If you want to do business in China, you need to spend money. Period

Last month someone emailed me asking me if I could help her source a promotional product in China.  This lady runs a small non-profit here in the SF Bay Area.  She said she had contacted some vendors and agents on alibaba but, having never done business overseas, was nervous about moving forward with them.  I told her I could help her and quoted my fee, which is not substantial.  She seemed to waiver and then told me that the Chinese  agents had quoted her a lower fee.  I generally don’t advise using Chinese sourcing companies for reasons I have written about here, and I told her so.  After a couple weeks of going back and forth and answering her questions as best I could I finally decided to give her the name of very reputable French sourcing company in China, for I had come to the realization that she was very reluctant to spend money on this project.   The French company charges less than the Chinese company and although they are staffed with locals they are owned and managed by a French national with many years’ experience in China. They have a good reputation, are responsive and I think their sourcing fee is very reasonable, although things can get expensive, in terms of the costs associated with follow up,  once they locate a factory for you.

About a month passed and the lady emailed me telling me she had had some discussions with the French company and was “weighing her options.”  She asked me to advise her.  I told her that with her QTYs and target costs, neither of which is substantial, she is going to need all the help she can get in finding a vendor in China who is willing to take her order.  And if she is serious about doing this she needs to see that she will have to invest some money. In spite of the seductively low costs one sees advertised on B2B sites like alibaba and Global Sourcing, sourcing  overseas requires serious investment and demands a serious, long-term commitment.  In other words if you want to source in China, but are not willing to spend the time and money to do so, my advice is simple:  forget it.

When you source in China, you need to think like a football coach

Tomorrow I am going to visit an electronics importer here in the Bay Area.  This is a small company but they are experiencing tremendous growth and want to ramp up their operations, which of course includes their China operations.  I was talking to the CEO on the phone the other day and he told me he was very happy with his main supplier now.  I asked him how long he has been doing business with the supplier and he replied three years. My first thought was that three years is not really a long time and that this company still needs to be careful and treat this vendor as a new vendor.  This means they have to do their part and get the vendor orders on time, clearly indicate product and testing requirements, avoid last minute product design changes and, of course, they have to inspect orders before they leave China. And they have to develop alternate suppliers in the event that problems arise with their current supplier, as far off as that scenario might seem right now. In fact, this is one of the Golden Rules of China sourcing, never feel complacent with a situation, no matter how long-standing the relationship with your vendor is and how well things seem to be going. Because something can always happen when you let your guard down.

A good parallel is this past weekend’s football game between Michigan and MSU. With ten seconds to go in the game and possession of the ball all Michigan had to do was punt the ball away and they would win the game.   What happened ?  The punter fumbled the snap, tried to kick the ball anyway ( when he should have just fallen on it)  and it was returned by MSU for a game winning TD.  In the post game discussions and write-ups all of the blame was directed at the punter, yet I think much of the blame should go to the coaching staff for not telling the punter what he should do if there was a bad snap or fumble.  That is what coaches are there for, isn’t it ? Yet the Michigan coaching staff just assumed the punter would kick the ball away and apparently did not discuss the contingency of a bad snap or fumble.  The lesson to be learned is this:  When the game is on the line don’t take anything for granted.  When you are a small business and are sourcing in China, and are succeeding at it, don’t feel  you have won.  You are winning but you have to be vigilant with every order and until the end.

Using online payment systems when you source in China

Until recently whenever you wanted to pay a sample fee to a vendor in China you would have to send a bank wire. Service charges for a wire transfer run between $30.00 -$50.00 and the wire can take up to a week to go through, although the ave time is 2-3 days. Not to mention the fact that you have to spend time to go to the bank and do all the paperwork for the wire transfer. Nowadays however, more and more vendors will accept Paypal as a way to pay for samples. I would say that whereas two years ago maybe one in ten vendors would have accepted Paypal, now it seems that about 50% of vendors will accept PayPal for sample fees. The advantages for you, the buyer, are obvious. Paying a vendor thru PayPal will save you a lot of time and a little money. PayPal also protects you if do not receive the samples or if the samples are not what you were expecting.

However, all this is not to say there will not be problems. A case in point: I have a client now who is ordering some samples from a vendor in China. This is a vendor who accepts PayPal. Last week I had an email from the vendor telling me that the samples were ready to go as soon as the sample fee was paid by my client. So I told my client who wrote back that he had already made a PayPal payment to the vendor several days previous to the vendor’s email. I checked again with the vendor who told me that there was no record of the PayPal payment from my client. We went back and forth for a few days and finally discovered the problem which was simply that the vendor was taking PayPal payments through his gmail address. However since Google is persona non grata in China the payments were not going through. So the vendor had to register another email address with PayPal and overall we lost about 4-5 days because of this. PayPal in China still has growing pains.

One other method of payment that many vendors accept nowadays is alipay which is Alibaba’s online payment system, and the largest payment system in China. Many vendors who sell on taobao.com (China’s equivalent of Amazon) use alipay as their payment system and the reviews are generally good. However, I would not recommend you use a China based payment system to pay for your sample fees for the simple reason that if you have a problem it may be hard to resolve it. If for example a vendor accepted alipay or wire transfer I would probably just opt for the wire transfer, time consuming as it is.

How to choose a Trade Fair in China

This morning I received an email from an American, “Jake” living in Krygstan, a small Central Asia country bordering Kazakhstan and Uzbekistan . He and his wife have a business there selling women’s apparel. He has been buying product from China from a middleman there in Krygstan but he finds prices are too high and that he would be much better off going to China directly. I think he has the right idea. When I lived in China in the 1980s-90s the Silk Road was thriving. Whenever we would go to the wholesale markets in Shanghai we would see we would see traders from all over Central Asia including many of the Soviet Bloc countries (In those days the USSR was intact). And this is still the case today.

Jake told me he is going to Shanghai next month to attend a trade fair and that this will be his first time in China. He was asking me what advice I could give him. The name of the trade show he will be attending was not familiar to me and so my first piece of advice to him was that he should make sure he picks the right trade show, because there are a lot of shows in China, some good but many probably not worth attending. There are shows in China that are full of 3^rd tier vendors, usually small cottage industry vendors, and these are probably not the kinds of vendors you want to deal with if you have a design driven product. Yet these shows are well-publicized and you can easily be led to believe you are attending one of the biggest shows in China. You show up in China to find a massive exhibition hall with just a couple hundred trade show booths and no foreign customers in sight. I have seen these shows many times. It is like seeing a watercolor exhibition in the Georgia Dome. So the first thing is to carefully research the fair you are thinking about attending. There are ways to research the fair, reading online reviews of trade fairs in China, asking about the fair in a Linked In Group specific to your industry, and sometimes just asking a handful of Alibaba vendors which shows they attend and see if the show you are interested comes up. It is also a good idea to call a local company that sources overseas and ask them which shows they attend. As long as you have a non-competitive product they should be perfectly willing to share their insights with you. A general rule is this, if you cannot find anyone who has been to the show you are thinking about attending, then don’t think about attending yourself.

I told Jake that he made a good decision to focus on Shanghai as Jiangsu Province, bordering Shanghai, is where so much textile production takes place. But he probably should have waited to attend Intertextile Shanghai, the biggest textile fair in China. The bigger and more established the show, the better vendors you will have a chance to meet, and the more likely it is that you are going to meet someone who can help you build your business. And this is the virtue of the Canton and Hong Kong sourcing fairs as well. These shows are well known in all corners of the world and although there are plenty of vendors you probably do not want to do business with, and although they may not be the best fairs if you have a high end product, you can usually find someone who can teach you a different way to look at your product and thereby help you grow your business.

In short going to a trade fair in China is a good first step. But research the show carefully and find the show that is best for your needs. Or as they say in China 量体裁衣. Cut the garment so that you can wear it.

Here are some more posts on Trade Fairs in China

Canton Fair 2012

Preparing for the Canton Fair

Don’t go unprepared to Trade Fairs in China

Ordering in small QTYs when you are starting a business

I have a client who is starting a new line of private label products and he wants to order in small QTYs from China, the goal being to see which products do well and which products do not  before he pours a lot of investment into anything. These are low value added products which retail at under $ 20.00. He sent me a list of about 10 products and the QTYs he wants to get from China are from 250-500 pcs per item. I like my customer’s common sense here, for I think in any China sourcing project it is good to start small, no matter what your projections or gut feeling may say. At the same time, often what gets a vendor’s interest is large order QTYs so an order of 250 pcs may have few takers. And if someone did take the order, it would not be a priority. The one exception would be if my client had a longstanding relationship with one factory. In this case the factory would willingly take the order because they would view it in terms of the larger relationship. Getting factories with whom you have done business over the years to take small orders is rarely a problem. But my client is starting out so he really does not have these kinds of relationships with factories in China right now.

For this reason, I have advised him that it is best to work through a trading company with this order, and one that specializes in the type of product he wants to import. In addition to run-of-the-mill trading companies that run the gamut in terms of what products they sell, you will find trading companies in China that are dedicated to one product category only e.g. auto parts, to stationary items, to toys, to baby products etc. I worked through a trading company once that specialized in silk flowers and automotive parts. It is an odd pairing but it worked for me because I was sourcing silk butterflies for a company in California. Had I been sourcing refrigerator magnets it probably would not have worked. So if you are looking for a trading company, it is good to remember this. Because the last thing you want to do is unknowingly give an order to a trading company that really has no expertise in the product you are interested in. You have no way of knowing this unless you do your research.

At the same time working through a trading company means that my client will have to lower his product standards considerably. Because trading companies are not the primary manufacturer and cannot be expected to attach importance to any but the most basic quality requirements of the customer one has to lower their standards accordingly. So when my client is already voicing about how he can tweak this or that on a product or how he can improve quality, I told him, forget about that. You are just ordering 250 pcs of something with minimal value. Right now just see if you can get these products out of China with your own label at a cost that works for you. Once you do that you can gauge the interest in the market. Even if a customer buys something and returns it for quality issues, my client will have seen that there is interest in the product, which I think is his goal now. When he knows which products garner interest and which do not he can then start thinking about bigger QTYs and approaching factories directly with orders that will get their interest. And then he can spend more time thinking about product quality and design.

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.

 

The day 40,000 people visited McDonalds in Beijing

I saw the other day that McDonalds has opened its 2000^th restaurant in China. To think that there are now 2000 Golden Arches in China because when I first lived in China there was one, in Shenzhen. The first McDonalds outside of Shenzhen opened in China in Beijing in 1992 and I was fortunate enough to have been there.

I remember a few things about that first visit to McDonalds in April,1992, namely how crowded it was (according to McDonalds there were 40,000 customers on that first day),  the line of people taking snapshots of the Ronald McDonald statue outside the restaurant and how I had to summon my courage to eat a Big Mac with cheese because the person behind the register could not comprehend a special request to make a Big Mac without cheese. After explaining to him that I did not like cheese I looked behind me at the great wall of people waiting to order and decided that I had better dispense with the special request lest it bottleneck production and create a major incident in what was billed as the largest McDonalds in the world. .

Thinking back to my first time at McDonalds in China I can remember how in those early years of Deng Xiao Ping’s reforms about the only two American foods you could find in stores, not counting the ubiquitous Coca Cola which had been in China since the 1930s, were Tang and Nescafe instant coffee. The popularity of Tang in China was hard to fathom since it had not been popular in the US in 20 years. I can only speculate that someone in the Nixon entourage had brought over a jar back in 1972, ( maybe someone in the State Dept thought it sounded Chinese as in Tang Dynasty ?) and the Chinese were hooked from then on. Who knows.

In those days then there was a buzz in the foreign community anytime an American brand was spotted in Shanghai, whether that was a short-lived Sees candy store on Jin Jiang Lu or a box of Ortega Taco Shells that somehow had found its way into the Soviet era grocery store on the corner of Wulumuqi and Hua Shan Lu. There was a randomness to it all that was exciting.

Beginning about 1992 or 1993 western style supermarkets started to sprout up all over Shanghai. They were big but did not offer much variety meaning you might find an entire aisle dedicated to one brand of hot sauce. The locals were slow to accept the supermarkets because they were more expensive than the local markets, did not except grain coupons and there was a tendency to distrust anything new. Imagine a local Chinese shopper in those days trying to figure out what a jar of Skippy was. I remember vividly how big but how eerily silent and empty the supermarkets were in those early days. You wondered if they would catch on.

If you really had to have that box of Pop Tarts or some Gray Poupon then there was the Wellcome Store, the Shanghai ex-pat equivalent of the Army PX, located in Shanghai’s most well-known ex-pat compound, the Portman ( now the Ritz Carleton Shanghai). But everything was expensive in this store so we did not go there but on the most special occasions or maybe after we had had a bad “China Day” and just needed a cup of Swiss Miss hot chocolate to keep our China life in perspective.

Nowadays when you go to Shanghai you can find anything everywhere. Whenever I go to Shanghai and pass by a bakery I like to recall those Sundays when I would get up early and embark on a two hour journey via bike, ferry and bus to the middle the old French Concession. There was a bakery there and they had a rare commodity that I was after. It was called bread.

Happy Thanksgiving

Some things to keep in mind for first-time China goers.

I was on a skype call with a prospective client the other day. She has a new product/business and would like to start sourcing in China. She has approached some manufacturers here in the US but with no success. Not only are costs to make her product, an apparel item, prohibitive in the US but she said the response she received from companies was tepid at best. Some of them didn’t even respond to her which is odd given her professional background and serious level of inquiry.

She had some questions for me which I answered. Her questions and my answers might be useful to others who are thinking about sourcing in China so here they are:

Question:

Does one need to speak Chinese to do business in China?

My answer:

No, it is not necessary and there are plenty of people who do business in China and who do not speak Chinese. But here is a fun, and I think reasonable way to look at it: not knowing Chinese will never help you and may hurt you. On the other hand, knowing Chinese will never hurt you and may very well help you. The big picture is that the Chinese want you to respect them and one of the best ways to show them respect is to make an effort to learn their language. This does not mean you have to go down to your local college first thing Monday morning and sign up for an intensive Mandarin course but you should at least  learn some greetings and maybe even a few proverbs, your knowledge of which will make a good impression on the people you meet in China. Just remember, big companies can afford to hire locals with good English skills to help them in China. Small companies must do everything on their own.

Question:

How do I find and settle on a supplier?

My answer:

Locating good suppliers is just a process of establishing contact, sending out samples and requesting counter samples and working with vendors to get to your target costs and achieve product quality you are happy with. One thing to pay close attention to when you are feeling out suppliers is how well do they communicate with you.  Do they reply to your emails promptly or do they make you wait ?  Are their answers to your questions perfunctory or thoughtful ? Do you have a feeling that they want your business ?  Just remember this: if the communication is sporadic to begin with, it will not be any better once you order. And in fact it may get worse as you ask more questions requiring more thoughtful and detailed answers.

If you are working with printed patterns then you will need to provide vendors with all artwork and pantones. I have often said that one really needs to finalize design before approaching vendors. Some of these vendors are very busy and if you approach them with a design and then change that design along the way they get frustrated. And it sends them the message that you are not organized/professional. So the first step is to finalize your design and have all the artwork on file.

Question:

How much will it cost to get samples?

My answer:

Cost of samples will vary depending on your design. If you want to use printed fabric with your own design, of course there will be a charge to cut a screen (usually $100-$200.00). If you have definite material or fabric requests then you need to send your vendors swatches and let them source for you. Often when you have specific material requests vendors may not have adequate stock of that material on hand and may have to use a substitute fabric. This is OK. A note on zippers: You should specify YKK because Chinese zippers are pretty bad. And even with YKK you have to be careful because there are plenty of fake YKK zippers in China.

Question:

What should I do to protect my designs/product in China ?

My answer:

For protecting all IP it is a good idea to register your trademark in China as well as in the US/Canada. The cost to register a trademark in China is 600-1000 USD if you use a Chinese lawyer and probably 3 or 4 times that much if you use a lawyer in CAN or the US. The key about IP is this: Don’t be paranoid about having someone take your name in China. Big companies are most often the targets. But don’t be nonchalant about your IP either. Stuff happens in China and you just want to do all your DD and take the same precautions you would take in your own country when starting a business, and this includes registering all IP.

Question:

If I work with you how can you guarantee that I will get what I order ?

My answer:

No matter who you work with when you do an order in China and no matter how good you think your supplier is you can never be 100% sure that what you order is what you are going to get. All you can do is try to reduce your risk. And this means vetting your suppliers before you give them orders, showing up occasionally to make sure they are keeping your company’s standards in mind, and checking your orders in China before they ship and you have to pay for them in full.

The Siren Song of China

Yet another behemoth global retailer has fallen in China. Tesco, the 3rd largest retailer in the world has announced that it is pulling out of China.This is the highest profile retailer to leave China since Home Depot announced it was closing all of its stores and rethinking its strategy in China. Tesco leaves China

Whenever I see a story like this I immediately think of the millions of dollars of that was probably spent on feasibility and marketing studies, the end result being that the research was just wrong. The reality is often different than what is on paper I like to say. I have been going to China for 25 years now and I could have told Tesco it wouldn’t work for them in China for a fraction of what they probably paid their own consultants. All you have to do is know China’s history. In his book On China, Henry Kissinger describes China in the early modern period

China traded with foreigners and occasionally adopted ideas and inventions from abroad. But more often the Chinese believed that the most valuable possessions and intellectual achievements were to be found within China.

Since China opened its doors to the world in 1978 the refrain has been that China will be a big market for foreign companies. This has become a platitude. With a few big exceptions, mainly Global corporations like Coca Cola and GM that have a long history in China ( Coca Cola first sold its product in China in 1928 and GM in the 1930s) and that can go into any country and succeed because of their sheer size overseas companies that have tried to sell into China have not fared well. China is like Anthemusa, the island where the Sirens lived. The Sirens were beautiful creatures, part woman, part bird but to reach them was impossible because of the rocky shores and cliffs surrounding Anthemusa. The coast of Anthemusa, it was said, was littered with shipwrecks – those who had heard the sirens song and who had tried to go ashore but had perished in the attempt.

China’s rapidly growing middle class consumer market is a Siren’s Song. Government regulations and bureaucracy, extensive language and cultural barriers, latent nationalism and xenophobia, of which Kissinger speaks, rampant corruption are the crags and cliffs that ultimately result in shipwreck for many companies, big and small, that try to go ashore in China.

So the next time you hear about how China’s grwoing middle class means opportunity for you, do as Odysseus did. Plug your ears with beeswax and focus on growing your business where it counts most, in your own country.

A first visit to China

My client from Toronto is back from his trip to China. This was his first trip to China, and in fact first ever visit to Asia. It sounded and looked like he had a great time ( from the glow he exuded on our skype call). And although he was less than enthusiastic about the vendor he had gone to see, he nevertheless regarded the trip as a success.

Regarding the vendor, my client said his impression was that this was a very big and a very busy vendor and that they probably regarded my client as a “small fry.” The vendor took my client to lunch twice but there was no official welcoming banquet and the head of the sales dept, who had approached my customer first at the NYC Gift Fair earlier this year, was absent for much of the two days my client was in Ningbo. Anyway, it certainly does not sound like they rolled out the red carpet for this father–son “delegation” who had travelled all the way from Toronto. I told my client that this was not a good sign. And in fact I have never heard of anything like this where a foreign guest was not taken to dinner by their hosts upon their arrival in China. But it may just be a sign of changing times in China where foreign importers are not accorded the same VIP treatment they have become accustomed to over the years. And many Chinese companies have overhead too. It may be that in these tough times extravagent, wastful banquets for customers are on the way out ( let’s hope not !).

Another couple of worrisome signs are that the vendor changed their pricing on my client’s product, telling him the very competitive prices he had given him before were based on a higher MOQ. My client seemed irritated by this but, as I had already warned him that something like this might happen, he seemed to be able to “process” it and move on. And the vendor also lengthened the lead time from 45 to 90 days. This is also very concerning. 90 days is a very long lead time for this product, most of which is automated product.

My client seemed to be at a loss about what to do. So I asked him what his gut feeling was. He said his gut feeling was that he wanted to give them an order. He likes their quality, their facility and they seem responsive and friendly enough. I told him that was fine and that these are definitely good points he does not want to ignore. But a first order should be as small as possible. See how it goes. If the service is good, then look at increasing your order. But he should anticipate that there will not be quick solutions to problems if they arise ( because they are big and he is small) and he should be very careful about the lead time. In China when a vendor gives you a lead time you should always tack on 2-4 weeks because China orders just always seem late for one reason for another. In other words, if he orders product with these guys and they have given him a 90 day lead time it may be 4-5 months before it rolls into his distribution center in the US.

Other interesting observations on his trip.

My client spent much of his career working in London but he said he found Shanghai much bigger and much more intense. He seemed overwhelmed by Shanghai. But having spent seven years there I can understand that. Shanghai is nothing short of overwhelming. I find it much more intense than Tokyo where I have spent the last three years. I would add that whereas the Tokyo energy just wears you down, the Shanghai energy invigorates you.

The train station in Ningbo was chaos. Yes, I believe that. Train Stations in China are very crowded and chaotic. You walk in the door and your heart sinks as you wonder how you are going to manage to buy a ticket. The experience can drain you in minutes. So always book your train tickets in advance ( preferably through a hotel concierge) and arrive at the station early because it may take you some time to find the right queue ( or what is supposed to be a queue).

The jet lag on his return really got to him. He travels a lot to Europe but the Toronto – China trip was just so much longer.

The food in China was wonderful. So true and one of the best things about travelling to China. Chinese food in China is an experience unlike any other. Westernized Chinese cuisine just does not cut it, no matter how “authentic” it is said to be. After eating Chinese food in China, you will return to your own country a Chinese food snob.

Haggling in the local markets was challenging and exhausting but fun. Yes, it is true. But if you go to China you definitely want to leave yourself a day to do this. It may be the highlight of your trip. And, as my client pointed out, the knock off LV bag you buy in China for next to nothing may be better quality than the original !