China as the land of opportunity for foreign businesses ? Not now. Maybe never

What people are saying about Mulberry Fields
“a very interesting blog” A company in France

There have been a couple good articles this week on success and more notably failure in China. In spite of all the headlines you see in national publications like the NY Times and Forbes extolling the opportunities for US companies there as China’s middle class grows China is just not an easy place to do business. Home Depot recently closed all of its China stores – and there were quite a few of them – citing years of doing an unprofitable business in China. Ditto for Best Buy which had a 5 year experiment in China and recently closed its last store there. Wal-Mart is also closing stores even though it owns only about 6% of Chinese market share now ( hypermarkets ). Wu-Mart on the other hand, a Chinese chain retailer, with both convenience stores and hyper-markets is doing quite well and is opening more stores. The reason for this is that Chinese consumers and the govt favor locally grown retailers to foreign ones, a point that was made in an Economist article in 2011 on Retailing in China. There are implications for this if you source in China as well.

I will paste the more positive article here, about Panjiva’s success in China. This 3 keys to China success as mentioned in the article pretty well encapsulates what it takes to succeed in China ( and make no mistake about it, China is still a very good place to do business, especially if you are sourcing there). However, I would add a 4th thing here. Luck. Because often finding a vendor in China or getting your order out on time needs some good luck in addition to all the due diligence and hard work.


How to win in China

I got an email from a customer today. He was very happy with some samples I had sent him recently. We had requested samples from about 4-5 vendors over the past 4 months and although some vendors did not pass muster, one did. This is a design driven product and my customer has high standards. He wrote: “I just received the hats today and they look great! Even better than our originals.” I am sure he is very excited because the search for a new vendor has taken some time. My client’s first vendor kept raising prices on him and there were some quality issues with his last order. 10,000 hats he had to repair himself. That is when he came to me.

So it looks like we have found a new vendor. But it is far too early to celebrate. So much work still needs to be done. The first step should be to send someone up to inspect the vendor’s facility. Vendor visits are invaluable because until you actually see a vendor’s factory you have no idea who you are dealing with. Vendor visits also tell the vendor you are serious about doing business with them. They appreciate the visits and it is an opportunity for you to reinforce your quality standards and tell the vendor how you do business. Then you have to get the order to the vendor which means you first need the order yourself ( my client is in discussions with his customers but still does not have a hard order). It is important here not to wait too long can because if you do then things can change quickly. A vendor that was hungry for orders in Nov. 2012 may not be hungry for orders in April 2013. And who is to say that the vendor will not raise their costs after they get a first order, what happened with another client of mine as I detailed in a previous blog post. In the event the vendor does raise costs we have to find other vendors, something I am now working on.

In short there is just so much work to be done yet. Still if you find a vendor who can make a quality product and meet your target costs you should see yourself as going into the locker room at halftime with the lead. But don’t lose sight that there is still an entire half to play. How you manage your vendor in the second half will determine the outcome of your business.

Forgive the football analogy but this is Super Bowl Weekend. Enjoy the game !


The importance of evaluating a factory’s finances

One of the largest toy makers in the UK, Hornby, a company which specializes in model trains, has been having problems with their factory in China. These problems go back to 2006 when the factory had some financial issues that were impacting production. The problems continue today as the factory faces myriad challenges including the rising costs of plastic and other raw materials and an acute labor shortage. What this represents for Hornby is five years of lost sales – both from reorders of existing product and from the inability to get new prototypes to market.

It is very important to consider your vendor’s financial circumstances when you do business with them. If a factory is having financial problems you can be certain that your orders will be impacted. The factory may not be able to make timely payments for the raw materials necessary to make your product, or they may buy substandard raw materials. Factory management will be pre-occupied and will not involve themselves in production of your order. Small details will be forgotten on the production end meaning that big problems will surface when product is delivered to your DC or to your customers. Facing financial problems factories will resort to severe cost cutting. All of this will have an impact on your order, from late deliveries to serious product quality issues.

The question is how to tell if your factory is in good financial standing or not? It is not realistic to expect that the vendor will be up front with you about their financial state. Of course, you could ask to see the FTY’s balance sheet– a reasonable request when you are about to go into business with a new vendor – but books can be cooked, and in some factories they are cooked with all the skill of the most exquisite Peking Duck. Still there are ways to evaluate your vendor’s financial standing as follows:

1.) Is the factory busy? If not that may be an indication that they are having financial problems. Moreover, if they are not busy, chances are very good that they have laid off workers. You have to ask yourself then if the FTY is going to be able to hire back the workers to do your order. With the labor shortage in South China nowadays it is no given that workers will return.

2.) Do the factory’s facilities seem to be in good order? Many small factories in China are in a constant state of disarray. But if there seems to be a lot of broken machinery (you can find out just by asking the vendor to turn machines on for you) then this is a clue the vendor does not have the money to repair the machines or the orders to warrant the repairs. A red flag.

3.) Are the workers young or old? If they are older, the FTY probably does not have the money to pay younger workers.

4.) Are workers paid on time? Are they paid overtime? This is where it is very helpful to know some Mandarin. Factory management will not tell you this, of course, but workers will.

5.) Does a factory ask you to pay for samples?  This may be a sign of extreme cost sensitivity, which is not good for you.

In short, you really have to be very careful about entering into a relationship with a factory that is having financial problems. Otherwise, their problems become yours.

Guanxi – as useful now as ever

I have been reading some of the China blogs lately – there are a lot of them – and have seen a few posts about “guanxi,” (关系)what is literally translated into English as “relationships,” but which really means “connections”   This is one of the first words that you hear or learn when you do business in China. Guanxi is simply knowing the right people in the right places i.e. connections.   Doing business in China used to be all about guanxi.  In the 80s and 90s when certain products were under quota for shipment to the US,  a quota could always be obtained by simply picking up the phone and working ones contacts.  I used to see this happen all the time when I worked in the textile industry in China. If my boss  needed to ship an order of bed sheets but he didn’t have a quota – because quotas of home textiles were usually filled by April each year – he would spend the entire day on the phone, the result being that he usually got the quota he needed.

As China has become a more legalistic society, guanxi has diminished value and for this reason some China bloggers and business people question its efficacy at all. These people say that all you need to succeed in China is good business sense and that guanxi nowadays accounts for next to nothing. I strongly disagree (as do others I have talked to ). Doing business in China is still very much about guanxi. I often call on people I worked with fifteen years ago to ask favors, to point me in the direction of a supplier or perhaps get me a favorable price on a product I am sourcing. Earlier this year, I found a factory that had a competitive price on product I  was sourcing but the factory did not have the requisite export license. I ran this by a lady I used to work for and she said “no problem” and told me that she could arrange shipment of the product if I wanted to order it.  This was quintessential guanxi at work. 

In fact, I don’t know if I have ever done business in China when guanxi was not used at some point to overcome a hurdle. It is synonymous with doing business in China. Although guanxi may account for fewer back-door maneuvers in large, cosmopolitan cities like Shanghai or Beijing, it is largely how business is conducted in many rural places in China. It is true that you can do business in China nowadays without guanxi . But it won’t be easy.