Using an overseas 3PL to cut your international shipping costs

A couple former clients of mine have come to me recently asking me to help them find a 3PL, or Third Party Logistics, warehouse overseas. One of the clients is looking for a 3PL warehouse in China close to where they manufacture their product.  They have a lot of clients in Asia and are looking to cut their shipping costs. Currently all their product is shipped to the US and then they ship it out again to countries in Asia. So finding a warehouse in China that will ship their product directly for them is important.  The other client is looking for a contract warehouse in Europe.  They have been using one in the UK but that warehouse is closing so they are looking for another.  The interesting thing about this client is that their 3PL provider in the UK charges a percentage of sales and actually has an incentive to help my client drive sales.  This is a bit unusual as most 3PL providers charge based on volume and labor. But in reaching out to some 3PLs in Europe I did find a few who said they might be willing to work with this arrangement as well.

Needless to say, if your international customer base is growing enlisting the aid of a good 3PL can save you a lot in overhead and shipping.  However, you need to make sure you pick the right provider otherwise you risk an interruption in your supply chain.  If your 3PL suddenly goes out of business then you face a major problem with your customers, what has happened with my client whose UK 3PL has suddenly decided to close.  So longevity is a key here and you only want to pick a 3PL that has an established track record.  You also should ask for references.  Most 3PLs will be happy to pass these along.  And as you do when you look for a prospective supplier in China, there are a couple things to keep in mind:

  • Only approach 3PLs that service companies the size of your own. A large 3PL is probably not going to be interested in your business anyway.
  • Attach much importance to communication when evaluating 3PL providers.IMG_0064
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Never let your guard down when you manufacture in China

There was an article in the Shanghai English Language paper recently about defective products being sold in Shanghai stores.  Apparently about 40% of the apparel sold in Shanghai area dept stores reveals defects, everything from excessive formaldehyde to misleading labels. A sweater, for example, was described as 100% wool but it turned out to have only about 20%  wool content. The same old China song and dance in other words.  Still I was a bit surprised to read this kind of story because over the years the quality of product made in China has gotten much better as overseas importers have imposed stricter requirements on their Chinese suppliers and as a growing and more affluent Chinese middle class has come to demand higher quality from domestic vendors.  The story illustrates however that the Made in China brand is still plagued by the quality problems that have been associated with Chinese products over the last 30 years.  In other words you can never take your guard down when you manufacture in China.   You still have to test your products at regular intervals and make sure your vendor knows your standards and is maintaining quality and safety standards.   Here is the link to the article

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If you want to source in China, be prepared to take risks

A friend of mine reached out to me recently asking me to help him apply for China patents for a new product.  Apparently someone had approached him because he used to work for a FORTUNE 500 company in China and wanted to enlist his expertise. So my friend came to me, thinking IP protection was the place to start.  I told him what I tell a lot of people, namely if you are going to be paranoid about losing your IP in China then you shouldn’t be doing business over there in the first place. It is simply one of the endemic risks of doing business there, much as mosquitoes are one of the endemic risks when you go camping.

My friend left China in 1997 and since his return to the US he has worked in Silicon Valley, doing non China-related stuff.  I think he has forgotten that when you do business in China you cannot expect Western principles of transparency, accountability and integrity to apply there, because they often do not.  In other words, just because you apply for and are granted a China patent does not mean that you will be home-free to manufacture your product in China without problems.  Someone will always come up with something similar to your product and exploit a loophole in the Chinese patent application (which is a complicated and time consuming process)  and there would be little you could do about it,  short of costly international litigation.  Are you going to be able or willing to do this?  If you are a small business with a limited budget the answer is no.

I gave my friend the advice which I always give to others, namely to focus on securing IP in the country where you will be selling your product so as to protect your own market.  If you have registered trademark and patent here in the US no one can sell your product but you.  If you want to take your designs to China then don’t be overly concerned about IP and take refuge in the fact that unscrupulous individuals in China who are bent on appropriating someone else’s IP are usually focused on bigger companies where the payoff is much larger.  When you grow that is the time to start worrying about IP and taking the necessary steps in China to protect yourself such as Trademark protection.

I have written a lot on this subject.  Here are some other posts you will find useful.

China’s Great Leap Forward with IP

Trademarks in China

Some advice on IP protection in China

Required reading for anyone thinking about sourcing in China

I was thinking this morning how many times over the years people have told me how they were cheated when they sourced in China. One of the better articles I have read on this subject appeared in 2013 in Inc Magazine.  The article describes the trials and tribulations of one entrepreneur from Ann Arbor Mi who learned the hard way that doing business in China is not easy. It is such Ona good article, in fact voted one of the best business articles in 2013, that I usually send the link to prospective clients who are approaching me to help them.  I see it as required reading for anyone who is thinking of doing business in China. INC Magazine article

 

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China sourcing from the perspective of a Hong Kong Sourcing Agent

I had an email the other day from a Chinese sourcing agent who is based in Hong Kong, Chris Lo.  Chris said he enjoyed my blog and wanted to offer a few useful observations about sourcing in China from the perspective of an on-the-ground local Hong Kong sourcing manager.  Accordingly, here they are ( his observations in Italics ) :

  • Chris writes that when you deal with suppliers in China it is always good to use a factory with Hong Kong or Taiwanese management if you can find one.

This is correct.  The reason is obvious, the HK and Taiwanese managers are just more in tune with Western and Japanese business practices and they tend to manage their factories well.  The only caveat is that you will probably end up paying more for your product than you would were you to use a Chinese mainland managed factory.  Still, I think it is worth paying a little more to get better communication and often better quality and for this reason if you do have a choice between giving an order to a Hong Kong managed FTY or a Mainland managed FTY, you should always give the order to the Hong Kong/Taiwanese FTY even if the cost is greater.

  • Chris mentions that as the Guangdong Government is trying to phase out Low Cost Manufacturing, many industries are relocating to the Eastern China, Zhejiang, Shanghai, Jiangsu i.e. The Changjiang Delta area as opposed to the Pearl River Delta area in Guangdong. He says that he has heard from other Hong Kong based sourcing agents that the MOQs are very high in these areas now, while quality tends to lag.  One reason is that these are bigger FTYs and they need bigger orders to stay afloat.

That the Central Govt is trying to phase out Low Cost Manufacturing in the South of China has become something of a standard line in recent years.  Nothing new here.  But this is the first time I have heard  about higher MOQs and lower quality coming out of suppliers in Eastern China.  I think this makes sense because manufacturing around Shanghai, in places like Zhejiang and Jiangsu tends to be on a larger scale.  I have been in a lot of huge textile and furniture factories there over the years, much larger than anything I have ever seen in other parts of China. So it is quite natural that these bigger FTYs need bigger orders to stay afloat. I am not sure about the quality statement.  I think it depends on the industry and product.  I do think that the South is still a good choice to source products because the infrastructure and product knowledge have been there for several decades whereas only in recent years has other manufacturing moved up north. Of course I would qualify this by saying that once again it depends on the product and industry.

  • Chris mentions that Fujian Province is a good place to manufacture now. He says it is a very good place to send your apparel projects and that all of the big global brands have production there.

I was not aware of Fujian Province’s strength as a textile producing base. I have made 2-3 trips to Fujian Province over the last 10 years and my sense there is that prices are very low, but that quality is an issue.  But these were not textile orders I was working on so I would not know. Still, I would be a little cautious sourcing in Fujian Province. It does not have the infrastructure that the low cost South has, nor the sophistication that areas feeding Shanghai have e.g. Zhejiang and Jiangsu.

Finally I would like to quote Chris verbatim for something he says about the ease of online sourcing these days:

“Doing business in China without regular checking would have a high chance going wrong (but I guess it is same for everywhere.). So to me I’d like to comment also on the emerging e-platform, I think it is just for gaining exposure for the suppliers but you cannot do industrial production without directly getting to your supplier, having face to face meeting and in-line inspection; the old fashion way of visiting industry fairs, factory visits still has place a good value for doing so. Industrial production is not talking about selling one item with simple emails and clicks.” 

I like that about the “old-fashioned” way of sourcing.  I agree, it is just a much safer way to go about it. 

Thanks Chris !

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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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The San Francisco start up mentality does not work in China

I had an email from another San Francisco Start up company last week. You can easily stereotype these start ups and this one is no different. The employees are all in their 20s and 30s judging by the youthful, telegenic photos on their website. I detected a hint of hubris in the email I received which is not a quality you want to have when you travel or do business in China. The person who contacted me wrote:

“What I am really looking for is someone who has the connections can ensure we get what we are after and that the samples we see are what we receive as well as that the costs quoted are all inclusive and there are no ‘blind sides.” As you can see San Francisco start ups don’t attach much importance to grammar. This city moves too fast these days apparently to care about such trivial things as good grammar.

My first reaction when I read this is do they really think sourcing or doing business in China is that easy? If it were then thousands of US businesses, big and small, would not have failed in China over the past 30 years. I advised this person that the best method of ensuring that they get what they pay for is to have someone on the ground in China overseeing production from start to finish. But even then, I explained, there is no guarantee that what the vendor puts in the container will be what you the buyer will pull out of the container a month later. The vendor may have used sub-standard raw materials in production, or the product may not react as predicted to a new environment, something that may become evident only after it has been put in the hands of the consumer. I have seen this happen many times.

In short there is no way to ensure with a China order that what you see is what you get. That is an American way of thinking that really does not apply when you source product halfway around the world in China. All you can do is to think about reducing risk, and adjust your attitude about doing business in another country accordingly.

Not surprisingly I never received a reply from this company. But that is OK. I will let someone else deal with them.

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Innovation is nothing new in China

Shaun Rein, the author of The End of Cheap China, a book I reviewed on my blog a couple of years ago, sent me an email today. In the email he was publicizing his new book about innovation in China entitled The End of Copycat China: the rise of Creativity, Innovation, and Individualism in Asia. The Book will be available in the fall.

I enjoyed The End of Cheap China ( review here The End of Cheap China ) and I am sure Rein’s new book will be just as good. Because you know what I agree with Shaun Rein. I think there has always been tremendous innovation in China. What is the old phrase Necessity is the mother of invention. Well no where is that more apparent than in China where decades of poverty have forced people to be innovative in every nook and cranny, something we do not see in developed countries.

One of my favorite examples of Chinese innovation occurred about four years ago on a trip to Guangzhou. I had broken a pair of glasses in Tokyo and could not find anyone in Tokyo who could repair them. I must have gone to five or six optical stores but no one could do it. All that wonderful Japanese innovation could not mend my $ 200.00 pair of glasses. Fortunately at the time I was headed to China for the Canton Fair and I knew if I took my glasses I would find someone there who could fix them. SEven years of living in Shanghai taught me this: if something is broken the Chinese can fix it. And so I packed a pair of broken glasses with me. One day after the fair I took the glasses to an optical store in Guangzhou and they told me 没问题 ( trans “no problem”) and asked me to come back in an hour. When I returned my glasses were fixed. The frame had been broken and while the Japanese looked at the frame and said it could not be fixed and just gave up at that point, the Chinese solved the problem by looking for a solution in the part that was not broken, the lens. What they did was to drill holes in the lens and then attached a wire frame to the lens. In many ways it was a typical Chinese solution, crazy but functional. And I have seen it many times over the years.

Of course these were just glasses and I can not use this one example to make an argument that China is on a par with the west or Japan in terms of innovation. I do not think it is. But the innovative spirit is there and China is catching up to the west. In fact, a recent study by the University of Michigan and Peking University makes the point that China has already surpassed the United States in innovation in Science and Engineering. The study was published in the Proceedings of the National Academy of Sciences in the United States of America. Reading this study critically one can question its objectivity since both of the authors are Chinese . But there is some truth to their findings otherwise it would not have appeared in such a prestigious journal. At least that is how I would look at it.

Why then China’s bad rap as a country and culture that is imitative and not innovative ? I think much of this misplaced attitude is owing to inherently negative views of China that have prevailed since the Cold War ( and perhaps before). Just as 40 years of anti Western propaganda in China have led most Chinese people to have an unfavorable view of the West, especially the US, so have four decades of anti-China propaganda in the US taken its toll in terms of how Westerners look at China.

But this is changing because China is innovating like never before.

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If you are looking for a factory in the USA you may well be wasting your time

Recently I came across a blog post of a toy manufacturer in the US. The blog post was the company’s response to a customer who had asked the company why they made dolls in China. It is not much of a question for the answer, that it is just much cheaper to make toys in China, is obvious but the blogger went on to list a couple of less obvious, but very good, reasons why China is a good place to manufacture dolls. These are as follows:

1.) According to the blogger there is just one doll factory remaining in the US, a factory in Indiana. When I go on alibaba and see how many doll suppliers come up in China, the number is over 7,000. In other words, if you are trying to get a doll made in the US you will have a difficult time of it. In fact I am a bit incredulous when the blogger states that there is just one doll factory in the US. Surely there must be more than one. Common sense tells me there are a handful. Still the point is well taken. It just saves time and money making a doll in China. And a lot of it. And I imagine it is the same with a lot of consumer products. No one even makes them anymore here.

2.) The US does not have the doll making technology any more since very few dolls are made here nowadays. So even if you had the budget to make a doll at the one factory in Indiana, there still would be technical limitations. This is a good point because one result of the cosmic shift of manufacturing from the US to China over the past 30 years is that all the latest manufacturing technology is in China and not the US. In fact, I just heard from a client of mine the other day who was having a hard time finding a factory in the US who could do a stitch she needed on one of her products. Apparently no companies she approached had the machines capabale of doing this stitch. They are all in China.

Made in the USA. Who can afford to do it anymore? And even if you can, is it possible?

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In China you need patience, patience and more patience

I have been exchanging emails this week with a San Francisco start up that wants to begin sourcing in China. Like all start ups here in the Bay Area these guys move fast. And they want me to move fast too. I gave them my timeline for a sourcing project which is generally 6-8 weeks and they said that was too long and that they were under pressure from their investor to get the ball rolling sooner. I have gone back to them this morning and told them I might be able to expedite the process by a week or two but after that I would really be pushing it. I explained to them that just getting samples to and from China can easily take 2-3 weeks. Their QTYs are also small, as this is their first order, and I told them that they would have a hard time pushing vendors unless they were really making it worthwhile for the vendor. NB. Dangling promises of bigger orders is not really an effective strategy when you are courting China vendors. The reason is that those small orders seldom turn into much larger orders and the vendors know it.

But this got me to thinking, what I have said so many times before, that it is important not to rush your orders when you do business in China. And this rule applies whether you are buying out of China or selling into China. Some big companies e.g. Best Buy, EBAY, Home Depot, Tesco et al have failed miserably in China because they rushed into China. Beginning in 2006 Home Depot opened 12 stores in China and six years later they were all closed. They might have done better in China had they opened just one or two stores and waited until those were doing well and the Home Depot brand was beginning to resonate with Chinese consumers. But when Home Depot left China no one noticed. Most people in China had never even heard of it.

As I like to say, when you do business in China you have to be patient, patient and more patient. And then when you think have exhausted your patience, you just have to be patient a little more.

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