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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The best way to pass on QC requirements to your vendor

Companies that source in China have a tendency to lord over their China vendors and to demand perfection when perfection is just not realistic. Years and years of seeing China as a Third World country with cheap labor have informed this misplaced attitude. The attitude is not only anachronistic ( China now has the 2nd largest economy in the world) but it in effect sabotages a lot of buyer-vendor relationships in China. The buyer demands a “perfect” product. The vendor has limitations over which they have no control and they cannot deliver. The buyer does not understand and comes to see the vendor as irresponsible and insubordinate. Throw in a little anti-Chinese sentiment on the part of the buyer, and anti- foreign sentiment on the part of the vendor and before you know it the buyer is looking for another vendor.

I have been caught in the middle of relationships like this many times and I think it is more often the fault of the buyer than the vendor. Buyers treat every QC point as a major issue the end-result being that the vendor becomes very frustrated and just wants to finish the order ASAP. And then things just start spiraling out of control. For this reason, I always try to work with my customers to get them to not only to clearly delineate what the QC points are but to go one step further and establish in their own mind which of those QC points are “Critical,” which are” Major,” and which are “Minor.” I always ask them, “Is this really critical and is there not any way you can live with this?” The whole point of this exercise is that I want vendors to spend their time and energy addressing critical and major defects, and not minor flaws that are not likely to impact sales. I do not want vendors to get burned out on the “little stuff.”

Critical points I feel should be limited to a few things and should be discussed in the most serious terms with the vendor. Major defects should also be discussed but the tone should be firm but flexible i.e. “please do your best to avoid these, if we see this problem too much we will have to reject it because we may lose sales” Minor defects, I feel, should be mentioned to the vendor only once, and sometimes maybe just in passing. Minor after all is minor.

Just put yourself in your vendor’s shoes for a moment. Is it going to be easier to work with someone who comes to you with ten problems and in a panic tells you they are all critical and need to be addressed immediately, or to work with someone who comes to you with ten problems and very calmly tells you three are critical and need immediate attention, three are serious and should be discussed at length, and four are not really serious and should be just mentioned in passing? Who would you rather work for ?

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American style management does not work in China

I was just thinking tonight about the post I wrote yesterday, specifically what could the owner of the US medical supplies company have done that would have helped him avoid the situation where he was held hostage and forced to pay out $ 500,000 in what effectively amounted to ransom ? I don’t know the details of the situation but it sounds like there was not much planning as far as how the decision to eliminate jobs at the plant was going to sit with workers, many of whom, according to some accounts, did not even know the plant was shutting down. This obviously should have been discussed in depth with the plant’s Chinese manager (s) and local officials who may have then been able to offer their suggestions about how best to do this. It sounds however that this was a typical American style downsizing – where employees are given no notice about their termination, have ten minutes to clean out their offices and are shown the door. When American companies do the same thing in China it just engenders a tremendous ill will and is sometimes very costly as it was in this case. One of the companies I used to work for in China – an American textile company – closed their China operation a few years ago the same way and it was a complete shock to the employess who worked there, some of them for upwards of 20 years. They went to work as usual one morning and at the end of the day they were jobless and wondering how they would provide for their families. This is just another example of how American style management often does not work in China.

I would add that the owner of the medical supplies company said he plans to continue to manufacture in China. But I am sure that after this high-profile incident he will not have an easy time of it.

http://www.theeastasiaco.com

Not all China sourcing companies give good advice

What people are saying about Mulberry Fields
“I have read through quite a few of your blog posts and have enjoyed them very very much. We do business in China and face many of the challenges you describe. Much of what you write resonates with me and there are some very helpful tips” – a kid’s apparel company in Utah.

I have been going to China since 1988.  That is 25 years of China experience.  I like to think that I have learned a lot in that time and can help other people get started in China.  And that is in fact my job. But I still feel that there is much more to know and to this end I am continually educating myself about all aspects of China, including language and various industries because I use this knowledge in my work. Not a week goes by when I don’t have to email a supplier in Chinese or learn something about a product or industry.

I also like to read other China blogs because I feel I can learn from my peers and I like to keep abreast of what is going on in China ( I am based in Tokyo). Unfortunately when I do this I see a lot of bad advice out there. I was on the site of a US /China based sourcing company today – I think a pretty successful one judging by some of the names of the contributors to the company’s blog –  and I was absolutely aghast at much of the advice I saw there,  some of which was as follows:

1.)  When you begin looking for a vendor in China you should have few hundred prospects and narrow the field down to 5 based NOT on any communication with the vendor but on their visual presentation in the form of website or catalogs.  My reply. This is an absurd number of companies to go through when sourcing in China and would be an incredibly time-consuming endeavor that may not be based on your needs.  What happens if you spend 2 weeks narrowing down your list to 5 companies and then all those companies turn out to be  30% over your target cost ? Would you  have to go through all 300 companies again ?  A more reasonable number of companies in a sourcing project is 25 – 50 – depending on the project. That number should leave you with a few good prospects at the end.

2.)  Don’t consider a company that does not have a good website.  My response ?  Totally disagree. Many vendors in China do not have very good websites but they may nevertheless be good vendors. Conversely I have seen some great websites only to visit the companies represented on the websites to find nothing.  And in fact I might argue that the nicer the website, the more likely it is you are dealing with a trading co. and not the factory itself.  In short a website should not be used to judge a vendor, except to see what kind of product they have and to get a general idea about the company, esp location, history etc. One caveat is that any vendor without a website is a red flag. I would not do business with any vendor who did not have a website. But don’t let a bad or slow website bother you. It is par for the course in China. In short, don’t judge a book by its cover.

3.) Do not discuss cost when you first contact a vendor.  Again, I fundamentally disagree with this kind of advice. The person’s rationale is that you will likely be seduced by the low-cost and may not pay attention to more important things like quality systems, lead time, delivery etc. This sounds good but in fact it is hardly practical. Cost is in fact a very important part of sourcing in China.  In fact, when deciding whether or not to do business in China the two most important factors are usually cost and quality. Companies have margins that help them build their businesses and they must work with vendors who can help them meet these margins. Why waste time with a vendor discussing product development when that vendor is going to end up being too expensive for you ?  It is best to find out quickly who you can work with and who you cannot. And then when you have that list you can eliminate others based on other sometimes equally important criteria, like quality and lead-time.

I would add that when I source I tend to pay less attention to the high and low costs on any given sourcing project, knowing that the vendors who offer extremely low-costs are probably not good on quality, or cannot hold those costs and the vendors who offer high costs are just not going to be acceptable to my client.

4.) Make sure vendors you are interested in have a QC manual. Once again this sounds like a perfectly good piece of advice.  But the more important question is not if a vendor has a manual but if they have one do they actually use it ? Many do not.  I would say it is a better piece of advice  to visit your factory and see if they have a dedicated QC area and if it is being used. If not than any manual they have on hand or have emailed to you is worthless.  I would add that QC manuals are standard in some industries – electronic – and not so standard in other industries e.g. handicraft. So depending on your product, industry and vendor setup e.g. vendors that rely heavily on cottage industry the absence of a formal QC manual should not overly concern you.

5.)  Tell vendors you are negotiating with to match costs you have received from other vendors or forget about the business. Sounds good but half the time it just does not work.  Many vendors have their own bottom line and the cost they give you covers this bottom line. It does not matter how much you tell them about the better costs  you have received from other vendors, if the vendor you are approaching simply cannot make your product at a cost that is acceptable to them ( not the  cost that is acceptable to you) they will simply not take your order.  A better strategy I think is to work with “target costs” and give these to vendors. This is less threatening to vendors and I think allows for more flexibility on both sides when trying to reach an agreement or cost that is workable to both parties.

In all fairness to the person who runs this sourcing company, there are a couple of good pieces of advice, namely visiting your vendors before doing business with them ( nothing but common sense here)  and hiring a third part auditing firm to make sure the vendor is in good enough financial shape to do your order.  I think this is a very solid piece of advice.

But all in all, I think one needs to be just as careful when choosing a China consultant or overseas sourcing company as they are when choosing a factory.  Because I for one would not want to have to go through a list of “a few hundred” vendors seeking a few whom I might be able to work with.  But whom I might not be able to work with as well.

www.theeastasiaco.com

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Trading company versus factory

I have worked as a full-time employee for several companies over the years and at all but one company the sourcing strategy was to deal exclusively with factories and to avoid trading companies.  Some product development and sourcing  professionals are very knowledgeable about their product and industry and find they can have more productive discussions dealing directly with the factory than going through an agent who does not possess product specific knowledge in many cases.  Representatives of trading companies are also notorious for not spending a lot of time on-site at factories and specifications sent from customers are sometimes passed on only via fax or phone – thus increasing the likelihood of error.  The result is that quality cannot be controlled easily. You can control quality much more easily if you deal directly with the factory, provided there are no language barriers, and provided you show up in China occasionally. Of course, one of the main reasons that importers like to avoid trading companies is cost. If you go direct to the FTY you will generally cut your first costs in half.  Sometimes your first cost savings by going directly to the factory will be as much as 60 %. 

However, this is not to say that trading companies have no value. In discussions with friends and local agents in China this past year I have come to realize there are exceptions – when working with a trading company is preferable to going it alone.  One exception is when you need to source a special product e.g. an unusual fabric or a special type of plastic. You may spend a lot of time looking for a factory that can do what you want or you can go through a trading company that may already have relationships with factories that will be useful to you.  Provided the trading company has proven reliable after a rigorous sample order and has passed a credit check it might be OK to use them.  Another case when you might want to use a trading company is when you have a low value/high volume product that does not need extensive QC. If  the trading company can give you a lower cost than the FTY – which sometimes does happen – then it probably makes sense to use the trading company. 

In short, think factory direct – especially if you have a design-driven product –  but don’t rule out the possibility of using a trading company if necessary.

More thoughts on reaching out to vendors before fair time

I received an email a couple weeks ago from one of my customers who is going to be at the Canton Fair and she asked me if it was OK to go cold.  In fact, a lot of people attend the fair without ever having so much as looked at the Canton Fair exhibitor’s list.  A company I used to work for was like this. When they attended the fair there was absolutely no preparation at all – unless I was going with them. Why someone would want to plop down $ 5,000.00 to attend a trade fair but not prepare for it I have no idea.

In fact, one of my favorite pastimes at the fair is to see who on the fair shuttle bus has prepared extensive notes on vendors and mapped out the show.  You can always tell who is prepared and who is not. The women are much better than the men at this and the Europeans better than the rest of the world.  

Most importantly, if you go to a trade fair without any preparation then you are increasing your risks of a disaster at production time. In fact, there are many vendors at the trade fairs in China and Hong Kong that you would just not want to do business with.  These vendors are synonymous with bad quality, late delivery, poor communication etc. You can begin the process of eliminating bad vendors  by contacting them before the show.  Vendors that do not reply to your emails, even after several attempts on your part are not vendors you want to deal with. Vendors that reply to your initial inquiries but then disappear after you ask them to quote on a product or make a sample for you to review at the fair are not vendors you would want to deal with. Giving people the benefit of the doubt has its risks.

Over the past month, in preparation for my trip to Guangzhou, I have reached out to over one hundred vendors of toys and plastics . Of these one hundred I would say 10-15 have turned out to be pretty good at communicating and showing interest in developing a business relationship with my customer (s). But among the companies I have reached out to so many have proven irresponsive or simply not helpful to the point that I would not recommend dealing with them. Would I have known this had I not reached out to them?  Yes, but only after a frustrating and costly sample or production order.

I do not envy the overseas buyer who will meet vendors like this at the fair and who, after receiving promises of low cost, quality product and cooperation will return to his/her respective country feeling that  they have found a good vendor in China only to realize,  after their order is a month late and they have lost an important customer,  that this was not the case.  

How to prevent price increases and quality fades

I have been working with some new bag factories on a project for a Canadian customer and one of the factories has shown a tendency to increase prices. My customer is a little worried about this. She writes:

“My concern would be that I would encounter the same issue I had with my current factory, which is they might give me a satisfactory target price to start with but then subsequent runs would just go through the roof, sending me back to the drawing board with manufacturers. I wonder whether I will need to continuously be sourcing new factories and taking a risk every time I do a production run with a new factory”

This is a good question as price increases are all too common when doing business in China. Some price increases are to be expected given the rising raw materials costs in China over the last couple of years. However, steep and frequent price increases are unwarranted. I have seen the following scenario many times

• First order: Small QTY order goes great. Customer is very happy.
• Second order: QTY on order is increased by customer. Vendor’s cost goes up. There are quality issues.
• Third order: QTY on order is increased by customer. Price goes up further. General quality fade and sporadic serious quality issues.
• Customer looks for new vendor.

How does one prevent this ? There are a few ways I think as follows:

1.) Develop a relationship with your vendor that allows you to talk on friendly terms and openly about price increases and or/production issues. If you are not showing up in China occasionally to visit your vendor and take your relationship with them to the next level, then they will not hesitate to increase your costs. Your absence signifies a lack of concern about both quality and cost and your vendor will likely regard you as just another foreign customer who is trying to profit from China’s cheap labor. On the other hand, if you spend time with your vendor in China you show your vendor you are serious about your business and take cost increases seriously.

2.) Have a few back-up vendors and don’t be afraid to use them. If you let your vendor know that you are prepared to work with another factory that can offer more favorable pricing they may call your bluff and hold firm on their prices. When you do leave, they will make every effort to get you back. I have seen this happen.

3.) Invite your vendor to spend a week at your company. Take them to the large retail stores or malls to illustrate for them how competitive the North American market is. Many vendors are absolutely overwhelmed at the size of US & Canadian retail stores and the variety of product because China’s malls and shopping centers, in comparison to those in the US and Canada, are dinky. If your vendor better understands the issues you face in your own market they will do more to keep prices within your target in China. They will also place renewed interest in their relationship with you once they see that you are their conduit to a potentially profitable overseas market.

In short, if you want to keep prices in line you really need to work on developing a relationship with your vendor. If you are just another customer to them then you can expect to see price increases regularly.

Doing a factory audit. More tips

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

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

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

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

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

Interesting currents in South China

I had some very interesting conversations about doing business in China during my trip there last week. On one day I paid visits to two Taiwan-owned factories in Dongguan and the factory owners in both cases lamented the challenges in finding labor in the Pearl River Delta region. The reasons are various including:

– Much of the labor force is young and workers are in many cases only children, the result of China’s “one child policy.” This is China’s “spoiled” generation. These workers weary easily of factory conditions in South China and want to return to their towns and villages where life, although harsh, is more familiar. Contrast this to the first wave of migrant workers to the South 20 years ago. These were workers who grew up during the end of the Cultural Revolution accustomed to deprivations and quickly embraced the opportunities that Reform and Opening ( as China’s open door policy is referred to in China) presented.

– As the interior of China developes there are more opportunities in the villages and cities that the laborers left when they came to South China in contrast to the shrinking opportunities ( many factories have closed) and rising cost of living in cities like Dongguan.

– Living off the land is much cheaper than living in the Cities where the cost of living and inflation are rising almost daily.

From my visits to these factories I could see that business was down considerably. One workshop I visited was half empty. I took a picture of this ( see below) and the owner of the FTY explained to me that 2 years ago every sewing machine was going. The other factory did not give the impression of being busy and the production schedule board had not been updated since early March ( my visit was the first week of May).

Both vendors maintained that the high end retailers like PB and CB were remaining in the South because of a well-trained labor force and overall higher QA standards while larger mass merchants where quality is not tied to brand e.g. TG, WM et al are heading up north to take advantage of cheaper labor. Many factories are following suit. I found these and other conversations fascinating.