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

Shanghai Defective Goods

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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Using mock-up prototypes when approaching new vendors

I had an email from a former client this past week.  She is the founder of a company that makes a popular line of kids bags and she is looking for new factories in China.  She had a strategy question for me as follows:

“I am sending samples for pricing from a factory that came highly recommended and of course they are asking how many SKUs etc. I have not actually revealed my brand as yet because I don’t want them to base their pricing by looking at our website prices. Do you think that this is wise? Or should I send them our catalog so they can see all of our SKUs and then give them target pricing ? Which do you think is a better strategy? “

This is a good question and I replied to her as follows:

“It is always a fine line to tread between being paranoid about things and being careful.  

I personally never recommend revealing your brand until it is absolutely necessary and I usually advise people to have mock ups without branding to submit to prospective vendors.  But if you feel they may know who you are already since you have been communicating with them or because you came recommended from someone else who has used them, then it is probably not a good idea to try to conceal who you are. 

But this leads me to a good point and that is that I think it is a good idea to have some mock ups made up from your current vendor so that in the future you can approach prospective vendors without revealing your company and retail pricing.   First costs from new vendors are important because those costs serve as the basis for your first few orders.  If they are high to begin with then when your vendor starts raising costs on your 2nd or 3rd orders ( as often happens) you may be priced out of doing business with them quickly.    If on the other hand you can negotiate a low first cost to begin with then even when the cost goes up you may still be able to hit your margins while you fulfill orders and look for a new vendor.  Making sure your vendor does not know your retail pricing goes a long way in keeping your first costs low. And mock-ups will help you achieve this.” 

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Some tips for first time China travelers Pt. 2

Travelling accessories

Make sure you buy a fanny pack for your wallet and passport.  There is very little violent crime in China but pickpockets abound.  I have known at least one person who had their passport stolen and she had to wait two weeks before the US Consulate could arrange a replacement for her. So be careful about this especially in crowded areas.  Fanny Packs are the way to go. Check with your airline regarding luggage restrictions and take over a half-empty suitcase if you can. You will do a lot of shopping in China and will need the extra suitcase for your return trip home.  Also make sure to take an adapter set with you.  You may need to use your hair-dryer or recharge your digital camera. China uses 220v and there are several types of plugs in use in China so you should buy an adapter set instead of a single adapter.

Food & Water

The restaurants in the hotels can be quite good. But they are expensive.  You will save a lot of money if you eat outside your hotel.  The food can be just as good and you will experience the thrill of eating in a real Chinese restaurant.  There are usually lots of restaurants around the hotels and these are recommended as they tend to be a little friendlier and may very well have menus in English, given their proximity to the hotels.  But do yourself a favor and try to get out of the hotel to eat.  The one exception is Breakfast.  The Breakfast buffets in the western style hotels are wonderful and a great way to start your day in China.

The water is fine. Bottled water that is.  But only drink the bottled water that you have bought in a drugstore chain or hotel kiosk. The reason ?  There is fake bottled water in China too.  And make sure not to complain about the water or food when you are in China.  This will not sit well with locals.

Taxis  

Getting around by taxis is cheap.  But trying to hail a taxi in a big city like Shanghai or Guangzhou can be a challenge.  And even more so if you are a foreigner.  Many cab drivers will not pick up foreigners because they know most foreigners cannot speak Chinese and you can easily spend an hour or two trying to hail a cab around rush hour.   So choose a hotel that is near a subway or public transportation line or hire a guide to take you around.

Hire a guide  

If you are going to China for the first time and will not be on a group tour then I would highly recommend trying to line up a guide beforehand.  One way to do this might be to look on Craigslist for the city where you are headed to see if there are some students offering guide/interpreter services.  A quick check of Craigslist Shanghai shows plenty.   You may be able to interview some candidates on Skype and make a decision that way.  Needless to say, you do not want to pay anyone anything before you have met them.  You can also ask the Concierge where you are staying if they can recommend a guide.  But finding a guide on your own on CL is probably much cheaper.

Keep your complaints to yourself  

In China you will encounter a lot of situations that will make you shake your head.  But at no time should you get angry or articulate your dissatisfaction to people.  The one exception would be in the hotel where you are staying. In short, tell yourself not to be an Ugly American when you travel abroad.

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Some tips for first-time China travelers Pt. 1

I have talked to a few people lately who told me they are planning a first trip to China.  Although I have written about first trips to China before these posts are more focused on first-time vendor visits and I have really not written a post about first-time China travel for the general traveler.  Accordingly, over the next two posts I will talk about travelling to China.

Best time to travel to China

I have always enjoyed travelling to China in the Spring and Summer. There are a lot of tourists at this time but generally that means that the service industry is in high gear and you will encounter fewer problems.  There are also no major holidays in China during the summer. The time to avoid China travel is during major holidays because transportation hubs are crowded beyond belief.  Major holidays that come to mind are Spring Festival ( Jan Feb), National Day ( Oct) and May Day ( May).  Don’t make the mistake of looking at the Calendar and thinking these holidays last for a day or two e.g. May Day. In fact, holidays in China can impact local transportation for a week or two, and even longer.  So a good rule might be this:  Don’t plan travel in China that a month before or after a major holiday. Check this list carefully and avoid travel in China around these times. China Holidays

Booking  your flight

The flight to China from overseas is lengthy and can be exhausting. For example, it takes 12-13 hrs from San Francisco to Shanghai and 15-16 hrs from NY to Shanghai.  So do yourself a favor and try to book a non-stop flight.  If you stopover in Tokyo, for example, you will have to get off the plane, go through transit security and then get back on the plane. This is not something you look forward to after having been on a plane for ten hours.  The best carriers are Cathay Pacific, China Eastern, China Airlines.  In fact, you may get better service flying the Chinese airlines than the other major carriers. A case in point: once  I was on a Japan Airlines flight that was forced to wait on the tarmac at the airport in Guangzhou for four hours during a thunderstorm. The pilot complained that some of the Chinese airlines had been allowed to take off but the Japanese carrier was made to wait. After that experience, when travelling to China from Japan I always made sure to book China Eastern.   

Selecting a hotel

Hotels in China age fast. Travelling to Guangzhou for the Canton Fair, I used to stay at the Ramada Plaza.  Unlike the Ramada chain in the US which is tacky, if nothing else, the Ramada hotels in China are first class, five star hotels.  And the Ramada Guangzhou was no exception.  It was a beautiful hotel, first class all the way when it opened in 2007 and I looked forward to staying there over the subsequent 3-4 years whenever I traveled to Guangzhou.  However, after a few years I started to notice that the hotel was beginning to look run down; tiles were coming off the floor, the gym which used to be open 24 hrs a day was now open just a few hrs a day,  chain smoking locals seemed to outnumber sophisticated international buyers in the lobby etc etc.  The transformation was noticeable.   So see how old the hotel is. If it is more than 10 years old there are likely issues..  The newer the better.  Opt for a Western Chain, Sheraton, Hyatt, Holiday Inn, These hotels are much nicer than their American equivalents. They are all western managed and the services tend to be extraordinary. You will also profit from the use of an airport shuttle. Arriving in China for the first time after a long flight can be overwhelming and you will appreciate the airport shuttle. Don’t overlook this.  Regarding Chinese hotels you will not get nearly as nice service in a Chinese managed hotel, the exception being the historical Chinese hotels  e.g. Peace Hotel in Shanghai,  Peking Hotel in Beijing. 

Finally, one more tip is to choose a hotel that is within walking distance to a metro or bus. In this way, you will not have to rely on taxis to get around.  The metros in China’s big cities are very user-friendly and have announcements in English. .

Applying for your visa

Once you have your itinerary planned and tickets and hotel booked you need to go to the Chinese Consulate or Embassy in your area and apply for a visa.  There are many categories of Visa so you have to make sure you apply for the appropriate category.  Citizens from certain countries are exempt from visa requirements so be sure to check all this carefully.  Visas are valid only for a limited time so make sure you have looked at your schedule carefully.  A visa approval generally takes no more than a week and there is an expedited service. You should also run your itinerary by a local travel agent.

Here is the link to the visa page of the China Consulate in San Francisco. All visa categories are listed here.  China Visa types

Learning some Chinese 

Don’t make the mistake of going to China not being able to speak some Chinese.  If you are planning this trip well in advance, as you should, your preparations should include a course in Chinese, whether that is online or at your local adult school. Your trip will be so much more enjoyable if you are able to communicate, even at a very rudimentary level, with your Chinese hosts.  And you will probably enjoy better service all around if you attempt to speak some Chinese.    At the very least learn how to say thank you and perhaps some weather terms. And if you really want to impress your hosts learn how to write a few characters.

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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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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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It is time to write off China….once again

A lot of talk about China these days because of the drag the Chinese stock market is exerting on the global economy.  And there was a story last week on the front page of the NY Times about the waning fortunes of China’s low cost industrial sector in Dongguan, everything from furniture factories to a US automotive parts supplier who relocated from Alabama to Donguan several years ago. There is a nicely done video to accompany the piece.  It features a  group of disgruntled factory workers sitting around a streetside restaurant discussing labor conditions in Dongguan, and it also profiles a shoe factory worker who is returning to his home in Sichuan Province follow the closure of his factory in Dongguan.  I do not draw conclusions about the Chinese economy based on the grumblings of a few Chinese workers with a grievance against their boss, but having ridden my share of trains in China over the years,  I really enjoyed watching the video. Here is the link   China NY Times video

If you read this article or watch the video, it paints a pretty bleak picture of manufacturing in China nowadays, especially in the low cost south.  But when I think back to my first blog post six  years ago, on the industrial slump in Dongguan, which at that time looked very real as the entire world was reeling from the effects of the Global Economic Crisis, I realize that this is just another one of those periods where people are writing off China because Chinese GDP is down and/or there is a stock market crisis in China. There is a small element of China bashing in all of this.  In fact, I have talked with probably 200-300 small companies over the past 6 years, in a myriad of industries, and a great many of them currently have production in Dongguan or adjacent areas.   In other words, although many factories have shuttered, there are still many more to take their place.  Just for some perspective, here is that first blog post.  First blog post

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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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Establishing if your vendor is trustworthy

I had a discussion the other day with a consumer goods company which I found very interesting. This is an established company, a leader in its field, that makes packaging for some of the biggest retailers in the world.  The person I spoke with told me his company’s process for evaluating vendors in China, specifically how they decide who might be trustworthy and who not.  When they source new vendors in China they tell the vendor that they have a order from a large retail chain, one that the vendor has likely heard of e.g. Wal-Mart, IKEA et al.  They intentionally drop the name of the customer on the vendor. They then wait to see if the vendor contacts the customer directly. If the vendor contacts the customer, that tells the company that this is not a trustworthy vendor.  If the vendor does not contact the company, they then believe they are OK going forward with this vendor.

If you are a big company this is probably a good way to knock out a few unscrupulous vendors when you are sourcing a new vendor.  The strategy has worked for the company I talked to.  They have several vendors who they have been working well together with for years, and many more whom they have eliminated because the vendor approached the retail customer directly.

But if you are a small company is this a good way to select vendors ?  I think it all depends on your relationship with your retail customer.  If you have a solid relationship with your buyer then you can try this. Your customers have come to expect quality from you and it would be unlikely that they would seek to go direct to the factory in China, even if cost savings were substantial. The fact is that your retail buyers are paying you for the convenience of getting product made in China for them.  They have no interest in dealing directly with China vendors and resolving all the problems that usually come with a China order e.g. QC issues, cost increases, late delivery etc etc.  In fact, the company I talked to the other day told me as much.  He said that the number one reason companies pay him to source their products in China is that they have a much better chance of holding a US company accountable in case something goes wrong.  Makes sense as any kind of legal action in China is time-consuming and costly.

At the same time, if you are doing orders with a large retail chain but have not yet established yourself with the buyer(s) then I would not try this for the simple reason that if the retailer already has an overseas sourcing agent they might use your contact and place the order directly with the factory. Although I don’t think it happens often, I have worked in companies where it has happened.  And this is why most product development companies and wholesalers are very protective of their information.

In the end though, you have to remember that there really is simply no way to know which vendors are trustworthy and which are not. Just because a vendor does not contact a customer whose name you have dropped does not mean they will not act dishonorably later on.  Because of this when you source in China the bottom line should always be whether or not a vendor is helping you build your business.  As long as they are doing nothing illegal and your business is growing it should not bother you if they are sometimes dishonorable in their dealings with you.  A case in point, I used to work in an office of an American company in China. The owner of the company told me he knew some of the local employees were on the take with the factories.  But since he saw these employees as knowledgeable, hard-working and productive, and the business continued to grow, he simply chose to look the other way.  I think that was the smart thing to do.

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