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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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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How to qualify your suppliers in China

Had an interesting conversation yesterday with a local company.  The guy I spoke with detailed some of the problems they have had with one of their major suppliers.  Apparently, the supplier consistently struggles to meet shipping deadlines because they do not have the capacity to handle the increasing order QTYs and they have to subcontract a lot of production.   It turns out that this supplier was selected without a qualifying audit. And this is one of the perils of giving an order to a vendor whose facility you have never visited.  In other words they may not be who they say they are.  A GOLDEN RULE of China sourcing is this: never give an order to a vendor you have not yet qualified.  And by qualified I mean visited with a checklist in hand.

When you do an audit you should have a checklist of things to look for.  Some of the following come to mind:

  • In the office: Make sure the vendor has an organized office. If they are as busy as they say they are they should have several computers.  If you go into an office and just see just one terminal and a fax machine that is not a good sign. What if that computer breaks down ?  You may not be able to get an answer to a question for several days. Ask to see your company file with a record of all sample orders, revisions etc etc.  Ask to see counter samples which you have approved, as all should be clearly labelled and dated.   All this tells you if the vendor is on top of things.   If you have concerns about order capacity, then ask the vendor to show you invoices from completed orders of other customers.  Are the QTYs big ?  Are there multiple invoices from the same customer indicating repeat orders and customer satisfaction ?  These are things the vendor should be more than willing to show you.  In short,  a quick tour of the office will show you how organized the vendor is.  And believe me you do not want to work with an unorganized China vendor, all the more so if you have a design driven product when record-tracking of details is very important.
  • Subcontractors: Since so many vendors in China use subcontractors it is vital to make sure those subcontractors have themselves been qualified by your vendor. Ask your vendor what procedures they have in place to qualify subcontractors.  In fact any visit to a factory in China will usually include a visit to that factory’s subcontractors.  If your vendor does not volunteer to do this then you should suggest it.  If they balk at the suggestion, then that means their subcontractors are scattered and probably not at a convenient distance to the factory, which is not good for you.
  • In the workshop. Are areas well lit?  Are instructions to the workers posted? Are QC and Production areas clean?  Does the factory look busy? Is there any evidence the factory  uses child labor ? Is the person showing you around knowledgeable about the orders?  I remember qualifying a vendor a few years back.  I went to the factory and I discovered that the person showing me around, who told me he owned the factory, knew nothing about any of the orders on the workshop floor.  And I mean nothing.   He was either a very hands-off manager or was simply a Trading Company Manager posing as a FTY manager (plenty of those in China). But in either case it was a warning that I delivered to my customer.  And there are just so many more questions to ask when you are thinking about giving a vendor an order.

 

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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.

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Can you chew gum and talk to the President of China at the same time ?

I turned on the TV last night and I was somewhat shocked to see Obama chewing gum while walking to a state event with Chinese President Xin Jinping. As expected media in China were incensed with this breach of etiquette. Some people here in the US may wonder why all the fuss about a piece of presidential chewing gum ? The fact is that in some countries in Asia one does not chew gum in public. In Japan, for example, baseball players will not chew gum during a ballgame because it is considered rude to do so . In fact eating anything in public in Japan is is widely frowned upon. China is a little more relaxed in this respect and people eat where and when they want. But at a higher level one encounters the same strict cultural formalities in China as they do in Japan which means you just don’t chew gum when you are meeting with a high ranking official or the president of a company. When I am in China I have no compunction chewing gum when I am talking with an vendor on the factory floor. But if the owner of the company is anywhere near I quickly jettison the gum and I am on my best behavior. That is what is expected of both Chinese and non-Chinese alike.

My first thought is that either Obama has some insanely ignorant China advisors in the State Dept or he is incredibly arrogant. I really don’t know which and I am amazed that no one in the presidential entourage whispered over to him as follows: “Sir, take the gum out. This just doesn’t look good and it will create a storm in a teacup with your Chinese hosts.” Maybe someone did say something to Obama, and in true Obama fashion, he ignored the advice. Who knows. But can you imagine if Xi Jinping were to visit Washington and as he walked in the White House Rose Garden with Obama were to light up a Marlboro ? There would be a media firestorm here unlike any other and everyone would remark how uncouth the Chinese were.

But Obama’s ignorance or arrogance, whatever it was, is a microcosm of condescending Western attitudes towards China over the past 30 years. No effort is made to understand China and its customs, while we dictate to China what we need, whether that be an order of upholstered chairs, a container of washing machines or a signature on an international carbon emissions agreement. But times are changing. If you don’t respect China, then you will find China difficult to deal with. And judging by the tone of President Xi’s remarks after meeting with Obama, the President should have saved the stick of gum for the privacy of his State Guest House.

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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.

Don’t believe success in China is cheap and easy

A client told me recently about a mompreneur who has achieved a small measure of success with a product sold widely in the UK and Australia. This mompreneur reportedly got started by placing a $ 1000.00 order with a China supplier she met on alibaba and my client is hoping she can start out with an equally minimal investment. As my client’s product is design driven and involves a custom mould and printed fabric I told her right there that her costs would be considerable. Mould costs and fabric minimums alone will run several thousands of dollars. But then I explained to my client that as dramatic as it sounds the mompreneur she had read about probably did not get started in China with such a small investment. Here were my reasons:

1.) A $ 1000.00 order out of China would mean that the vendor made a very small profit, just a few hundred dollars, or they just broke even. Most vendors in China I know do not do small orders with small foreign home-based businesses just to break even. Some vendors will take small orders but usually only from established companies where the hope is that the second order will be much larger than the first.

2.) I looked on her website and see that the mompreneur’s product retails for about $ 20.00 meaning that she probably gets it out of China for $7.00- $10.00. So a $ 1000.00 order would translate to between 100-150 units. No vendor I know of would accept such a small order.

3.) The mompreneur’s product includes a full color retail display box. No printer I have ever done business with is going to make up just 150 boxes. Printers have minimums and no printer is going to print up a mere 150 small boxes which probably cost no more than $0.10 each. Do the math: 150 boxes at $ 0.10 each is $ 15.00. Is any printer going to accept that order?

4.) Most Chinese companies with English speaking employees have a fair amount of overseas business (that is the only reason they would have someone who speaks English on their staff). In fact a lot of Chinese companies still do not retain any English speakers. It is unlikely that a company that already does a lot of business with overseas buyers would be interested in such a small order.

This is all pure speculation on my part. Of course I don’t know for certain that the mompreneur did not get started with such a minimal investment (this fact was apparently included in a newspaper article about her company). Who knows, it is possible she found a very small 3rd tier factory on alibaba who was in dire straits and desperate for an order. Plenty of those in China these days. But my common sense and 26 years of China wisdom tells me that the $1000.00 story is more hyperbole or creative marketing than actual fact.

In short, don’t always believe the small business rags to riches stories that you hear. More often than not they are not true. It takes time to build a business and, especially if you are in consumer goods, it usually takes a fair amount of cash as well.

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A little wisdom goes a long way when you source in China

I had an inquiry from a small company in Australia this week. This inquiry was like so many I get from small companies or start-ups that have an idea for a product but no idea how to source it. I thought the individual who wrote to me showed great wisdom because she said she had been considering a trip to China to meet a supplier she had found on alibaba until she realized that that might not be a good idea. She wrote:

we had been planning to take a trip to China to get some samples and designs sorted with one supplier we had found online, but I decided we really didn’t know enough about what we were doing to take the step of flying there when ….. we didn’t have any back up options had we not been satisfied with them ( the supplier).

To this I replied:

You have made a wise decision in cancelling the trip to China, if all that would have been involved was meeting one supplier you met on alibaba. Those China trips are expensive, not to mention tiring, and you should always get as much out of them as you can.

My best advice to her was to line up some vendors over the next couple of months and then consider attending the Canton or Hong Kong sourcing fairs in the fall. At that time she could meet with all the vendors she had been in discussions with as well as many new vendors at the fairs. This is the way to start sourcing in China. Yet too many people I meet are just so anxious to get started, believing that they have re-invented the automobile, that they rush into an order with a supplier they know nothing about and what results is almost always a fiasco.

She went on to say how she had identified the need to work with someone who knows China as they get started over there.

We are now at the stage where we are ready to source a manufacturer and are ready to fly over there to get the ball rolling, but feel we need the services of someone with plenty of experience in this area to assist us in making sure we are doing so in the smartest, best-informed manner possible …… We obviously do not speak any of the language and although have both been on short holidays to China, are definitely not well acquainted with the country, so we would love to have someone who can source suppliers for us and who can help us to arrange our initial trip there and advise us on the process.

Smart thinking. Trying to navigate China on your own is just not wise. You can lose a lot of money there if you are not careful in your choice of suppliers. And even when you are careful you can still lose money if you let your guard down. It is just not an easy place to do business. The more knowledge you have on your team going in, the better you will do. If you have to pay for that knowledge I would say that is a good investment.

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Interview with the East Asia Company

A procurement software company asked me to sit down for an interview a couple of weeks ago. This is pretty much doing business in China in a nutshell. http://blog.procurify.com/2014/05/08/tips-on-doing-business-in-china-from-a-veteran/

Valuable China sourcing lessons from Kenny G ? Yes, from Kenny G.

There was an article on Kenny G in the NY Times this weekend. Actually it was an article on the popularity of Kenny G in China where one of his songs, Going Home, has become part of the cultural landscape, played everywhere, in supermarkets, schools, shopping malls, etc. You cannot travel to China these days and not hear Going Home. It is everywhere. And that has been the case since it was released 25 years ago.

It was an interesting article because I remember well my introduction to Kenny G. I was a lecturer at the Shanghai Maritime Institute at the time and one of my students, Mr. Yu Shi Jie, came to my apartment one day. After a little chit-chat Mr. Yu surreptitiously pulled a cassette out of his black leather jacket ( this was after all China in 1990 when people were still fearful of any display of things Western ) and asked me if I wanted to hear “sex phone.” Thinking he had meant to say phone sex, which was popular in the US back then, I looked at him incredulously and asked “sex phone in China ?” He said yes and brazenly proceeded to put the cassette in a tape player sitting on my desk. I kind of cringed not knowing what to expect but as soon as I heard Kenny G’s alto sax coming out of the speaker, I just laughed. Mr Yu of course had meant to say Saxophone.

So that was my introduction to Kenny G in China. That was 1990 and in those days Going Home was played everywhere. After a year or two of incessant Going Home all of us in the ex-pat community in Shanghai were sick of Kenny G. So I was surprised to see that hit song, Going Home is still going strong in China some 25 years later.

But the article in the Times was interesting for another reason as well. Amazingly Kenny G receives no royalties for any of his music when it is played in China. But he does not mind. He is quoted as saying.

“Do I wish I could get paid for everything? Of course,” he said in a telephone interview. “But I surrender to the fact that that’s the way things go there.” Touring China in the 1990s, he heard “Going Home” playing in Tiananmen Square, in Shanghai, on a golf course and “in a restroom in the middle of nowhere,” he said. “It made me feel great to know there was no language barrier to connecting with music.”
There is a lot of wisdom in that statement “…I surrender to the fact that that’s the way things go there.”

One of the reasons so many foreign businesses have a difficult time in China is that they refuse to “surrender” to China’s way of doing things. They try to impose their own value system on the Chinese and they are offended when the Chinese reject it. They are very un-kenny G-like about the whole thing. IP is a good example. Many foreign businesses expect the Chinese to respect IP failing to understand that just 20 years ago the concept of IP did not even exist in China and that many people there, especially in under developed areas, still don’t understand it. In Kenny G;s words: “…that’s just the way things go there..”

Funny but I would say that Kenny G understands China more than some people who have been doing business there for years.

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