Check your orders before they leave China NOT after

I have had a lot of requests lately from people asking me to help them source in China, everything from kids clothing to electronic toys.  I do not take on just any product and usually if I am not interested in a project then I just point the person to a sourcing company in China who might be able to help them.   And the other day this was the case with a person who came to me asking me to help them source some smoking paraphernalia in China.  Not only am I opposed to smoking but I know nothing about it and for this reason I was not interested in accepting the project.  But the guy seemed nice enough and judging by the drawings he sent to me he is far along in his product development and is very serious about taking his product to market. So I gave him the name of my contact in China but I also gave him some parting advice. That advice was simply to inspect his orders BEFORE they left China.  This is the advice I give everyone but it occurred to me in that instant, when I was just thinking about one piece of useful advice I could offer someone who was about to start sourcing in China, that, yes, checking your orders before they ship from China is the only way you can guarantee that your vendor is delivering to you what you have paid for.  If you inspect an order in China and you don’t like what you see you can ask the vendor to redo the order or you can just walk away.   The most you stand to lose is your 30% deposit.  The analogy I always use when explaining this to people is the shoe analogy.  When you buy a pair of shoes the last thing you do at the register, before the sale is rung up and you take the shoes home, is to open the box to make sure the two shoes in the box are the same size, and that you have one left shoe and one right shoe.  And this is exactly what you have to do when you have an order shipping from China:  Verify.

The one caveat is that small companies or start ups operating on a budget do not have 5K to spend on a one week trip to China to inspect an order.  Or they may not see it as good business sense to spend 5K to go inspect an order, the value of which may be less than the cost of the trip to China itself. This is understandable until you figure that if that order goes badly then you will not only lose your investment but may lose customers and your business as well, assuming you have taken orders that you will not be able to fulfill.  I have one on and off client who got a bad order from China and four years later he is still selling off the defective product after repairing everything himself, piece by piece. I imagine it has also cost him a little money to warehouse the product, one container’s worth, in that time.  And this is what I mean when I tell people to take the broad view and to always see China sourcing as a long term strategy.  You may operate on razor thin margins at first or may even lose money but if this helps you get quality product to your customers and build your business it is probably worth it.

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The need sometimes to take a break from an idea

An entrepreneur from Singapore, Mark, has been emailing me over the last two months with an idea for a new product. This is a piece of furniture and I think would do very well in the industry he has targeted it for, the hospitality industry.  However, the product design is so complex that I have advised him this would only work if he simplified his design, not only to reduce the burden on factories for sourcing parts and contracting out parts of the manufacturing, but also to minimize shipping and end-user assembly.  I told him that only a large company with extensive manufacturing and distribution resources could pull of the product as it is now. He agreed and has spent the last month trying to simplify his design.  The other day though he emailed me and told me the project is on hold because he has realized there are too many issues.  He said he is focusing his time now on an apparel project and is headed over to China this week.

I was glad to hear this and think this is a good lesson for entrepreneurs. Building a product in China and then getting that product to the US and in the stores here are two different things.  As I told Mark, all it takes is one defective rivet on a unit bought here in the US and he may have a very expensive return on his hands. This is after all a big piece of furniture. So he had better wait until he has 100% confidence in his product or until he has the means to process returns at minimal cost to himself.   And these are the hallmarks of big companies that profit from economies of scale.  Not small ones.   Just look at IKEA and how easily they process returns.  You can return anything to them and they still make money.  Small business, on the other hand, can lose a lot of money if they don’t handle product sourcing correctly.

But as Mark said he has not given up. He is just going to focus on something else for the time being. Who knows but maybe the apparel project will go so well that he will be able financially to revisit the furniture project.  Or just stepping away for a while may lead him to look back at the furniture product to see ways it can be improved and made feasible, what he was not able to do when thinking about it night and day.

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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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It is time to write off China….once again

A lot of talk about China these days because of the drag the Chinese stock market is exerting on the global economy.  And there was a story last week on the front page of the NY Times about the waning fortunes of China’s low cost industrial sector in Dongguan, everything from furniture factories to a US automotive parts supplier who relocated from Alabama to Donguan several years ago. There is a nicely done video to accompany the piece.  It features a  group of disgruntled factory workers sitting around a streetside restaurant discussing labor conditions in Dongguan, and it also profiles a shoe factory worker who is returning to his home in Sichuan Province follow the closure of his factory in Dongguan.  I do not draw conclusions about the Chinese economy based on the grumblings of a few Chinese workers with a grievance against their boss, but having ridden my share of trains in China over the years,  I really enjoyed watching the video. Here is the link   China NY Times video

If you read this article or watch the video, it paints a pretty bleak picture of manufacturing in China nowadays, especially in the low cost south.  But when I think back to my first blog post six  years ago, on the industrial slump in Dongguan, which at that time looked very real as the entire world was reeling from the effects of the Global Economic Crisis, I realize that this is just another one of those periods where people are writing off China because Chinese GDP is down and/or there is a stock market crisis in China. There is a small element of China bashing in all of this.  In fact, I have talked with probably 200-300 small companies over the past 6 years, in a myriad of industries, and a great many of them currently have production in Dongguan or adjacent areas.   In other words, although many factories have shuttered, there are still many more to take their place.  Just for some perspective, here is that first blog post.  First blog post

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Why incentives from US companies are rarely effective in China

It seems that every company I have ever worked for has tried to implement an incentives program for vendors in an effort to get them to produce quality product and ship on time. I once worked for an American textile company, the owner of which had the idea to reward top performing vendors with trips to the US home office. What management of the textile company did not understand was that most of the vendors had absolutely no interest in getting on a plane and going to a country where the Chinese food in a five-star restaurant was probably inferior to the gruel they were accustomed to eating in their own factories. Not surprisingly, the incentive program was a failure. Another company I was employed by gave brass plaques to its top performing vendors, only to find that quality showed no improvement and, in some cases, got worse.  I mean what of what value is a brass plaque of recognition from an American company to a vendor far off in China ?  The answer is very little.

Providing vendors or workers with incentives is a classic example of a management program that works in the US but does not work in China. Why don’t these incentive programs work in China? I think there are a few  reasons:

1.) In China there is sometimes a tremendous degree of mistrust in personal and business relationships (perhaps the legacy of the Cultural Revolution when neighbors turned on neighbors). Most vendors regard incentives from US companies with a great deal of skepticism. They simply do not believe you will pay up, so to speak.

2.) More importantly, many vendors endured the bone-grinding poverty of pre-reform China and lost myriad career opportunities during the Cultural Revolution. For this reason, vendors have a “cash-in-now” mentality, and focus mainly on short-term gains. It never ceases to amaze me how few vendors in China look at relationships with American customers as long-term and mutually beneficial.  Of course incentives are part of a long-term program.

3.) To meet production goals requires vendors to invest more in production.  Yet vendors do not want to invest more in an order than is absolutely necessary.  No vendor in China is going to spend more out of their own pocket to get an order out on time simply because they covet that brass plaque you promised them.

More importantly offering incentives to your China vendor may in fact be counterproductive. If you give your vendor production or QA targets, he may feel he has reached these while you feel he has not. This just leads to conflict, an erosion of trust and you are soon looking for a new supplier. I have seen this happen.

For these reasons, it is probably best to avoid offering vendors any kind of special incentives. The best you can do is tell them they will get more business from you if the current order goes well, work closely with them on quality and hope they follow through accordingly. On your side, do everything you can to make those order QTYs bigger with each order.

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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.

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5 questions you need to ask yourself before you source in China

The other day I read an interview with former GE CEO Jack Welch. In the interview he said of China “ China is a very difficult place to do business and you can’t just use simple Western techniques.” I love it when I read these things because as I like to say, if it is that difficult for GE to do business in China, imagine how difficult it is for your garden variety Main St. USA small business to do business there. You just cannot expect not to have problems in China if you do business there and that is why you have to ask yourself a lot of questions before you begin your China sourcing. Because, in fact, if you are not careful you may find that sourcing in China becomes far more expensive than you had anticipated and you put your business at risk. So some of the questions I think every start up or small business owner should ask themselves before they get involved in China are as follows:

  1. What is the true landed cost of my product ?  Landed cost is the cost of the production, inspection, and shipping.  When you consider all these costs your unit cost may go up considerably and well beyond your target cost. I think too many people look at product cost alone and think they have a business. I can remember working for a furniture company and pricing out some chairs for a large retail buyer.  The first cost ( the cost of the product alone) was very good but by the time we added in the shipping costs the project was not viable. The reason: Chairs are bulky, they damage easily and you need to pack them very well. Consequently it is very expensive to ship them from overseas.
  2. What are the packaging costs ?  When you get that quick quote on Alibaba, it does not include packaging.  Retail packaging can be expensive and you need to figure this into your final product cost. You may find that it costs you $0.50 to put packaging on a wholesale $ 3.00 item. Needless to say, that just does not seem worth it.
  3. Who is going to do my inspection in China? Am I prepared to travel to China to do my own inspections? And how much is this going to cost ?  The only way to minimize risk when you source in China is to check the product before the vendor loads it into the container.  Needless to say, if you have a 50,000 pc order and it costs you $ 10,000 to fly to China and inspect it yourself, you will have to add $0.20 to your product cost. So let’s say $ 0.20 for the inspection, $ 0.50 for your creative retail packaging and another $0.25 for shipping. Before you know it that $1.00 you thought it was going to cost you to get a product from China has quickly become $ 1.95, almost twice what you thought.
  4. How much is it going to cost to retain the services of a shipping agent?  International shipping is far too complex to do it on your own.  Any small business that wants to source overseas needs a logistics company or shipping agent. These are the guys who book the vessels and clear customs for you. They can save you a lot of money and you should see them as indispensable to your business.
  5. What product safety requirements does my product have and how much cost is this going to add to the product to have the vendor comply? This is a very important thing to consider. Vendors have different grade materials for different markets.  Usually the stricter the environmental/safety standards, the more expensive the product is.  Sometimes the cost of the product will double if the buyer requires a top grade material.  But if you are selling in a market with these regulations you need to meet them.

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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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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.

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Sourcing and Cultural Intelligence

There was an article in one of the China English language papers the other day about the challenges Chinese companies face when they do business in America. Many Chinese companies are doing well here in the US but about 40% of companies are losing money. One of the main reasons cited for the failure of these companies is the lack of “cultural intelligence.” Cultural intelligence may be defined as one’s ability to understand the culture they are living or working in. Because they increasingly see the importance of cultural intelligence, more Chinese companies are trying to hire locals when they do business abroad as opposed to bringing staff over from China.

Cultural intelligence is also a trait you need when you source in China. A case in point is the concept of saving face, a concept which is best understood as maintaining ones dignity. You really need to understand the concept of face when you do business in China, or other countries in Asia for that matter. But understanding this concept is not easy when you come from a country, like the US or Canada, where admitting mistakes openly is considered a virtue. In China, on the other hand, people are not wont to admit mistakes because it is embarrassing to do so. When you are doing an order in China and mistakes happen your vendor will most likely not tell you about them because they do not want to lose face. It is up to you to discover those mistakes with constant supervision and/or to affect such a relationship with your vendor that they will gradually come to be candid about their mistakes and work with you. If you don’t understand all this when you source in China, in other words if you do not possess this kind of cultural intelligence, you will almost certainly face problems at production and delivery time. What then can you do? Well, always make sure you have someone on your team who has some advanced understanding of the country where you are sourcing your product. Ideally you want someone who has lived there and speaks some of the language. This will significantly reduce your risks when you source overseas.

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