Although Apple may manufacture some parts themselves e.g. computer cases,  most parts, for example. motherboard components are provided to Apple by outside companies which specialize in the manufacture of these parts. These then are known as OEM suppliers.

These days however OEM pretty much refers to any supplier in China, whether they are selling parts or finished goods, In fact most companies you see on Alibaba advertise themselves as OEM suppliers, even those that are really no more than trading companies. So that is one change: Whereas OEM used to refer strictly to a parts it now refers to a part or a finished product if that product is going to be rebranded or sold under private label.

Another change in the meaning of OEM is that it now as often refers to a buyer as it refers to a supplier. If, for example, I buy some toys from China and resell them under my brand in the US I am engaged in the OEM business. In fact, the term OEM, it seems, has really come to be synomous with sourcing in China.

In short, OEM is at once so widely used and yet so confusing that I do my best to ignore it whenever possible. If you are confused then do as I do and pay no attention to OEM.  Using the term adds nothing to your conversation with your supplier and often just comes across as jargon.

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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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Drop Shipping from China

I have gotten a couple of inquiries lately about drop shipping from China. Drop shipping, where the distributor or factory ships directly to a retail customer, is a of course a way to cut lead time and reduce costs substantially and at least here in the US it works. Drop shipping is a common feature of e-commerce nowadays with sites like EBAY and Amazon and even with many brick and mortar retail stores. But drop shipping out of China ? Hmmmm..I don’t think we are there yet.

One company that called me is an industry leader in a minor category of apparel and they wanted to ask me about finding a supplier in China who could drop ship to their customers in the US. They said they have a new CAD program which will allow customers to design a garment online and the factory in China will make the product from the online specifications as entered by the customer. I asked them what happens if what the customer orders is not what they get and they replied to me that would not happen because all the specs are there for the customer and vendor to see. The guy I talked with was insistent that there was no margin for error. This is a real company and theirs was a serious inquiry so I listened to them, politely. But all the while I am thinking to myself “these people do not understand China.” There are a few problems with this idea as follows:

  1. In overseas manufacturing something can always go wrong, no matter how simple the product seems. And, far from being simple, garment manufacturing is no walk in the park. I know because I used to work in Home Textiles.  Drop shipping garments made in China to individual customers in the US seems like it would be fraught with problems.  I can see massive returns based on incorrect sizing, color or quality. I mean, just because you show the vendor where the stitch goes does not mean they will put it there. As a vendor once said to me when I told him he should be able to find a solution for a simple problem we were facing “sometimes the easy things are the most difficult.”
  2. Few Chinese companies that I know of are going to be interested in doing orders like this. One reason is that it takes a lot of time to set up a production line and factories do not want to do it unless the order QTYs are large.  Although the US Company said their solution would be to bundle the orders so that factories were given an order for, say, 1000 units a month, it just would not be a big enough order to get many Chinese companies interested.    I should say here that a lot of small companies that come to me have ideas for products and they get very excited.  They think that all they have to do is to find a factory in China to make their product and they have got it made. They expect the factories they approach in China to share their enthusiasm and they don’t understand when the factory does not.  But factories want big orders.  They don’t care what the product is. They just want volume, because that is where they make their money, and if you can’t offer that to them, they just are not interested.
  3. The cost to send one garment from China to the US via an international carrier such as FEDEX or EMS, is from $30.00-50.00.  Needless to say that adds a lot of money to the product and I don’t think there are many customers who are going to be willing to absorb that kind of shipping cost on a $25.00 product.  And then when there are returns the cost goes up even more. No one is going to want to absorb that cost, neither the customer nor the manufacturer.

As I said, these are serious companies and one company even offered to fly me out to Denver to discuss the project with them. But I knew I would just be going there to tell them that they did not have the right idea about China, and that an idea to drop ship from China to the US was just not a smart idea, and not one I wanted part of,  so I politely declined.

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Four Maxims that will help you succeed in China

Sometimes I have found that I come up with catch phrases when giving advice to people who want to source in China so I thought I would publish a few of these here today. They are easy to remember and reflect some valuable wisdom acquired over the past 25 years.

1.) The best way to work with a problem supplier is to avoid them altogether. I get emails from people all the time who are having problems with their suppliers and it usually comes out that the person did not really research the supplier fully before giving them an order. In many cases the supplier is just someone the person met on Alibaba or another internet site. I often think the best way to find a good supplier is to eliminate as many bad suppliers as you can. You do this by doing your Due Diligence (DD).

2.) Work with your vendor, not against them. Too often people who source in China have a mindset that their Chinese suppliers are there to serve them and that they (as the buyer) can dictate the terms of the relationship. Wrong. Mutual respect is the basis for any successful relationship in China and you have to show your vendors respect at all times. When you have problems don’t look for blame. Look for solutions (this reads like another good maxim in and of itself).

3.) When doing business in China you need to be patient. And when you think you cannot be patient any longer, you still have to be patient. Patience is the one virtue you need more than any other when you source in China. When you rush your orders, rush your vendors that is when problems happen. So give yourself plenty of time on your orders. And, more importantly, give your vendors time.

4.) Be Calm, Be Clear, Be Polite, Be There. I had a customer once who had a lot of experience in China, having sourced there for years, but she found that this rhyme really summed best what it takes to succeed in China so she printed it out and put it over her desk. If you are sourcing in China, you should do the same.

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Sourcing effectively in China is about being smart and practical

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:

  1. They want a native English speaker with China experience to take them into China.
  2. 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.

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Some valuable lessons from a China sourcing project

I just finished a project helping a start up apparel company find a supplier in China. This company is showing at a trade show this month and they just received the show samples which they were very pleased with. The vendor I set them up with, a vendor I met in China a few years ago, has been great to work with. They have been very responsive and worked effortlessly to get samples to my client in time for her show. It was close though. My client did not communicate her show sample needs to me immediately the result being that we had to grapple with month delay because of Chinese New Year and ran the risk of not getting the samples in time.

Reflecting on the order yesterday I told myself, yes there are valuable lessons to be learned on almost every order it seems. Accordingly here are the lessons on this order:

1.) As soon as you know your show schedule and your sample needs communicate those to vendors or agents or anyone you are working with on the order. In general you should give vendors three months to get samples ready for you. That may seem like a long time but remember vendors are busy people and have other customers as well.

2.) Check the calendar of the country where you are sourcing and look for major holidays which might mean hiccups in production or delivery. In China, for example, you do not want to schedule anything, samples or bulk production, around CNY or National Day. These are not garden variety national holidays but major holidays that usually result in 2-4 week work stoppages. In the West, or Japan, a holiday means a few days off. Not so in other parts of the world.

3.) Don’t stop when you have found a good vendor. The client I refer to here is a small business. The vendor I have set her up with is a big factory that can count Disney and the Gap among their customers. I would not normally set up a small business with a big factory but this vendor is very responsive, professional and can give my client a good cost based on economies of scale. I have also met them and have established some rapport with them over the years. This is not the first project I have run by them. Having said all that I have told my customer that in order to keep the vendor’s interest she will have to increase her orders over time and establish a good working relationship with the vendor. Hopefully the samples she just received will go a long way in helping her do that. But at the same time she should be looking for other vendors in the event she is not able to increase her orders to the satisfaction of her vendor.

And this is the model you follow when you source in China. Always.

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The fall Canton Fair

I just returned from the Canton Fair.  I was there for all five days of Phase 2 and had occasion to talk to quite a few vendors.  One question I often ask vendors is how business is compared to a year ago, or even five months ago – since the spring fair.  Most vendors said that business was not good and the figure I got from several vendors was that booth visits were down about 30 %.  Some halls seemed busier than others but by the last day all of the halls were somewhat empty. The concierge at the hotel told me that it used to be that people would stay for the entire fair but now they attend for a couple days only and then leave. Like everything in China, the Canton Fair is changing as well. 

One day I walked over to the Jin Han fair, a parasite fair next to the Pazhou complex and I was shocked at how empty it was.  This was my third or fourth time at the Jinhan Fair and this was emptiest I had ever seen it. I can imagine that some vendors at the fair did not have even one visitor. It was that empty. 

When I called an old friend of mine in Shanghai, Nat, to catch up on things he told me that the 30%  figure I had heard from vendors was accurate. He is in the paper industry in China– he supplies the companies that make corrugated cartons – and told me that mills are carrying a lot of inventory nowadays. He added that some of China’s largest paper mills are closing factories because of the reduced demand for corrugate from both inside and outside of China.  When I told him that China’s growth rate this year is forecast for 9 % he said that much of that will be due to a busy first two quarters.  Since the summer business has fallen off considerably and he said he would not be surprised if China’s growth rate then is only 4-5%. Nat  has been living and doing business in China for 15 years and he seemed genuinely concerned about the situation in China– growing inflation and shrinking exports.   

One other thing I noticed at the fair this time is that there were many more mainland buyers than usual. I saw quite a few of them. This is testimony to the increasing consumer demand coming from within China.

The Spring 2011 Canton Fair

After a three-year hiatus I was back at the Canton Fair last week. I could not get over how big the Pazhou complex is. The last time I was at Pazhou it was the inaugural year of the complex, although half the exhibitors at that time were still at the old exhibition center across from the Dong Feng Hotel. There are over forty exhibition halls at Pazhou and in each one there are an average of 300 exhibitors. Each hall is brightly lit, some of the booths equipped with television monitors that stream high-gloss infomercials. Walking through the fair, you could easily imagine you were in an upscale shopping mall in San Francisco. McDonald’s and Starbucks have replaced the Chinese noodle stands and soviet style kiosks that dotted the old complex across from the Dong Fang Hotel. Romance has given way to comfort and convenience. But make no mistake about it the Canton Fair is a much more pleasant experience than it used to be.

Still, vestiges of the old fair remain. One has to check booths and name cards carefully because vendors are wont to rent out their spaces to other vendors without changing the name on the booth. When I got back to my hotel each night and sorted through business cards there were always a few cards that did not match up with catalogs or booth numbers. Some vendors would have one booth in one hall under one name, and then another booth in another hall under a different name ( more often than not a trading co). Needless to say, Chinese vendors still play with mirrors.

I was at the fair to find woven bags for a customer of mine and I had to go through about 1500 bag vendors. There was so much to see that my own strategy was to walk the show from 9:30 am until 5 pm without taking lunch and allowing myself just one ice-cream break ( Hagen Dazs bars at the fair cost $ 8.00. Welcome to China circa 2011). After several hours of walking it began to feel like I was participating in a decathlon.

Depending on which taxi driver you talked to attendance was down slightly or a lot from years past. The Global Economic Crisis has taken its toll on Canton. I did notice that all the parasite fairs that used to spring up in Guangzhou at the time of the Canton Fair are all but gone. Those fairs sparsely attended as they were, were nevertheless something of a refuge from the big fair and the exhibitors always gave you the red carpet treatment once they saw that you had left the Canton Fair and walked across the street to see them. Costs were much better as well. Knowing China I suspect that these fairs will be back at some point – probably right down the street from the Pazhou Complex. It is only a matter of time. This is China.