10 Things I Wish I Had Known Before Coming to China!
As the founder of Easy Imex – one of the largest China-based, Western-run sourcing companies – I’ve experienced almost every problem imaginable when dealing with Chinese suppliers. So that you can avoid some of the same mistakes that I’ve made along the way, here’s my top 10 list of things I wish I’d known before coming to China.
- Yes means maybe, maybe means no, no means no! In China, especially in the business setting, people don’t like to say no! So when you ask a Chinese factory about whether they can manufacture a product, rarely will you get an answer of no! The Chinese philosophy towards business is to grab the chance while it’s there and give it your best shot.
- China manufacturing and poor quality control often go hand in hand. While Chinese manufacturing standards have improved dramatically over the past 10 years, issues with product quality remain a major concern for importers. As such, coming to China without doing quality control inspections is madness! If your margins are so tight that you can’t afford a $250 pre-shipment inspection – then you’ve either found the wrong product, you’ve failed at price negotiations, or you haven’t budgeted enough in the first place.
- Assumption is the mother of all stuff-ups! One thing I’ve learnt during my time living in China is to NEVER ASSUME ANYTHING. This applies to even the most basic of things. Whatever your factory tells you, never assume it’s true. Seeing is believing. Don’t assume your factory will do what they say they will do, assume the opposite! (Hence why quality control is so important, more on that later!)
- Regions of china. China is a huge country. Looking at a map of the world, China’s landmass basically covers Western Europe. While manufacturing is concentrated on China’s eastern coastline, for various reasons different products are better bought from different regions. If you’re buying your product in the wrong region, there is a high chance you’re at a price or quality disadvantage. Generally speaking, the south of China (starting from the bottom of the map of China) around Guangdong and Shenzhen is the region of China that specializes in high tech products. As you move further north, towards Fujian, Shanghai, Hangzhou, then further north after that, Qingdao, Hebei etc., products generally become ‘bigger’. So as a basic guide, just remember small products in the south, big heavy industrial steel fabrication in the north! Read this article for a detailed breakdown of China’s manufacturing geography.
- Time frames. When you’re importing, assuming you’re selling product to make money, staying in stock is important. As simple as this sounds, I’ve seen many importers screw up year after year due to poor management of their supply chains. Consequently, businesses are out of stock during peak season and are overburdened with unsaleable stock during the off season. There are various holidays in China that will cause delays, the Chinese New Year and May, October holidays being the main ones! You need to plan in advance to get around this!
- Capital requirements and order volume. When you’re importing, it’s really a case of Y. Many new importers come to China and want to dip their toe in the water before committing big bucks to a project. This is a flawed strategy. By starting small, you are forced to deal with less professional manufacturers. This makes quality control hard. You are also not a priority for the factory because your order value is small. If a larger customer comes along, expect to be kicked to the back of line. You also have far less leverage with manufacturer with price negotiations and contract negotiations.
- How much is it going to cost to import? Before you buy anything in China, it’s important to understand your LANDED COST. That is, after you pay the factory in China, what is the unit price per product by the time it arrives at your door. You need to be aware of the sample costs, incoterms, quality control costs, logistics costs, relevant customs duties, and sales taxes (GST, VAT)
- Quality Control. My number one tip to any importer is to do some form of quality control. Importing goods from China without doing quality control is like playing Russian roulette! You might get away with it sometimes, but the risk of failure is high! Why people take these risks I will never know! What you need to remember when it comes to importing from China is this: it’s a one-way street. Meaning, that once your goods have left, they won’t come back (for complex reasons such as the factory won’t accept returned product and government policies to re-import into China make it financially burdensome).
- Simple things are very complex. Inexperienced importers often underestimate the technology involved in manufacturing the simplest of products. Also, don’t assume that your manufacturer understands how your product is used.
- On the ground presence. There’s an old saying in China that the mountains are high and the emperor is far away. Essentially it means that local officials will disregard the wishes of the central government in distant Beijing. The same is true of the relationship between Chinese manufacturers and buyers in the West. Chinese manufacturers will use this tyranny of distance to distort reality and deceive foreign buyers who don’t have a local presence in China. For instance, they can outsource production to alternative cheaper factories. They can raise prices and blame it on local conditions influencing raw material costs. They can blow out lead times and blame it on the weather, power outages etc. If your supply chain is complex, there are countless opportunities for the factory to pull the wool over your eyes. The best way to solve this problem is to have a representative acting on your behalf on the ground in China.
6 Crucial Steps for Sourcing a Good Factory in China
In our previous article, we identified the top 3 mistakes to avoid when selecting a manufacturer in China. Mistakes generally occur because importers make decisions based on their emotions and how a salesperson made them ‘feel’, rather than tangible evidence of a factory’s quality, export experience, production capacity, internal quality control systems, documentation etc.
In this article, we will go through 6 crucial steps that importers should take to ensure they pick the right supplier. Before we get to that, let’s have quick look at the benefits of careful factory selection:
- Greater control over your supply chain
- IP protection is made easier
- Less chance that the factory will collapse from unpaid debt obligations
- Greater confidence in product quality
- Legal recourse if a problem arises
- Less chance of receiving defective product
- Quicker lead times
- Supplier reliability
- Better communication and service
Step 1: Know your product – if you don’t know the specifications (input materials, dimensions, components, packaging requirements), the compliance requirements to sell into your country, along with the quality demands of your market, then it is very hard to determine which manufacturer is right for you. Price should never be your only concern!
Step 2: Research – trade websites such as Alibaba.com and MadeinChina.com are a great tool for finding factories. However, many professional manufacturers will not advertise through these portals and are instead found through Google, Baidu (the Chinese equivalent) or through industry specific trade shows. Keep up to date as to when and where specific trade shows are held, both in China and in your own country.
Step 3: RFQ – Sending out a request for quote is important as it allows you to gather information about a factory and their capabilities, along with their price levels. It’s also an opportunity for yourself to demonstrate that you are a serious buyer that will bring the factory good business over the long term.
Step 4: Vetting suppliers based on – communication, location, size of the factory, specialisation, export experience, legitimate operating entity, and the level of interest.
Communication: can you communicate efficiently with the manufacturer? Are they prompt in replying to your calls and email? Are they ok discussing specifications in detail?
Location: factory location will have a bearing on lead times. It will also impact prices through labour costs, access to raw materials, rent etc. Avoid companies that don’t provide the location of their production facility as they are probably a trading agent or middleman.
Size: typically you want to represent 5-30% of the factory’s business during that period. Anything less and you won’t be a priority for the factory and you’ll have limited leverage with price negotiations. It’s also worthwhile investigating the operation size, production capacity, equipment, and staffing.
What they specialise in: China’s manufacturing sector is highly competitive. As such, Chinese factories are forced to specialise in production to maximise efficiency. I’d be wary of purchasing from a manufacturer who claims to manufacture a wide range of products. They are probably a trading company.
What markets they sell into: if your product must comply with strict national standards, it is wise to choose a factory that has experience manufacturing that product for sale into your market.
Legitimate operating entity: check the ownership papers of the factory. Also, depending on the value of your order, auditing the factory can be worthwhile.
Level of interest: sometimes good factories have no interest working with you. There’s no point pushing.
Step 5: Ask for samples – request that the supplier sends samples of the product. For off-the-shelf products, the samples should closely match the specifications you supplied to the factory. If the factory can’t match your samples, then unless you are willing to spend time and money on re-tooling and product development, the factory is probably unsuitable.
*it is common to have samples redone and redeveloped in order to reach your desired outcome. Don’t write-off a factory too quickly if the first sample is not perfect.
Step 6: Visit the factory – this is by far the best way to determine if the factory is suitable. By visiting the factory you can eyeball the equipment, the factory’s capacity, the quality of the factory workers, the sample room and the factor’s internal quality control systems. It also allows you to negotiate pricing directly with the factory boss.
Top 3 Mistakes to Avoid When Selecting a Manufacturer in China
For many first time importers, selecting the right supplier is like playing pin the tail on the donkey. Sometimes they get it right, and the tail lands on the donkey’s backside, but most of the time it ends up on the donkey’s head, on its chest, or it misses the animal completely!
Here are the top 3 mistakes made when selecting a factory.
Relying Solely on Alibaba and Made in China When Sourcing
While Alibaba and Made In China have thousands of good suppliers, many of the best suppliers in terms of price, quality, export experience and lead times do not advertise their business on these platforms. A large percentage of the Easy Imex preferred suppliers were found at industry specific trade shows held in China. The best suppliers often prefer trade-shows because it attracts serious importers who buy in volume and understand international trade.
Getting Persuaded by the Salesperson’s Charm and Low Prices
Most importers begin their sourcing exercise by visiting the likes of www.alibaba.com or www.globalsources.com and contact 20 suppliers at random.
They then receive 10 quotes back and carry on talking with these people. One salesman from the factory is really chatty, talks about how the factory produces excellent quality and forms a relationship.
Another factory does the same, but this saleswoman explains a few more details than the other factory and her price is 5% cheaper! Boom, she gets the sale.
The second factory got the sale because the saleswoman was a good talker, built up some dialogue and rapport and because she offered a low ball price.
For all the importer knows, this savvy saleswoman is working out of an apartment block in Shenzhen while claiming to be a manufacturer. In order to maximise her profits, she is now going to outsource your order to the LOWEST priced factory she can find. The factory’s prices are low for a reason because the quality and reliability of the factory are poor.
The buyer was coaxed in by salesmanship and potentially overlooked 15 alternative factories, one of which was a highly professional manufacturer with over 20 years’ experience, and another five were highly experienced factories that were willing to negotiate lower on price as the relationship developed.
The mistake the importer made was to select the supplier who 1) was proactive and replied 2) talked a good talk 3) promised the world 4) gave the cheapest prices!
Failing to Background Check the Factory
It’s essential that you background check your preferred suppliers to determine if they are trading companies, manufacturers – or even real at all! Relying on price, salesmanship and product samples opens your business up to huge risks. A thorough background check should look into:
- Factory licenses (business license and export license)
- Factory financials, size, and location
- Export history
- Compliance with national standards
- Factory accreditation (ISO 9001, ISO 14001, SA 8000, OHSAS 18001)
- Internal quality control systems
It’s common for Chinese factories to close down due to unpaid debt obligations. We’ve had several clients over the years who contacted Easy Imex because their previous factory literally disappeared. The factory stopped answering emails, their website went offline and they were unreachable via phone. Apart from the inconvenience of sourcing a new manufacturer, one particular client also lost a 30% deposit on a very large order before coming to Easy Imex.
In the next post, I will discuss how to select the right manufacturer. Get this right, and you will greatly improve your odds of running a successful import operation.
4 Ways to Protect Your IP When Manufacturing in China
Easy Imex often handles inquiries about how to protect sensitive IP when manufacturing in China. As this article will point out, there are ways that you can reduce the chance of your product being copied and sold to competitors. Let’s run through your options.
Protecting your IP outside of China
The best strategy for IP protection is to prioritize IP registration in your major sales market/s. If you have a large budget and expect global sales, then you should register your patents and trademarks in every market you plan to sell into. This means that if you intend to sell your product in China, you also need to register your IP in China!
However, if you’re a small startup without funding, you’ll need to prioritize. It’s expensive and time-consuming to register IP in every market, so work out where your customers are located and register your patent and trademark in those jurisdictions.
Limit IP theft before manufacturing
If you have a pioneering product then you should definitely set up a Product Manufacturing Agreement that is legally binding and enforceable through mainland Chinese courts. As Dan Harris from China Law Blog points out, Chinese judges won’t enforce a foreign judgment. If you are going to the effort of preparing a contract, agreement, NDA, NNN etc. make sure that it is done correctly by a lawyer who understands how to meet China’s standards.
Product Manufacturing Agreements typically cover the following: quality requirements, lead-times, product and IP ownership, molding/tooling ownership, NNNs (non-compete, non-circumvention, non-disclosure), and penalties clauses.
Limit theft during manufacturing
If you have a product with multiple components, Mike Bellamy – China Operations Manager at PassageMaker – recommends separating the production of key technologies and having them sent to a trusted third party warehouse for assembly behind closed doors.
This process isolates the final product in a controlled location which limits the chance of someone stealing the idea and manufacturing for sale to your competitors.
Make your product copy proof
The surefire way to protect your intellectual property is to make it copy proof! As this excellent QZ article by Josh Horwitz explains, groundbreaking designs are not enough.
“Companies must create products that are impossible to copy exactly from the get-go, by focusing on a special feature they can protect, or creating a coveted brand name consumers will pay more for.”
This can include creating exclusive software to compliment your product, using complex manufacturing processes that prohibit easy copying, and focusing on your brand and after sale service.
On a final note, deciding to manufacture outside of China in the hope of limiting the chance of IP theft is ineffective. It’s simple for copycats to purchase your product once it hits the market, send it to China for reverse manufacturing, make a few slight changes and then compete directly with you back in your market.
Sea Freight vs. Air Freight – The Ultimate Guide
Deciding on whether to ship via sea or air is a crucial decision for importers. We’ve put together this guide to help importers quickly decide the best option based on cost, delivery time and complexity. The guide covers freight methods, container types and sizing, delivery times and weight calculations.
For volumes over 1 cbm and weights over 100kg, delivery via sea is definitely your cheapest option. The downside of sea freight is slower delivery times.
FCL and LCL
There are two options for sea freight, full container loads (FCL) and less than container loads (LCL). FCL containers are filled with your product only. With LCL containers, your product will be consolidated with other importers’ goods from the same port origin and destination.
When to Ship FCL?
As a general rule of thumb, if your volumes are over 15 cubic meters (cbm), then it makes sense to ship FCL as the freight costs per unit with FCL are lower than with LCL. If your container load volume is above 10cbm, then consider increasing your order volumes to fill a full container load to reduce freight costs per unit.
There are three sizes for FCL containers: 20 foot, 40 foot and 40 foot high container. The practical container capacity for each size is 28cbm, 56cbm and 68cbm respectively. The weight limit/restriction for each container is a maximum of 28000kg irrespective of container size.
Approximate delivery times from a port in China:
Australia ~ 18 days
The United Kingdom ~ 30 days
USA and Canada (West) ~ 20 days
USA and Canada (East) ~ 30 days
South Africa ~ 30 days
Air Freight and Courier
Shipment via air is best for high value – low volume goods (electronics), and for urgent deliveries (samples). When shipping small volumes (less than 1cbm), delivery via air is faster and in most circumstances more affordable than shipping via sea.
What’s the Difference Between Courier and Air Freight?
Courier is a ‘door-to-door’ service through companies such as TNT, FedEx, and DHL. These companies will arrange to pick up from the factory and handle customs clearance at both the destination and origin ports, along with payment of duty and taxes.
Air freight is similar to shipping an LCL container in that the service is port to port (airport to airport in this instance). A forwarding agent will be required to handle customs clearance and to arrange internal delivery (haulage) to your door.
How Do I Decide Which is Best?
Delivery through a courier is the simplest method as you don’t need a forwarding agent to handle customs clearance, payment of tax and duty, and internal delivery. Courier services are also typically faster than air freight.
When it comes to pricing, for small chargeable weights (see below for formula of chargeable weights) less than 500kg, a courier is more economical.
It’s important to note that we are talking about ‘chargeable weight’, which is the greater of either the actual weight or the volumetric weight of a shipment.
Think of it this way, a 100kg parcel of linen will have a much larger volume (box size) than a 100kg parcel of batteries. It will, therefore, take up more space on the plane. Freight services account for this differential through the volumetric weight formula.
How Do I Calculate Volumetric Weight?
Volumetric weights for cargo in kgs/cbm are calculated as follows: total volume (LxWxH) x 167kg/cbm
Where 167 kg/cbm is the air shipment volumetric weight constant for courier (it’s 200kg/cbm for air freight).
If you have 10 boxes with the dimensions of 1.2m x 0.4m x 0.6m. The volume is 0.288 cbm x 10 boxes = 2.88 cbm
The volumetric weight (courier) is therefore 2.88 x 167 = 480.96 kg/cbm
*For air freight it’s 2.88 x 200 = 576kg/cbm
How do I Calculate the Chargeable Weight?
As mentioned above, the chargeable weight is the greater of either the actual weight or the volumetric weight.
From the calculations above, the volumetric weight is 480.96 kg/cbm.
If each box weighs 40 kg, then the actual weight is 40kg x 10 boxes = 400 kg.
Therefore in this instance, the chargeable weight is the volumetric weight of 480.96 kg/cbm.
*as the weight is above 100kg and the volume is above 100 cbm, the best option in terms of price would be to ship this parcel via sea freight rather than air.
Shipping and logistics are far less complicated than most new importers imagine. It can provide you with a competitive cost advantage over your competitors if you take the time to understand the processes and plan/forecast order quantities over the medium-long term.
How Understanding China’s Manufacturing Geography Leads to Better Sourcing Results
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.
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 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 licensing 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.
Why Importers Must Understand the 5 Types of Supplier In China
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 suppliers.
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 a 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 mean 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 a 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 canceled 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 a 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 the 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 a 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 to 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 organizations. 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 a 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 are no cost savings unless order quantities are huge. Often exclusively manufacture for a 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 shipbuilding 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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