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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FOB vs CIF

I had an inquiry today from someone who wants to move their CPG ( Consumer Packaged Good) production from the US to China.  They want to ship CIF which stands for Cost Insurance and Freight.  In a CIF transaction the supplier/exporter is responsible for assigning a carrier/vessel and insuring the cargo.  Once the vessel lands at the destination port the buyer/importer takes possession.  The main advantage to doing a China order CIF, as opposed to FOB ( Free on Board) is that the supplier handles all the shipping arrangements for you.  You simply have to pick up the cargo when it arrives and arrange for transportation to your warehouse. In theory CIF reduces the work load on the importer and may seem like the ideal arrangement for a first time importer who has no experience with international shipping, which can be quite complicated.  The downside to CIF however is considerable.  Your product will cost more because you are asking your supplier to bear more responsibility and not surprisingly most suppliers will look at a CIF proposal as an opportunity to pad their margins. In addition, you lose transparency on the real cost of your product.  The real cost of your product is what it costs to make and package your product.  Not what it costs to ship your product ( which is landed cost and which varies depending on a number of factors). You will also have no control over shipping.  If yours is not a time-sensitive order then CIF might be OK.  But if you need your product shipped on a timely basis, to fulfill orders, you will be taking a big risk because you will have no control over transit times and carriers.  In fact, your supplier may not choose the best carrier but the carrier who offers them the most preferential terms.  Your supplier will act in their best interests, not yours.

With an FOB order, on the other hand, the importer, working with a Logistics company, has complete control over shipping.  If problems arise you can work quickly with the carrier directly to resolve them.  The downside to FOB is that, yes, you need a Shipping or Logistics Company to help you arrange shipping. This is of course another cost, one of the hidden costs to overseas sourcing.  But you have to look at it as one of the necessary costs and you should be prepared to bear it.

In the end your expenditure will probably be the same, whether you allow your supplier to arrange shipping, resulting in a higher unit cost for your product, or whether you enlist the help of a Logistics company to help you arrange shipping and handle documentation.   It is when problems arise that you are far better off with your own shipping agent as opposed to trying to resolve problems with an anonymous shipping company that has been selected by your supplier.

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3-D printing: An alternative to expensive prototyping.

I was talking with my friend Hank yesterday.  Hank is an old friend from my “China days.”  We lived in the same Guest House at Jiaotong University in Shanghai way back in the day.  Hank, like I, has a lot of China manufacturing experience, although for the last ten years or so he has been working in a role completely unrelated to China, as a Senior Manager at a well-known Silicon Valley co.  We were discussing sourcing in China and I mentioned to Hank the high, often prohibitive, cost of molds for plastic injection molded products.  These molds can easily run into the tens of thousands of dollars.  And, believe me, the high cost of a mold has stalled many a promising product launch.

Hank mentioned 3-D printing which is a new technology for making prototypes and which is much cheaper than the old technologies. 3-D printing is also known as Additive Manufacturing, Desktop Manufacturing, Rapid Manufacturing, Rapid Prototyping  etc etc. The best way to think about this is as follows;  In traditional prototyping when you make a metal or plastic part you cut that part from bar stock or plates. You are basically subtracting a part from the whole and for this reason traditional prototyping is also known as Subtractive Manufacturing. Another term you often hear is machining. A good analogy for traditional prototyping is chiseling a statue, which is labor intensive and expensive.

With 3-D printing, on the other hand, you are developing a product from nothing. After your computer makes a 3-D rendering of your design you send this design to your printer as you would a normal document.  Instead of ink, however, a 3-D printer contains glues, powders, resins, molten plastics etc etc and these are fashioned via a nozzle into a prototype according to the CAD design. Materials are then cooled to harden. This is why 3-D printing is also known as Additive Manufacturing.  In fact the term “printing” can be a little confusing because nothing really is being printed, but is being built instead.   I like to call it “Organic Prototyping.”  And whereas a good analogy to subtractive manufacturing is chiseling, a good analogy for additive manufacturing is baking a cake, where you pour successive layers of batter into a mold and then harden the whole in the oven.

Some vendors in China have 3-D printing capabilities but as 3-D printing is more suited to prototyping samples and very small production runs, I think the technology has only limited application in China right now.  Injection molding is still the way to go for big production runs.

Hank sent me a link to a company in New York that specializes in 3-D design.  I am pasting that link here as it might be helpful to inventors who have a great idea but lack the resources to get expensive prototypes  or molds made in China. 3-d molding company .But ask your vendors in China as well if they have these capabilities. As I said, some do and some don’t.

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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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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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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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China’s Great Leap Forward with Intellectual Property (IP).

A former client of mine sent me an email a couple of weeks ago asking me to help him with his trademark application in China. He applied for a trademark in China last year and he is just getting the results of his application now. But that is par for the course in China with trademark registrations, the process easily taking upwards of a year. This may sound like a long time but it really is not because the trademark bureau has to search quite a few filings to make sure there are not similar trademarks. China has the largest patent office in the world in terms of how many patent applications it receives per year, well over 500,000, and I imagine trademark applications are just as many.

The result of my client’s application was that some of his product has been approved and some of it has not. It seems there is a similar trade name on the market in China that the Trademark Bureau felt too closely resembled my client’s tradename. I looked at the report from the Trademark Bureau and I can see where they might have a problem with my client’s tradename. The law firm in Beijing that is handling my clients application said he could appeal if he wanted. But my client seems reluctant to spend more time and money on this. My advice to him was to consult an English speaking lawyer in the US or Canada as language seems to have been a bit of an obstacle in his correspondence with the law firm in Beijing. Although undecided about what to do, he says he is glad he has gone through this exercise and has acted in good faith to protect his name in China. I agree.

But I am impressed how far China has come in terms of protecting Intellectual Property. China’s first trademark law was implemented in the early 1950s but it was more a law in name than in practice given the communal nature of post revolutionary Chinese society and the suspension of many commercial laws during the Cultural Revolution. With the opening of China in the early 1980s the Chinese Government saw fit to establish a new Trademark Law and they did so in 1982. That law has been revised three times since, most recently this past May. It is evident that the Chinese Government, facing severe criticism from overseas firms doing business in China, has identified a need to catch up to international Patent and Trademark standards, and I at least see my client’s application as one example that they are doing a pretty good job of it. It is pretty amazing when you consider that 30 years ago trademarks and patents meant next to nothing in China. Now they are protected.

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Ordering through a trading company. A case study. Part 1

I once worked for a company the owner of which just did not like to deal with trading companies. If you mentioned the word “trading co.” he would just groan. Still he used them occasionally maybe because he really liked a certain product and he had no way to source the product from the factory directly. But if you were a trading co that was one big strike against you and you really had to have an exceptional sales pitch or product to get an order from him.

And that has always been my way of thinking as well. As a rule I generally don’t like to use trading companies because often they have no control over the factory. If you have a design driven product with a lot of requirements it is imperative that you work directly with the factory because that is the only way you can control quality in production. You simply cannot rely on intermediaries – sometimes individuals who have very little on site factory or product experience – to manage your relationship and product standards with a third party vendor. Trading companies just seem very ineffective to me and they always have.

But as with my former boss so with me. Sometimes your only option is a trading co. Last spring I went to the Canton Fair on behalf of a client. I came across a booth that had the nicest and widest selection of product in my client’s category (home décor). They seemed very responsive and professional. The owner was very nice. I have been in a lot of booths at the Canton Fair over the years and have met a lot of vendors and I liked the owner of this company. But they were a trading co. I had two choices, ignore them because they were a trading company or give them the benefit of the doubt get their info and pass this along to my customer with the caveat that for her product this might work only if she were prepared to monitor the production in China (this is the only way sometimes to ensure the quality of your orders factory or trading co). I decided to pass on the info to her simply because I knew the vendor had product my client would be interested in. I would add that my client has been to China several times and she herself has worked with vendors and trading companies there over the years. As long as I gave her full disclosure and my advice she would know what was involved and she would then be in a good position to make her own decision.

To be continued.

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The risks of sourcing on alibaba

As much as I like Jack Ma I really have to question sometimes how effective it is to source product on alibaba. A case in point: a company in Vienna asked me recently to help them locate a supplier in China. The company has bought some health products from someone they met on alibaba but the orders have not gone too well and the Viennese company now realizes that it has been dealing with an agent and not the manufacturer itself. So they have asked me to help.

And this is one of the risks in using alibaba, namely that you really have no idea who you are dealing with. Many agents in China set up on alibaba and use the names of the companies whose products they are selling but in fact they have no association with the company. So you think you are buying direct from the factory in China when in fact you are not. For this particular project, I looked up the Chinese company in question and I found 5-6 alibaba sites for them all with different contact people listed. It looks like agents or individuals in China are selling the Chinese company’s products on alibaba simply using the company name. It is very confusing to say the least and I can understand how the company in Vienna could have been misled. But this is SOP in China so you have to be careful.

One clue that the Viennese company has not been dealing with the original manufacturer was that they had been making payments to an individual and not a company. This does not necessarily mean that one is not dealing with the vendor itself for small companies may sometimes have payment arrangements like this. I had another project recently where I was asked to pay a sample fee to an individual’s Western Union account in China which I thought was strange. But the vendor explained to me that if paying a sample fee to the bank, the service charge really offsets the sample charge. It made plenty of sense and it was not worth worrying about for a sample fee. But if you are asked to make a sizeable payment for an order to an individual you should at least try to obtain proof that the person is affiliated with the company you think are buying from. You can do this by running a credit check on the company in question and then using the contact info on the credit check to contact the company to verify who you have been dealing with. A credit check on a Chinese company will cost you a few hundred dollars but you have to see it as doing your due diligence. And in China sourcing you have to do your due diligence. Make no mistake about it.

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