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How Understanding China’s Manufacturing Geography Leads to Better Sourcing Results

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As an importer it’s vital you’re familiar with China’s manufacturing geography as price levels, quality, logistic costs and manufacturing capabilities all vary region to region. The information that can be gained through a quick survey of manufacturers and their location is significant and should not be ignored.

If 99% of factories making a particular product are concentrated in one region, you can bet there is a competitive advantage to them being there.  Typical regional advantages include access to raw materials, access to component parts, cheap labour, specialised labour or logistics.

That doesn’t necessarily mean that you should dismiss outlier factories.  However, before purchasing from these suppliers you must be diligent to ensure that price advantages arise from genuine competitive advantages (i.e. cheaper production costs), rather than poor quality control systems and bad management.

This article will lay out the differences in China’s regional development and how that may play into your sourcing decisions.

 

The Pearl River Delta (PRD)

 

Located in China’s south, the PRD encompasses the areas of Hong Kong, Guangzhou and Shenzhen.  This region owes its industrial transformation to the “reform and opening up strategy” of Deng Xiaoping and the creation of “Special Economic Zones”.  The PRD developed rapidly as foreign companies invested heavily into the area to leverage favourable trade and tax policies, access to cheap labour, and proximity to Hong Kong.

The two cities you need to know, Shenzhen and Guangzhou: Shenzhen has grown from a market town of 30 000 people to become an international city of over 10 million people.  Guangzhou, Shenzhen’s older brother to the north, is the main manufacturing hub in the Pearl River Delta.  Guangzhou hosts the bi-annual Canton Trade fair, which attracts thousands of prospective importers every year.

What does the PRD specialize in producing? The PRD is transitioning away from labour intensive consumer goods and now specialises in high-tech electronic equipment, machinery, and auto parts.  The region does, however, still lead the way in the production of footwear, lighting, and toys.  It’s also a good place for sporting equipment, stationery and art ware, construction materials and furniture (amongst other things).

What are the advantages of sourcing from the PRD? Factories here are experienced with the demands of the international marketplace. The infrastructure in the PRD is world class which makes transporting your goods from here affordable and efficient.  Sourcing component parts, raw materials, packaging materials, production equipment etc. is easy due to the massive concentration of manufacturing within what is about a three hour driving radius.  It’s by far the best place to manufacture complex or high tech goods.

What are the disadvantages? Due to the reasons mentioned above, prices are generally higher in the PRD.  Manufacturers here are also well aware of the going market rate for their product in your home market.  They will negotiate prices to a point where it’s just enough for you to make a profit in your home market and nothing more.

 

The Yangtze River Delta

 

Surrounding the megalopolis of Shanghai, the Yangtze River Delta (YRD), with its enormous population of 105 million (2014), historically manufactured products for China’s domestic market.

Production in the YRD has traditionally been geared towards high volume, low margin type commoditized goods.   Competition for business here is fierce and this has generally kept prices low.  The downside to this is that tight margins encourage factories to cut corners on quality and cut production costs by using inferior raw inputs. Service in the YRD is also of a lower standard compared with the PRD.

While it can be more difficult sourcing from this region, importers should not be discouraged.  With careful oversight, factories in the YRD can produce excellent quality products and at low prices.  As China’s number 2 export base, the region is moving up the quality scale as firms gain experience selling into international markets.

Cities you should know: The major cities in this region are Suzhou, Ningbo, Shanghai, Nanjing and Hangzhou.

What does the YRD specialise in producing? Labour intensive consumer goods, textiles, metals, glass products, furniture, motor and bicycles, electronics, household appliances, construction materials, paper products etc.

What are the advantages of sourcing from the YRD? Costs for manufacturing many products are cheaper than the PRD. The YRD has the same advantages as the PRD in terms of excellent infrastructure and access to raw materials.

What are the disadvantages? The region focusses on price over quality.  Many factories in this region are in debt and risk going under.  Copyright infringement is rampant in the region so be cautious if you have IP to protect.

 

The Northeast

 

Historically the Northeast has been China’s heartland for heavy industry due to its abundance of coal and oil.  Industry here is heavily centred on the production of iron, steel, oil, petrochemicals, shipbuilding, machine tools, aviation and automobile manufacturing.

In recent years the government has set about transitioning the region away from heavy industry to become a centre for modern manufacturing. Reform efforts are yet to come to fruition.  Problems of overcapacity, poor investments, and a dominance of state owned enterprises remain.

Cities you should know: Shenyang, Dalian, Harbin, Changchun and Anshan.

What does the YRD specialise in producing?  Heavy industry: iron, steel, oil, petrochemicals, shipbuilding, machine tools, aviation and automobile manufacturing.

What are the advantages of sourcing from the Northeast? While it is unlikely that you will be sourcing from this part of China, you can find non-heavy industry factories here that produce at unbeatable prices.

What are the disadvantages? Sourcing from the northeast can be a major challenge.  Production needs careful oversight and you must pay careful attention to project management, IP protection, quality assurance and due diligence.  Logistics from this part of China is also more challenging than from the south.

 

The West

 

The Western regions of China have long been the supplier of cheap labour for the richer coastal regions.  Migrant workers, attracted by higher wages and guaranteed work, flooded the coastal regions and sustained China’s comparative advantage in labour intensive manufacturing for decades.  Rising rent and labour costs have pushed manufacturing inland, away from the coast, in recent years, which has convinced migrants to return home to the west.  The Government’s “develop the west” initiative – which has pumped massive amounts of money into the west – is also contributing to this shift.

While manufacturing is gaining traction in the West, it is unlikely that you will find yourself sourcing from these areas.  Similar to the northeast, while pricing might be attractive, problems with logistics, IP protection, quality assurance, due diligence and export licencing make exporting from the west a challenge.

Cities you should know: Chongqing and Chengdu.

What does the West specialise in producing?  The West is China’s manufacturing hub for motor vehicles.  It is also a hotspot for computer parts/components.

What are the advantages of sourcing from the Northeast?  Significant savings can be made on production costs due to lower prices for labour and land. For computer components, heavy machinery and automobiles it may be the cheapest place in China to source from.

What are the disadvantages?  Being landlocked, logistics from the region is difficult, time consuming and expensive.  Goods must travel by road, rail or most commonly via river all the way up to a port in the Yangtze River Delta (Shanghai) or the Pearl River Delta (Shenzhen).

As this article has shown, you can reveal significant information about your supplier by knowing their location.  Will lead times be slower? Is the price advantage due to nefarious reasons? How long has this factory been in operation? Do they have an export licence?  By looking first at location you will naturally provoke important questions that will expose the legitimacy of your manufacturing prospects.

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Why Importers Must Understand the 5 Types of Supplier In China

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The biggest challenge importers face when sourcing from China is selecting the right manufacturer.  If you don’t understand the type of factory you are buying from you risk paying higher prices, opening yourself up to IP theft, having delays with lead times, receiving defective product, or in the worst case, losing your initial down payment as the factory collapses due to unpaid debt obligations.

The process of selecting a manufacturer is significantly easier if importers have a background in the five categories of supplier that operate in China’s manufacturing landscape. As this article will show, by understanding each category importers can identify which supplier is suited to manufacturing their product in terms of price, risk, and quality. What follows are the five types of supplier.

Small Local Chinese Run Businesses (SCR)

Low Pricing, Low/Medium Grade Product, High Risk, Best Value

100% owned and operated by Chinese, these factories compete by providing low cost product.  Most SCR factories don’t have strong management systems or quality control procedures in place. Without careful oversight they’ll cut corners on upkeep, quality control and use substandard input materials to save on production costs.

Stiff competition and lower profit margins means these factories live hand to mouth. They think in the short term and will often lie about their capabilities, even if it bites them in the long term.

So why bother with SCR factories? Because with careful oversight they can produce products competently and at rock bottom pricing. If you’re in a competitive market – say selling on EBay or Amazon – SCR factories are often the best choice for the pricing needed. Quite simply, few other factory types can match their pricing.

Example (negative): We ordered coffee tables for client. Pricing was competitive. The factory produced samples, with strict packaging requirements. Samples arrived in good condition and well made. We approved the samples and put together a detailed contract which both parties agreed upon. This took 4 week’s work. We paid the factory on Friday. By Monday they asked for $2 more per table. We told them, “No. This is not possible!” We cancelled the order and the factory returned the money.

Why did the factory do this? It’s likely they received a large order from a large customer. They agreed to the low pricing at first because their factory was not busy and they wanted production lines to keep running. But once they got a better deal, they reneged. This happens with some SCR factories.

Example (positive): Easy Imex purchases a wooden piece of bedroom furniture for client. The product is price sensitive. We found a small factory with no export license who sells to larger factories in the town. They produce product for the USA and European market – but have never worked with direct customers before – only through other factories who subcontract to them. The boss is in his early 30s and has passion for the product he makes. He strictly and personally manages the workers. He has few systems – so would be unable to scale easily – but he manages this factory tightly. His costs are dirt cheap. No marketing, no expensive management systems.

This boss focusses on making a reliable product. His pricing is exceptionally low as there’s no premium going through other suppliers. His factory is small, but well organized due to his micro-management. The capacity of the factory is the main issue, and a secondary issue is if something happens to the boss. But for the 2 containers per month required by our client, it’s a good fit. We ordered the product and it received very strong reviews from customers (average of 4.6 stars on Amazon USA).

Pros: The cheapest option for sourcing in China. Well suited to products sold on price sensitive online markets, such as EBay.

Cons: Quality control is often poor. Factories are unreliable and require significant micromanagement to ensure specifications, quality requirements and lead times are met.

Large Chinese Run Businesses (LCR)

Low/Medium Pricing, Low/High Grade Product, Low/High Risk

These companies usually began as SCR factories and through shrewd business acumen, good timing and a bit of luck/guanxi/corruption developed into large multi-million dollar organisations.  They capitalized on the golden era of manufacturing in China and used powerful connections with local authorities to maintain their home ground advantage.

LCR factories will have good production and quality control systems.  Although their management techniques remain Chinese, there is an awareness/understanding of what foreign customers require.  LCR businesses typically have English speaking staff and nice looking factory premises to present to foreign customers. These factories have decades’ of experience – and have grown large because they service North American or European clients with huge volume.

Example:  Whitegoods. If you want fridges or washing machines – there are a handful of companies in China reliable enough to get the job done. They’ve invested hundreds of millions in plant, and are established and professional. If you went to a small Chinese run factory – you would run the risk of catastrophic failure – with a product which has many components that can go wrong. The large costs in this industry mean that larger factories are the only realistic options. Companies like Midea are examples of successful privately run factories that have grown over the decades into multi-billion dollar behemoths.

Pros: Can produce at a low price point and maintain high quality standards. They have experience dealing with foreign customers and are familiar with the standards required to produce goods sold into foreign markets. Whether they are a good fit depends on the specific factory and your industry.

Cons: More expensive than SCR factories and will prioritize customers with large order quantities. 

Wholly Owned Foreign Enterprises (WOFE)

High Pricing, High Grade Product, Low Risk

WOFEs are set up so that foreign enterprises can shift manufacturing to China for the cost advantages while maintaining control over intellectual property/trade secrets and production quality. WOFEs are typically higher cost, but well developed with strong systems and procedures from overseas management.

Often you won’t be able to buy from a WOFE as they make exclusively for their parent company. If you do source from WOFEs, you can expect to pay similar prices to back home.

Pros: Similar production quality as back home. 

Cons: Cost advantages only arise from scale. There is no cost savings unless order quantities are huge. Often exclusively manufacture for parent company.

Foreign Direct Invested Enterprises (FDI)

Medium Pricing, Medium/High Grade Product, Low Risk

Foreign Direct Invested Enterprises are factories that have investments from overseas.  FDI enterprises are often cheaper than WOFEs while maintaining advanced levels of quantity control.  Their mentality towards production, management and quality control is similar to the standards of their home country and attitude towards service is also more in line with Western standards.

There are two notable subcategories under the FDI section – Hong Kong FDIs and Taiwan FDIs. Both leveraged their historical ties with the PRC along with their geographic proximity to move manufacturing to the mainland.

Example: Easy Imex required a high-quality office furniture product made of metal. The client’s existing product was locally produced and sold at a premium price. It also came with a 5-year warranty. Quite simply, the manufacturing needed to be impeccable for this type of product.

Ultimately we sourced a Taiwanese invested, owned and managed supplier – with factory based in Shanghai. The factory was compact, organized and had attractive pricing due to their efficiency and scale. The factory had moved from Taiwan to Shanghai in the early 1990s. But it had over 40 years manufacturing experience. They made a product no other factory in China could match, due to the special knowledge and expertise in this area.

We were able to get our client an OK price, but an outstanding product. The price was approximately 15% higher than other Chinese local suppliers. But the build and paint quality was outstanding and came with a 10-year warranty. From more than 6,000 units ordered the feedback was they had one defect. Which is exceptional!

Pros: Will consistently produce excellent quality. They are reliable and easy to deal with.

Cons: Significantly more expensive than Chinese run organisations. Only produce for customers with large order quantities.

State Owned Enterprises (SOE)

Variable Pricing, Variable Quality, High Risk

State Owned Enterprises are companies owned and controlled by the local or central government.  China’s reform and opening up period has seen SOEs disappear from many sectors of the economy. However, they remain powerful in areas that are strategically important to the government.

Without proper market incentives SOEs operate differently from other manufacturers.  Incentives can be perverse and the requirements of the customer can take a back seat to objectives of government officials.

SOE’s operate in every field; machinery, automotive, constructions, metals, shipbuilding, shipping, aviation, telecoms, banks, oil production etc.

Easy Imex rarely deals with these large entities because they don’t suit our client profile. 42% of SOE’s made a loss in 2013. Nonetheless for large industrial equipment, steel, shipbuilding etc. SOEs are sometimes the only option.

Example: Easy Imex had a client involved in ship building and wind turbine production. They required steel and port equipment. The only options were large state funded entities. In the end, the client didn’t purchase for a variety of reasons. But the point was there were no other entities on this scale privately owned. The SOE’s visited tended to produce a low quality product at a very low price. Which didn’t suit the client’s requirements.

Pros: With certain products they are your only choice of manufacturer in China.

Cons: Operate under perverse non-market incentives. Expect delays and poor quality.

This article has demonstrated that the landscape of suppliers in China is complex and inconsistent.  Many importers have lost money, time and business as a result of selecting the wrong manufacturer.  If you are looking to manufacture in China, expect to spend anywhere up to a month sourcing the right supplier. It’s also worthwhile doing a thorough background check before entering into any contract with a Chinese factory.

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What Can and Can’t I Import Into the UK?

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The rules governing what you can and can’t import into the UK vary depending on whether you’re importing commercially or for your own use. In both cases, however, there are a number of items that are banned or at least require special licenses and permits in order to be imported. This article will look at those items in more detail.

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Why You Need to Register a Trademark in China as Soon as Possible

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For most people, all we know about garage flooring is what we learned from our parents, which is not much at all. This article seeks to demystify the process of covering your garage floor, explaining why concrete is no longer the only option for garages in 2015, and looking at what the best material is for your garage floor. So let’s look at all the different types of flooring available.

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15 Incredible Facts about China’s Economy

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In 2015, the IMF ranked China’s economy as the world’s biggest in purchasing-power-parity terms for the first time since they began recording. The US has been knocked off the top spot, which it has held since it overtook the UK in 1872.

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What Not To Do When Negotiating With Chinese Businesses

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China is a massive opportunity for many Australian businesses. It’s the largest economy in the world; it’s still growing rapidly and, equally rapidly, it is opening up to overseas investment.

But people who want to do business in China would also do well to remember that the country has a different culture and rules of etiquette. Relationship building is critical to being successful in China and, as such, it’s important to learn the dos and don’ts to successfully building and maintaining relationships with Chinese business partners.

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How to Pack Goods for Transit

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No one likes getting a package in the mail to find the goods inside damaged or, worse, broken. When this happens the temptation is always to blame the postage services (everyone likes blaming their postie) but, no matter how bad the postal service is, just as often the damage will be caused by a poor packaging.

It’s worth taking the time to get the packaging right in order to make your customers happy and, ultimately, save your business money. Customers will demand refunds or replacements for broken or damaged goods, and when that happens you’ve got a choice of either sending out a new copy of the product, or risking the customer’s wrath (and subsequent bad reviews damaging your businesses’ reputation).

The good news is that a well-packed product will be able to survive almost any postal service across the world. There are some simple procedures to follow to ensure that your customer receives what they paid for safely.

The golden rule is: whatever you are packing should be able to withstand a drop of one metre, regardless of if it’s a rigid block of iron or the most delicate of glass goods. If the object breaks under this test, then you should consider improving your packing standards.

The second golden rule is: invest in good quality boxes. It can be tempting to use light, cheap cardboard boxes, but this would be a mistake. Light boxes are cheaper to buy and weigh less (and so are less expensive to send), but don’t offer anywhere near the same protection for their contents. It’s not just shock resistance, either. Thin, cheap cardboard boxes also offer less resistance to water and, as they get damp, can either develop mold, or fall apart mid-transit. We recommend that you use desiccants inside boxes that will be in transit for any significant period of time, regardless of the quality of the carton itself, and that you let products rest in a dry room with air conditioning before packing them – especially if they’re heading to humid areas like the tropics.

For fragile goods

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Fragile goods are, surprisingly, relatively easy to pack, because the risks they face in transit are obvious. Glass and porcelain doesn’t handle shock well, so all you need to do is give it a nice, soft cushion to sleep on for the trip.

  • First up, wrap each object that is to be sent securely in tissue paper or newspaper.
  • Place these wrapped items in an inner container.
  • In a larger, outer container, fill evenly with cushioning material, such as bubble wrap and foam. Place the inner container snugly within this. It should be a tight enough fit that the inner container won’t shake around.
  • Use reinforced tape to close the box.

Perishables

Perishables can be difficult to send. Fruit and the like can be crushed and damaged from impact, just like glass, and equally they are susceptible to mold and rot. So packaging them requires a unique approach.

  • Place items in paper mache trays, which are resilient to a multitude of different sources of damage to perishables.
  • Next, put those trays in a heavy cardboard container that is lined with absorbent slabs (to protect them from moisture).
  • Seal the box using reinforced tape.
  • Write “PERISHABLE” on the top and on one side in large, clear, legible characters so that the package handlers know to treat with care.

Crushable items

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Imagine buying a poster, art print, photo, or book and opening it to find the material bent, frayed, dog-eared or ripped? There are a couple of things that you can do in packing these objects so your customers don’t have that experience.

  • If the object has a frame (or cover, as in a book), then protect the front and back of it with a rigid material that is larger than the actual frame.
  • Between the frame and rigid material, stuff in bubble wrap or similar to reduce the pressure that the material will have on the object.
  • Pack the object in the heaviest cardboard outer container you can find.
  • Seal the box using reinforced tape.

Sharp items

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It goes without saying that these objects, if not packed properly, can be very dangerous to those who handle the package in transit and also to those who are unpacking the goods. This means that you need to take extra precautions when packing, not just to protect the object but also those who are handling it.

  • Tightly wrap the object in thick newspaper, and secure in place with tape. Make sure the newspaper extends well past the tip of the blade, too, in case it does move in transit.
  • Place the item in a corrugated outer container, and surround the item with cushioning material to hold it in place.
  • Seal the box with reinforced tape.

One final point to note

Cartons that are opened during transportation are more at risk of damage. One of the most effective ways to minimise the chance of the carton being opened is to apply nylon bands around it.

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A Guide to South African Business Etiquette

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Etiquette refers to ‘rules governing socially acceptable behaviour’, but the problem is that these rules may vary significantly in different countries and cultures. Business etiquette involves attitude as expressed in writing, speech, or behaviour, and consideration for habits and sensitiveness that exist within a certain culture. What may be acceptable at home, may cause resentment and rejection in a foreign country.

South Africa has its own standards of acceptable social behaviour. And the problem is that this etiquette varies depending on which city or area you visit and the people with whom you engage.

Before we can discuss business etiquette in South Africa, we need to give readers some demographic data about the South African population; their origins, culture and language.

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Australia’s Import Trade with China

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In terms of trade relationships, Australia ranks in 14th place as one of China’s principal export destinations. While Chinese imports make up 19.8% of Australia’s total import trade, it accounts for no more than 1.7% of China’s total export trade, which is dominated by the United States, Hong Kong and Japan.

By comparison, Australia ranks in 6th place as one of China’s principal import sources with a trade volume that represents 4.6% of China’s total import trade. The top three import sources include the Republic of Korea, Japan and the United States.

These figures make China our largest trading partner, both in imports and exports.

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How the ChAFTA Will Affect Imports from China to Australia

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Importing Chinese goods into Australia has just got a whole lot easier with the implementation of a Free Trade Agreement (FTA) between Australia and China. This agreement has taken a long time to develop but the implementation of it will give huge benefits to business owners and consumers. Let’s take a look at what exactly the FTA will do, how it works, and some of the key benefits to Australia and China.

What is the China Australia Free Trade Agreement (ChAFTA)?

A FTA is an agreement between nations to lift all possible barriers and taxes, with the aim of encouraging the trade between the nations. A new FTA between Australia and China is planned to come into effect this year. This will increase competitiveness with other countries, like New Zealand, who currently enjoy a FTA with China. It will also add to investment, which the Chinese Government estimates to be $1.44 trillion over the next 10 years.

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