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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China as the land of opportunity for foreign businesses ? Not now. Maybe never

What people are saying about Mulberry Fields
“a very interesting blog” A company in France

There have been a couple good articles this week on success and more notably failure in China. In spite of all the headlines you see in national publications like the NY Times and Forbes extolling the opportunities for US companies there as China’s middle class grows China is just not an easy place to do business. Home Depot recently closed all of its China stores – and there were quite a few of them – citing years of doing an unprofitable business in China. Ditto for Best Buy which had a 5 year experiment in China and recently closed its last store there. Wal-Mart is also closing stores even though it owns only about 6% of Chinese market share now ( hypermarkets ). Wu-Mart on the other hand, a Chinese chain retailer, with both convenience stores and hyper-markets is doing quite well and is opening more stores. The reason for this is that Chinese consumers and the govt favor locally grown retailers to foreign ones, a point that was made in an Economist article in 2011 on Retailing in China. There are implications for this if you source in China as well.

I will paste the more positive article here, about Panjiva’s success in China. This 3 keys to China success as mentioned in the article pretty well encapsulates what it takes to succeed in China ( and make no mistake about it, China is still a very good place to do business, especially if you are sourcing there). However, I would add a 4th thing here. Luck. Because often finding a vendor in China or getting your order out on time needs some good luck in addition to all the due diligence and hard work.
http://www.inc.com/minda-zetlin/want-to-expand-into-china-read-this-first.html

http://www.theeastasiaco.com

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The meaning of the fake Apple store

I enjoyed the story about the fake Apple stores in Kunming, China. My first thought was what them took so long to find out about these stores ( it turns out there were a few of them in Kunming). The story was initially brought to light by a local blogger who just happened upon one of the stores while out and about on his bicycle. This gives you an idea of how insulated from the outside world some of China’s big cities still are. Kunming, after all, is not exactly off the beaten path. The story also brings back fond memories of my early days in Shanghai and a fake McDonald’s restaurant that sprang up on Huai Hai Rd in Shanghai in the summer of 1993. It became something of “must –see” attraction for all the ex-pats who lived in Shanghai then ( FYI the first McDonald’s actually opened in Beijing in the summer of 1993). The Golden Arches had been slightly altered so that the M looked more like an N and the official name of the restaurant was “Nancy’s” But there was no mistake about what effect the owner was trying to achieve.

The fakes though are something you really have to watch out for if you do business in China, whether as a big multi-national company or a small importer in the Midwest.

A case in point is YKK zippers. According to YKK’s official website fake YKK zippers are a big problem worldwide nowadays. YKK even has a separate page on their website which addresses the issue.I know about this because I am working now on samples for a customer who wants YKK zippers on her product. She has used generic Chinese zippers up until now but they break easily and, for this reason, she wants to move to YKK zippers. A couple of vendors had quoted me extremely high costs for YKK zippers & pullers – $ 3.00-4.00 which has me asking myself how can you be sure that what you are paying a premium price for is, in fact, the real thing ? Sometimes Chinese fakes are so good that it is virtually impossible to tell the difference between the authentic and the counterfeit. So how does one deal with a problem like this? There are 2 ways I think:

1.) Provide the vendor with your own YKK zippers. One can buy from YKK directly or source within China from an accredited YKK distributor. You can also tell the vendor to buy directly from a source you provide them with.
2.) Discuss the problem with the vendor and ask them to provide receipts from their zipper supplier. You can then check to see if their supplier is a verified YKK supplier.

In short, this is just another reason is why doing business in China can be so challenging and why it is very important to have a relationship with your vendor in which you can discuss these issues in an open and friendly manner.

Doing a factory audit. More tips

I did a factory audit in China a few weeks ago. This was a fairly standard Chinese factory, located in the South of China. This factory does a lot of MDF product, mostly decorative boxes and storage containers. They have about 100 workers and the management is extremely friendly. Based on the management’s attitude it is a factory I would consider working with. I mean I really liked these guys. But there were red flags during my audit.

1.) Lighting in the factory was very poor. Lighting is very important especially when workers are doing detailed work as these workers were doing. Small factories tend to run budgets on a shoestring and often work without lights in daytime. I suspect this factory was no exception. But it is good to pay attention to this. Areas where touch up and QC work are performed should be well-lit, if not with fluorescent lighting then with natural light.

2.) The factory seemed to have no in-line QC process. When I asked about this I was told that there was a dedicated QC area. In fact it was the packaging area. QC at this factory was workers doing cursory inspections as they wrapped each product in EVA foam. I watched one worker QC several boxes and her MO on each piece was different. On one box she inspected the inside, on another box she did not inspect the inside, on a third box she inspected both inside and outside but didn’t even look at the bottom of the box. This told me that there really was no QC procedure to speak of. I would also add that a production schedule-board I saw – which outlined the steps of production from carpentry to packaging – had no mention of QC. A good factory will usually have QC procedures printed out and taped on a wall. At the very least they will be written on the wall.

3.) There was no dedicated area for storage of packaging materials. Corrugated cartons can pick up intense amounts of moisture in China – especially in the late spring and early summer – during rainy season. If they are not stored in a cool location then they run the risk of becoming damp and will damage easily during transit. All of the cartons I looked at were stored in one of the main workshops and were extremely damp. Most small factories, of course, do not have temperature controlled storage units but packaging should be stored in the coolest location in the Factory. In another factory I visited on this trip, this was the case.

In short, take your time when you are inspecting a factory. Look around, spend time watching QC, ask the tough questions, and take notice of small details. Small details can sometimes tell you a lot about a factory.