When you source in China, you need to think like a football coach

Tomorrow I am going to visit an electronics importer here in the Bay Area.  This is a small company but they are experiencing tremendous growth and want to ramp up their operations, which of course includes their China operations.  I was talking to the CEO on the phone the other day and he told me he was very happy with his main supplier now.  I asked him how long he has been doing business with the supplier and he replied three years. My first thought was that three years is not really a long time and that this company still needs to be careful and treat this vendor as a new vendor.  This means they have to do their part and get the vendor orders on time, clearly indicate product and testing requirements, avoid last minute product design changes and, of course, they have to inspect orders before they leave China. And they have to develop alternate suppliers in the event that problems arise with their current supplier, as far off as that scenario might seem right now. In fact, this is one of the Golden Rules of China sourcing, never feel complacent with a situation, no matter how long-standing the relationship with your vendor is and how well things seem to be going. Because something can always happen when you let your guard down.

A good parallel is this past weekend’s football game between Michigan and MSU. With ten seconds to go in the game and possession of the ball all Michigan had to do was punt the ball away and they would win the game.   What happened ?  The punter fumbled the snap, tried to kick the ball anyway ( when he should have just fallen on it)  and it was returned by MSU for a game winning TD.  In the post game discussions and write-ups all of the blame was directed at the punter, yet I think much of the blame should go to the coaching staff for not telling the punter what he should do if there was a bad snap or fumble.  That is what coaches are there for, isn’t it ? Yet the Michigan coaching staff just assumed the punter would kick the ball away and apparently did not discuss the contingency of a bad snap or fumble.  The lesson to be learned is this:  When the game is on the line don’t take anything for granted.  When you are a small business and are sourcing in China, and are succeeding at it, don’t feel  you have won.  You are winning but you have to be vigilant with every order and until the end.

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Attending the Canton Fair for the first time ? Prepare, prepare, prepare.

The Fall Canton Fair is coming up next month.  I have not been to the Fair in a couple of years and I do miss it, from the excitement as we get on the shuttles to the fair every morning to a cold beer in the hotel bar with other traders at the end of a long day.  It is kind of like being on tour with the Rolling Stones.  I always prefer the fall fair to the spring fair because the spring fair usually coincides with the onset of rainy season and with May Day which can make travel in and out of China pretty uncomfortable.  The fall is much nicer weather wise and the major fall holiday, National Day, occurs well before the fair. So if you are planning on attending one of these fairs, by all means go in the fall.

I had an email from someone the other day who is headed over to the Canton Fair next month. He will be attending Phase 2 of the fair looking for toys for his online business. This will be his first visit to China and he is understandably nervous.  I told him he needs to prepare, prepare, prepare.  This means putting together a list of the vendors he would like to meet with, contacting them prior to the show and then mapping out his visits beforehand.  The fair is too immense to just ‘wing it’ as they say.  If I remember correctly Toys take up Hall 14 1-3 and some space in adjoining halls 13 and 15 meaning there are probably between 1200-1500 toy vendors.  Needless to say, no one can visit that many vendors in a few days’ time, and by not spending time on the CF website before the show, contacting suppliers, you may miss some perfectly good vendors if you walk the show unprepared.   Additionally, there is a psychological benefit to contacting vendors prior to the show, for you go to Canton feeling that you know someone.  And when vendors know you are coming they are usually very welcoming. This will make you feel more relaxed and give you more confidence as you walk the show.  You need that confidence because not only are there so many booths to walk past but everyone is Chinese. If you are coming from Boca Raton Fla is the person who emailed me is, then you are probably going to feel like a fish out of water in China.  Whatever you can do to minimize this feeling you should do. The more relaxed you are in China, the more positive you will feel about your business there and the better will be your chances for success back home. And it all starts with preparation.

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5 assumptions NOT to make when you do business in China

There was an interview in the China Daily recently with the President of the American Chamber of commerce in China, Ken Jarrett. Jarrett was discussing the need for American companies that sell into China to adapt their product to local tastes. In Jarrett’s words “My advice for forthcoming US companies is to be aware of what is different about consumers here. You can’t assume that the product you have in the US has the same attraction here, so you need to adjust it,” There is a lot of wisdom in this statement and it should be applicable to companies that source in China as well. In other words, when you source in China you have to respect Chinese business customs and you need to be careful not to make the same assumptions about behavior that you make in your own country. Here are five assumptions that I have seen US companies make in China that just lead to problems.

  1. My production will be every bit as good as my sample. Not so. A sample should simply be regarded as an example of the vendor’s capabilities and nothing more.  If the vendor can do a sample to your liking that is big step forward. But there is a long way to go to ensure that your entire production looks like that sample.
  2. My vendor will implement my design changes. Although a vendor may tell you they will make the changes you suggest, they may not if these changes involve too much cost. It is very important to try to maintain a dialogue with your vendor about the cost of the project and reassure them if they see added costs.
  3. My vendor will inspect my order. Vendors put very little into inspections. They can sometimes be remarkably short-sighted in terms of making sure they deliver a good product to their customer.  Often, they want to ship the product ASAP and get paid, not caring if a subsequent order will materialize or not. The burden is on the buyer to inspect their own product, whether they do that on their own or through a third party inspection firm in China.
  4. My order will ship according to the date on the PO.  ALWAYS be prepared for the likelihood that your order will ship late.
  5. My vendor will do what they have promised.  A promise in China sometimes means very little. When a vendor promises you something don’t believe it. Instead keep talking about it and make sure they do it.

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A letter from a start up that wants to source in China

I had an inquiry from a person in Australia this morning. I get so many inquiries like this so I thought I would publish the inquiry and my reply accordingly. I think it will be useful for others who are experiencing the same frustrations in their China sourcing.

Hi,

I have read quite a number of your blogs and I wanted to ask you for some advice. My name is Robert and I am in the process of forming a startup active wear label in Australia. I have a pattern maker here in Australia so that part is covered but otherwise I am not sure how to progress forward to having my line manufactured. I have found the process to source a quality manufacturer in China who is willing to work with me both time consuming and very difficult. To start my runs will be small as I don’t know what will work for my target market and what wont. Over time this is something I hope to develop obviously, but I see the need right now to work with someone who understands China and how best to bring a product from design to production. I am hoping you can help me out or point me in the right direction.

Any help or tips are most welcome

Thank you

Dear Robert.

The first step before you do anything is to finalize your designs.  Then based on one of your completed designs I would make a special mock design for a prototype and start sending this out to vendors for feedback/ quotes. Please note that you have to be very specific about sizing and material specifications, as well as packaging. Don’t neglect any product detail. In other words, you really have to know your design and product needs inside out (no pun intended). Where most people have problems is that they have not finalized their design, and don’t understand their own product. And then they leave it to their vendor to educate them. Not only does this add considerable time and cost to a project but it tells potentially good vendors that you are an amateur.  That is not the kind of message you want to send to someone whom you are about to enter into a contractual agreement with.   Here is a little synopsis of what you need to do.

1.) Finalize your designs.  Pantones, sizing, material specifications.  Testing requirements if applicable (children’s clothing).  All packaging as well down.

2.) Project your first order QTY and target cost. Remember that the cost of your product will go up with packaging and shipping so be aware of this when you try to come up with a target cost.

3.) Reach out to vendors. Start with 20 vendors.  You can use alibaba for this or I can help you working from my file of vendors, which is substantial and generally does not cover the same landscape as alibaba.

4.) See who gives you the best price and who leaves you with the best impression as far as quality of response/feedback goes.  Watch carefully and eliminate two types of vendors as follows: those who are very slow to reply to you or those whose cost is simply prohibitive for your needs. Aim to have 6-7 vendors after this weeding out process.

5.) Go down to your local discount chain and buy a product that has similar material/packaging specifications as your own. Send pcs aka swatches of this material along with one of your designs to the 5-6 vendors you have targeted.  See what kind of revised pricing the vendors come back with. Once again eliminate vendors whose response is feeble or whose revised cost is simply too high.  At this point, maybe you have 3-4 vendors who look promising.

6.) Request samples but watch out for excessive sample fees. If a vendor overcharges you on a sample it will likely mean that they will over-charge you in production. Stay away from vendors like this.

Good luck !

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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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If you are confused when you hear OEM, you are not the only one.

One of the more confusing terms you hear when you start to source in China is OEM. OEM stands for Original Equipment Manufacturer. It was first used widely in the computer and automotive industries where component parts (numbering in the thousands) were supplied by many different manufacturers and these manufacturers were referred to as OEM suppliers. OEM was simply a term coined to designate the manufacturer of the component part as opposed to the manufacturer of the  product as a whole. Apple Computers for example, manufactures computers made up of thousands of parts. Although Apple may manufacture some parts themselves e.g. computer cases,  most parts, for example. motherboard components are provided to Apple by outside companies which specialize in the manufacture of these parts. These then are known as OEM suppliers.

These days however OEM pretty much refers to any supplier in China, whether they are selling parts or finished goods, In fact most companies you see on Alibaba advertise themselves as OEM suppliers, even those that are really no more than trading companies. So that is one change: Whereas OEM used to refer strictly to a parts it now refers to a part or a finished product if that product is going to be rebranded or sold under private label.

Another change in the meaning of OEM is that it now as often refers to a buyer as it refers to a supplier. If, for example, I buy some toys from China and resell them under my brand in the US I am engaged in the OEM business. In fact, the term OEM, it seems, has really come to be synomous with sourcing in China.

In short, OEM is at once so widely used and yet so confusing that I do my best to ignore it whenever possible. If you are confused then do as I do and pay no attention to OEM.  Using the term adds nothing to your conversation with your supplier and often just comes across as jargon.

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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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How to choose a Trade Fair in China

This morning I received an email from an American, “Jake” living in Krygstan, a small Central Asia country bordering Kazakhstan and Uzbekistan . He and his wife have a business there selling women’s apparel. He has been buying product from China from a middleman there in Krygstan but he finds prices are too high and that he would be much better off going to China directly. I think he has the right idea. When I lived in China in the 1980s-90s the Silk Road was thriving. Whenever we would go to the wholesale markets in Shanghai we would see we would see traders from all over Central Asia including many of the Soviet Bloc countries (In those days the USSR was intact). And this is still the case today.

Jake told me he is going to Shanghai next month to attend a trade fair and that this will be his first time in China. He was asking me what advice I could give him. The name of the trade show he will be attending was not familiar to me and so my first piece of advice to him was that he should make sure he picks the right trade show, because there are a lot of shows in China, some good but many probably not worth attending. There are shows in China that are full of 3rd tier vendors, usually small cottage industry vendors, and these are probably not the kinds of vendors you want to deal with if you have a design driven product. Yet these shows are well-publicized and you can easily be led to believe you are attending one of the biggest shows in China. You show up in China to find a massive exhibition hall with just a couple hundred trade show booths and no foreign customers in sight. I have seen these shows many times. It is like seeing a watercolor exhibition in the Georgia Dome. So the first thing is to carefully research the fair you are thinking about attending. There are ways to research the fair, reading online reviews of trade fairs in China, asking about the fair in a Linked In Group specific to your industry, and sometimes just asking a handful of Alibaba vendors which shows they attend and see if the show you are interested comes up. It is also a good idea to call a local company that sources overseas and ask them which shows they attend. As long as you have a non-competitive product they should be perfectly willing to share their insights with you. A general rule is this, if you cannot find anyone who has been to the show you are thinking about attending, then don’t think about attending yourself.

I told Jake that he made a good decision to focus on Shanghai as Jiangsu Province, bordering Shanghai, is where so much textile production takes place. But he probably should have waited to attend Intertextile Shanghai, the biggest textile fair in China. The bigger and more established the show, the better vendors you will have a chance to meet, and the more likely it is that you are going to meet someone who can help you build your business. And this is the virtue of the Canton and Hong Kong sourcing fairs as well. These shows are well known in all corners of the world and although there are plenty of vendors you probably do not want to do business with, and although they may not be the best fairs if you have a high end product, you can usually find someone who can teach you a different way to look at your product and thereby help you grow your business.

In short going to a trade fair in China is a good first step. But research the show carefully and find the show that is best for your needs. Or as they say in China 量体裁衣. Cut the garment so that you can wear it.

Here are some more posts on Trade Fairs in China

Canton Fair 2012

Preparing for the Canton Fair

Don’t go unprepared to Trade Fairs in China

Canton Fair 2011

In China nowadays its the foreigners who are poor

I saw an interesting article online the other day in which it was said that Chinese consumers now regard Louis Vuitton as a pedestrian brand. In one way it did not surprise me, for there are a lot of Chinese nowadays with a lot of money. Most of my old colleagues at the Shanghai Textile company where I worked as Deputy GM 20 years ago, now have more money than I could dream of. One of those colleagues bought a home in Toronto several years back and paid 1 million dollars in cash. Another colleague has two villas in Shanghai each valued at over 2 million dollars. But when I read the article about Louis Vuitton bags in China I thought back to a project I had a few years ago helping a New Jersey company source leather handbags in China. The guy who hired me, Neal, had seen the bags when he was at the Canton Show but had a hard time following up with the vendor. Her email did not work, the phone number he had for her did not work, in other words the same old frustrating exercise trying to get in touch with a vendor in China. But Neal really wanted these bags so he asked me if I could help him.    I finally was able to get ahold of the vendor and requested a price list. What she sent me was a list with many bags whose FOB China cost was over $1000.00. I couldn’t believe it and when I expressed my surprise to Neal, he just kind of nonchalantly said “oh yeah, I forgot to tell you they are not cheap bags.”   Still for someone who lived in Shanghai in the early 1990s when an average salary for a college educated company employee was about $ 50.00 a month, and Adidas or Nike were prestigious brands that company employees saved months for, the thought of a $1000.00 bag was something to get used to. And judging by my reaction when I read the article about Louis Vuitton bags it is still something I am not used to.

But as my old friend and Shanghai resident for 25 years now, Andrew, said to me a few years back “It used to be that the foreigners had money and the Chinese were poor. Now the Chinese have money and the foreigners are poor.” Times have changed. And nowhere more so than in China.

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Is manufacturing really coming back to the US ?

I love reading the Wall St. Journal. In addition to great book reviews and the always interesting human interest stories at the bottom of page 1, there is a lot of China news, usually in the Marketplace section. This past week there was an article entitled “It’s No Fun Making Toys or Toasters in the USA.” As the headline suggests the article was about the challenge that small business in the US face when they try to manufacture here in the US. In fact if you are a toy company and want to get, say, a plastic toy made in the US, it is almost impossible to do so. The main reason is that US manufacturers are just not set up nowadays to handle large orders, most of those orders having gone to China over the past 20-30 years. So China now has the infrastructure and the US does not. This is nothing new, really, and I have written about this before here. Making dolls in the US But I like to see these stories now and then in the major news outlets because I think they offer a good dose of reality and offset the almost fantasy like stories about manufacturing returning to the US. Because you know, with very few exceptions you just can’t make low cost consumer goods in the US anymore and have a viable business. A case in point: I received an email from a vendor in China the other day and this vendor was offering a 3 pc breakfast set , a table and two chairs, made out of particle board and powder coated steel. The price $ 28.00. And I am sure if I went back to him and told him I wanted to place an order for 1000 pcs I could get it for under $20.00. And there are probably 1000 more vendors like him in China. Do you think there is any place in the US where you can buy a breakfast table and two chairs for $ 28.00 ? I seriously doubt it.

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