When you ship out of China just think FOB

I had an email a couple of weeks ago from someone who wants to ship an order DDU out of China. DDU stands for Delivery Duty Unpaid. It is actually an outdated term having been replaced several years ago by DAP Delivery at Place. In a DAP transaction the seller is responsible for all costs up to the point where the product is delivered. If for example the goods are going from Shanghai to Columbus, Ohio the seller would be responsible for all costs up to delivery in Columbus, with the exception of Duty and administrative costs to get the goods from the port in the destination country to the final destination. This sounds a lot like CIF, the difference being that in a CIF transaction the seller is responsible for the cost to deliver the cargo to the destination port only. At that point the buyer takes over and assumes all costs up to the point of delivery.

Since I have never known anyone to ship an order out of China that was not FOB, and since I know that Chinese vendors do not want to assume risk, what a DAP transaction involves for a seller, I was a little skeptical when I heard about this order. I went online to do some reading about DDU transactions and realize that the only reason a Chinese vendor would consent to DAP is that it allows them to add costs to the project; the vendor selects the carriers and pays VAT and other charges up to the place of delivery. If the vendor is in cohoots with a forwarding company in the US then the charges to deliver the product from port to destination could be excessive. And if you don’t pay those charges they will not deliver your order. Of course, for a first time buyer out of China who has no logistics experience or agent to work with DAP might sound like a very easy solution. But in fact DAP could be both expensive and problematic.

In general anytime you order out of China you really should be looking for FOB terms FOB stands for Free on Board and the seller and buyer share responsibility equally, the seller up to the port of embarkation of and the buyer once the goods have been loaded on to the vessel designated by the buyer or their shipping agent. If you approach a vendor in China and they suggest other then FOB, be skeptical and do some research. Of course there are exceptions to FOB but they are rare for small importers.

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The importance of counter samples

I visited a company the other day and was surprised to learn that this company does not as a rule keep counter samples when they do production in China. The handmade nature of the product and the small order QTYs leads them to believe that counter samples are really not necessary as they pretty much inspect every piece upon delivery. Although I have never heard of an importer, particularly for a design driven product, that did not keep counter samples on hand, I can’t argue with them since they seem to be doing a pretty good business. Theirs is a design driven product with big margins. I simply suggested to them that counter samples is a very good idea. Maybe when their business grows they will see a necessity to do this. And most certainly if they get a large order from a big-box retailer they will need to do this.

As a rule I think it is a very good practice to keep counter samples on hand and to make sure your vendors have them as well. A case in point: a past client of mine emailed me recently and asked me if I could request samples of one of his products from a vendor we had discussed an order with a couple of years ago. It seems my customer had no more samples of his own product. When I emailed the vendor to see if they could do some more samples, they very politely declined. They explained that it was a lot of work for them to do samples and they did not wish to make any more samples without an order. And I do not fault them since it has been two years since we first approached them and my client has not given them an order in that time. Reading between the lines, I would just say they are busy and do not want to be bothered. But that is their right. Still in the end my customer does not have a sample of his own product. Hard to believe, isn’t it. He will have to dig out the artwork for the product and approach a new vendor to get new samples. This will cost time and money. And it just goes to show the importance of keeping a counter sample on hand at all times.

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Whither China’s economy ?

There was an article in the NY Times this weekend about the direction of China’s economy. There has been a spate of these articles lately as certain economic indicators coming out of China point to a slow down. I think there is not a small amount of envy behind these trendy headlines about China’s slowdown, for Americans are not happy to see so much growth in China and so little growth here at home. Whenever economic markers point to a slowdown in China, the media here in the US jump immediately and all the headlines are about “…the slowing Chinese economy.” This seems to be the pattern. In the meantime the Chinese economy marches forward.

The point of the article is that no one really knows what is going to happen to China’s economy over the long run. There are indications that the phenomenal growth we have witnessed in China over the past 30 years will soon come to an end. But others say we have to ignore those signs, based on historical data and statistical models, and look at what is happening inside of China right now. Here is the article. NY Times article

For my own part I don’t see things slowing down in China for a long time, and for the same reason someone quoted in the article gives: China’s drive to urbanization. For all it’s progress over the past 30 years, which saw 30% of the Chinese population move from rural to urban areas, China remains a country mired in rural backwardness. About half of the country sill lives in rural areas where the average wage is less than $5.00 per day. In fact only two years ago did the urban population of China surpass the rural population. In contrast only about 20% of the US population lives in rural areas and in Japan the figure is less than 10%. I have been in some of these rural areas 3rd and 4th tier cities in inland provinces and they are huge, but underdeveloped. Some of them remind me of Shanghai 25 years ago and when I drive through them I think to myself “ wait until these places start developing as well….” And that is what is going to happen over the next 25 years.

The state of printing in China

Someone was asking me this week about doing retail display packaging in China. They simply wanted to know if most vendors were set up to do packaging in addition to product. My answer was yes. Most vendors have a local print mill they call on when they need to do retail display inserts and packaging for their customers. Packaging is never a problem so you should always feel confident when you hand over your packaging specs to your vendor. As long as your specs are complete the vendor will have no problem delivering quality display packaging to you. Remember China makes over 60% of the world’s consumer goods across many industries. And that includes packaging. They know what they are doing.

Anyway this question got me to thinking about, printing in China. In fact, printing in China is very good nowadays. There are over 100,000 printing companies in China, as compared with about 65,000 in the US. And although there are probably quite a few dilapidated state run printing enterprises using out of date equipment among these, a great many other printing companies have state of the art printing equipment from Germany and Japan. A case in point is a printing company I visited in Guangzhou a few years ago. All the equipment in the factory was from Germany, including a state of the art half a million dollar dye-cutting machine.

China’s big labor force is also an advantage as people can be trained to specialize in one area of printing meaning the quality of each section of a printing project is necessarily high. In fact China has about 20 national universities just dedicated to the graphic arts. Needless to say with this combination of skill and low cost, printing in China is an option that many overseas publishers and printing companies look at nowadays. If you have a high-end printing project e.g. a limited edition with a hand stitched leather binding, for example, China is one option you will consider. I have seen deluxe limited edition art books that retail in the US for $600.00- $900.00 which were printed, you guessed it, in China.

Finally I will add that whenever I am in China I usually pick up a few books at the local bookstore where I am staying.. The printing and paper in books you find in China nowadays is extraordinary and in sharp contrast to the almost tissue like paper that books were printed on some 25 years ago in China. In those days the cost was cheap but that cost was every bit reflected in the quality. Nowadays cost is still pretty low but the quality is very high. But what would you expect from the country where printing was invented !

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Sourcing from China ? All the better if you like Chinese food

I have always said that one of the best things about doing business in China is that you have the opportunity to eat some great food. And make no mistake about it if you want real Chinese food you have to go to China. You just cannot find authentic Chinese food in NYC, San Francisco or Tokyo, three places I have lived at length and tried to find good Chinese restaurants. To no avail.

For me, three things stand out about Chinese food: the variety, the regional cuisines and the cost.

Variety: Case in point. A few years ago I was in Guangzhou and picked up a recipe book for soups in a local book store. This was just another recipe book in the food section of the book store but there were 2000 different recipes in this book ! And that is just soups and soups from just one province, Guangdong Province. And this mirrors my own experience living and travelling to China over the past 26 years. I can still go to China and, depending on where I am, I will have dishes I never tried before, much less heard of. And they usually turn out to be the best dishes I have ever had in my life.

Regional Cuisines. It is true that all countries have their own regional cuisines. In Japan, for example, there are many different types of Miso soup depending on which prefecture you are in. In Italy the same holds true; in the South they use more tomatoes and olive oil in cooking Still most dishes are the same regardless of where you are and in this respect food works somewhat like language. In other words, from region to region the idiom is the same with only slight variations. But in China it is different. In China when you walk into a restaurant in, say Hefei ( capital city of Anhui Province) you will find a menu entirely differnt from one in a restaurant in Shanghai.

Cost: When I lived in Shanghai some 15 years ago I used to eat regularly in a restaurant down the street from my apt. The tab for 3 or 4 dishes, rice and a couple bottles of beer was always under $ 10.00. Of course that was then. But food in China is still very cheap. In most cities, even in places like Shanghai and Beijing, you can walk into a pretty decent restaurant and eat for under $ $25.00 You can get dinner and drinks for a group of six people for proabaly not more than $ 100.00. If you went to one of the good Chinese restaurants here in San Francisco with a group of six it would probably cost you upwards of $ 300.00 -$400.00, San Francisco being what it is nowadays, one of the most expensive cities in the country.

A final thought: How much do you budget for food for a week in China ? The answer : Zero. If you are on an official vendor visit vendors will usually foot the bills for all of your meals. You will only have to pay for meals when your vendor is not present. Who could ask for more than that ?

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Are Mexico and Latin America really an alternative to China ?

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

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

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

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Don’t feel complacent with your China supply chain

I currently have an ongoing sourcing project for a US apparel company. I have found several good candidates for my client. All of these companies have submitted samples based on my customers specs and we are feeling pretty confident that at least one vendor is going to work out. Over the last year we have probably approached about twenty vendors and have had about ten of those vendors submit counter-samples. And now three vendors have passed muster as far as pricing and being able to produce a top quality sample. I always say the goal is to have a primary vendor and a couple of back ups. And that is what we have now.

Still the other day I received an unsolicited email from an apparel vendor in China who I think may be able to do this product as well. My gut feeling is that even though we already have enough vendors lined up I might as well go ahead and send them a sample to see if they can do something. It certainly cannot hurt ( I mean it costs just $ 5.00 to send a sample to China) and will be a good way to establish a connection with them. And this got me to thinking that although you may have reached your goal goal of having a primary vendor and a couple of back up vendors in place, this does not mean you stop looking for more vendors. It just means that you don’t look as actively.

So if you feel that you are all set as far as your China vendors go and you get an unsolicited email from a new vendor telling you they can do your product, don’t just ignore it or delete it. Send them a sample and get a quote. Because in China sourcing you just never know when you are going to need a new vendor.

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How to negotiate with your China vendor

I saw a discussion in an online small business community the other day about what the best negotiating tactics are.

Some of the suggestions that people had are as follows:

1.) Build trust by listening to others and acknowledging problems

2.) Never negotiate under pressure

3.) Lay out the result you want and ask them how to get there.

4.) Make an emotional connection.

Although these may be good negotiating tactics in the US or other western cultures, let’s see how they apply to China. I will go through 1-4 as per the above:

1.) In China it takes years to build trust. You do not establish trust in negotiations with a first time vendor. Do you listen to and acknowledge your vendor when they tell you about production limitations or why they can’t reach your target cost? Of course but that does not mean you should believe them. So always be nice but ask questions to give your vendor the idea that you are no pushover and will question everything they do.

2.) This is a good rule. Never negotiate with a vendor when you are in a rush to find a supplier. They will sense it and you will not win. Always project the attitude to the vendor that you have plenty of time to find a supplier and that you will go elsewhere if they cannot meet your target costs.

3.) This is very good advice. Tell the vendor your target cost. If they say they cannot give you the product you want at the price you want, then ask them what changes they can make to the product to get the price down.

4.) This is good advice and can be a very effective tactic when you do business in China. But to do so you have to speak pretty good Chinese. You are not going to make an emotional connection with anyone in China if you speak English only.

Finally, although I do use some of the tactics listed above, this is generally how I see negotiation in China in a nutshell:

The key is to know the true cost of your product and build your target costs around this. If you meet with a lot of resistance when you tell a vendor your target cost, then don’t waste time with that vendor. The reason is this: Even if the vendor finally agrees to your costs, at some point they will try to recover what they may have given up in negotiations, by cutting corners in production or throwing a price increase at you late in the game. So my negotiation advice is always to lay out for the vendor what you need and if they really don’t seem willing to accommodate you then look for someone else who wants your business on your terms.

Finally, the Chinese negotiating method is often characterized – in articles and books about doing business in China – as a long drawn out process whereby the Chinese try to wear down their opponent into making concessions favorable to the Chinese side. There is some truth to this. When in the 18th Century Great Britain wanted to establish formal trading relations with China it sent Lord McCartney to Peking to negotiate on its behalf. Negotiations took over two months. But, remember, you are simply negotiating a cost of a product and not bi-lateral trade agreement. Negotiations should not take long and if they start to it means that you would do best to move on, just as maybe Lord McCartney should have. In the end he returned with nothing.

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When you do business in China you are helping more people than you are hurting

I am always amazed at the fervor of the anti-China sentiment that I see in online discussions in places like Linked In and Google plus. For example, if you join a furniture community on Linked In and initiate a discussion on China sourcing then chances are you will receive at least a couple of hostile anti China messages, usually from companies who have lost business to China.

Many people resent China because of the effect China’s rise has had on their own local economies, in the form of industry shut-downs and job losses. Yet, people who criticize China fail to realize that in spite of the problems it has created, China’s rise over the past generation has done more good than harm for the world. China’s remarkable growth has created far more jobs than it has lost and has pushed down costs on a lot of consumer goods, enabling more people to live better lives. In fact in a recent NY Times round table discussion, the same point was made.

NY Times Round Table

There is no better example about the irrationality of China bashing than in the Smithfield Foods story. Smithfield, America’s largest producer of pork has signed a tentative deal to sell the company to a Chinese pork manufacturer, Shuanghui Foods. If the deal, valued at over seven billion dollars, goes through it would be the largest ever takeover of a US company by a Chinese company. There are a lot of concerns now that the takeover would threaten the safety of the US food supply because China’s struggles with food safety are well publicized. This at least is what one reads in the headlines. However, since the US will not be importing pork from China under the deal these concerns are misplaced. The deal is more to allow Shuanghui to acquire the technology and additional supply it needs to fulfill consumer demand in China. China consumes more pork and has more pigs than any other country but this is still not enough to feed its demand. Pork consumption in America, however is declining, and for this reason the deal would ensure that Smithfield’s 46,000 employees could keep their jobs. In fact the deal would probably allow the company to add new jobs as it ratcheted up to meet growing demand from China for pork products. Make no mistake about it the deal would be beneficial to the US as well to China.

Just as a lot of China business is good for the US.

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Small business is not a small investment

I help a lot of small companies who have proprietary products which they make in China. Most of these companies have just a few employees and very modest but consistent sales. They are trying to grow their businesses and that is why they come to me. They need new suppliers so they can deliver better quality to their customers at more competitive prices. When we have Skype conferences we usually do so from the comforts of our home offices. Nothing fancy here. But sometimes in talking to clients I am astounded at the cost it has taken them to start their businesses, a piece of info they sometimes relate to me. They have to register their companies, get product safety insurance, do product testing, pay for a marketing plan, hire a sales rep, attend trade shows, find a contract warehouse in the US to store their product, pay for patents and trademarks etc etc. These costs add up quickly.

On top of this they have to pay a vendor in China to make the product (usually with MOQs) and then ship it to them in the US or Canada. This is where it gets really expensive and I cite my own example. Sometimes I have ideas for products. I figure that it should be easier for me than for most because I don’t need to pay someone to find me a vendor in China and manage my sourcing. I can easily do it myself. Last year, I had an idea for a kids product and I asked some vendors in China quote on it accordingly. The result was that I estimated it would have cost me $ 20,000 just to meet the MOQ from vendors and buy 2000 units of the product. I did not have that kind of money so I had to let it drop.

But to illustrate this best here is an example from a customer of mine. He said he forecasts 800 K in sales this year. This is based on projections from his current customers. That is great, I think to myself. But in order to make 800K in sales, he tells me, he has to come up with 400K to make the product and have it shipped to his warehouse. So he has to go to the bank for a loan. And not all banks these days are willing to lend someone 400K based on projected sales.

Small business equals big investment.

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