On bahalf of the CSIC, I interviewed Hannes Basten in Fiducia’s Shanghai office to help shed some light on this opportunity for foreign buyers.  Here are is the link to the article: VAT reform: who wants to save some money?!

Wishing you successful China sourcing!

About the blogger

Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center (www.ChinaSourcingInfo.org). He is also the author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

ask the experts Q&A

What needs to be marked “Made in China”?

DIY or outsource your sourcing?

Molds and Tooling Costs

The Chinese Spring Festival and Shipping/Processing from China

Statistics on sales volumes for USA brands

Breakdown of subcontracting cost

Doing due diligence and background investigations.

How should I record and manage factory conditions?

The seller wants 100% up front. What should I do?

What’s the securest payment method, and who can I trust

Quote of the month

“If you aren’t explicit about what you want, you will get exactly what you didn’t ask for. And without a signed, formal Purchase Order you have next to no legal recourse in China should something go wrong.”      – Mike Bellamy, Author of “The essential reference guide to China sourcing”  on the subject of QC and PO’s.

  Videos of the month

Common Mistake #9: ‘Registering your intellectual property after you have been knocked off’

Common Mistake #8: ‘Arm’s length buying’

Common Mistake #7: ‘Leaky contracts’

Common Mistake #6: ‘Payments not liked to performance’

Common Mistake #5: ‘Who’s the project manager?’

Common Mistake #4: ‘Failure to conduct due diligence and verify key information’

Learn how Global Sources can help you source

Common Mistake #3: ‘Failure to audit the factory/ Falling for the golden sample’

 Mike’s China Sourcing Blog

Exclusive look at data from one of the largest Chinese supplier surveys ever conducted

My friend Kevyn, the Magnum PI of China sourcing

Is there hope for IPR in China?

Pay suppliers in RMB and save big

For the past 5 years the trend is pretty obvious. Just look at the chart below. Beijing has kept the maximum daily allowable appreciation amount to a minimum, so there were no big jumps, but day by day, the currency got stronger and stronger. 

Let's take it to the next level...

 I was recently contacted by an overseas brand of electronics to help them understand how and why the marketplace was being flooded with defective merchandise made under their brand.

Background:

Buyer designs and distributes electronics around the globe under their own brand.

They have almost a dozen suppliers/ contract manufacturers in China.

Brand is very serious about quality, customer services and maintaining their margins.

They recently discovered their products for sale online in China and suspect this may be the source of un-authorized “gray channel” imports into their major markets in  N. America and Europe. The gray channel exports are priced well below MSRP and appear to have serious quality issues and could impact the global reputation of the brand. 

Step One: Investigation

Technical review of samples found in the unauthorized gray channels confirmed that the products originated among the brand’s contract manufacturers in China.  The factories do not admit responsibility.

Key finding:

Further investigations confirmed that the majority of products in the gray channels were directly linked to the batches of production in China which were rejected by the buyer due to quality issues.

Strategy implemented by PassageMaker (the sourcing services provider brought in by the brand to investigate and solve the problem):

Purchase Order Templates were adjusted to clarify that rejected goods must be destroyed by supplier at their cost.

3rd Party Inspectors would be hire to record the destruction.

Client’s brand was registered in China. Previously registered only overseas. With the IP now protected in China. The brand holder can take legal action in China if needed.

3rd  Party Investigators were retained to monitor both Chinese and English language websites like TaoBao.com and T-mall as well as the websites of the contract manufacturers to look for unauthorized products.

3rd  Party Investigators were retained to monitor tradeshows in China and HK to look for unlicensed products.

Brand holder clarified its marketing materials and product packaging to state that only product purchased from authorized distributors are under warranty.  In this fashion the demand side could also play a role in preventing gray channels.

Between production runs the tooling was removed from the factory and stored at a 3^rd party facility in China to avoid unauthorized production. (Visit http://www.psschina.com/about/virtual-tour/services-and-pricing/tool-and-die-steward/ to lean about the “Tool & Die Steward.”) 

Important Concepts:

Before the adjustments above, the suppliers were essentially selling rejects out the factory back door to subsidize their costs of production. In some cases, because of the tight quality requirements of the buyer combined with the poor quality system of the supplier, this back door income was a significant source of revenue for the suppliers. Cutting off this source of revenue was hard medicine for the supplier to swallow.   Two methods proved successful to remedy the situation.

Some suppliers were dropped and a  sourcing feasibility study was conducted to find more professional replacements suppliers who could meet targets for price, quality, lead-time and trust. 

The suppliers worth continuing to do business with were given a sit down to explain why it was good for the supplier as well as the buyer to cut out the gray channels.  Key points included:

Unlicensed products cannibalize revenue of the brand owners. If they lose money, they can’t place as many orders to the factory.

Brand holder is no longer tolerating unlicensed products and the parties involved face significant financial risk when caught.

The defective goods finding their way into the market are hurting brand reputation. If the brand reputation is gone, the orders for everybody will be lost. 

Perhaps the most important message conveyed to the suppliers is that the brand wanted to have stable long term relationships with partners who could be trusted.  To show their commitment to the suppliers, and to help the suppliers, the brand owners provided the following:

Accurate annual forecasting and projections.  Suppliers love stability almost as much as they love volume.

Technical support and training to help suppliers upgrade their quality systems and finally understand that avoiding defects in the first place, not selling defects out the back door, is the best way to protect the supplier’s margin.

Periodic engineering reviews with suppliers to look for ways to reduce costs in production methods and materials,  yet not compromise quality. These saving were shared between the factory and brand holder.

 Interesting Side Note about www.TaoBao.com :

To our pleasant surprise, once ownership of the brand was confirmed to belong to our client, www.TaoBao.com was cooperative in helping to remove unauthorized product from their website.  Moral to the story: register your brands and IP in China even if you don’t plan to sell there.  Here are some blog posts and videos addressing how to register and protect your IP in China:

Protecting your Intellectual Property

Where can I find a partner to help distribute a product under my license for the IP?

China’s Legal System

Michael Jordan forgets to register his IP. Learn how not to make the same mistake.

Land Rover fails to register their IP (lessons for buyers)

Wishing you successful China Sourcing!

Mike Bellamy

Owner, PassageMaker Sourcing Solutions

Volunteer, China Sourcing Information Center & China Sourcer e-magazine

Author, “The Essential Reference Guide to China Sourcing”

Blogger, www.AnotherChinaBlog.com

Join me on LinkedIn

In order to prop up sagging exports the Chinese Commerce Ministry stated that China will:

 ”at the appropriate time, increase tax rebates on specific categories of goods, including labor-intensive products”.

This is not the first time China has adjusted the rebate system.

“From 2008 to 2009 when the financial crisis hit, China raised export tax rebates seven times on a wide range of goods. Tax rebate rates in general were increased to 13.5 percent in 2009 from 9.8 percent before the crisis.”

 The rebate referred to above is the VAT rebate. You may be interested in checking out What is VAT and why should I worry about it? to understand how the system works in China.

“Higher export tax rebate rates would help us get through the difficult patch and prevent the hardest-hit from going bankrupt…”

explains a China factory.  This “bonus rebate” is essentially the central government subsidizing production costs. This is great for us buyers of Chinese exports IF the rebate is passed on to us.  But from my experience, unless the buyer knows about the rebate and twists the arm of the seller, the suppliers are likely not to pass on the savings to the customer.    

Strategy

At the time of writing it has not been made public which industries will receive the extra tax rebate. But it is very positive that the government is hinting the list will include labor-intensive products which make up the bulk of Chinese exports.  As soon as the list is made public, I will post the information to my blog and suggest readers who are buying these products from China use this “inside information” to negotiate better pricing with their suppliers. Get ready to twist some arms!

 The article also went on to explain:

“Relocation has proven to be an effective tool in slashing costs for exporters. Wenzhou-based shoe maker China Juyi Group has moved some of its manufacturing lines from Zhejiang (on the coast) to Anhui province (in the interior) , where labor and land costs are lower. Many enterprises in Wenzhou are doing the same while costs in the eastern coastal areas surge,” said Luo Li, Juyi’s deputy general manager.”

Unfortunately, factories can’t pick up and move overnight. Yes, in the long run (2-5 years) more and more factories will move inland to help keep costs down. But the short term rebate increase from Beijing is a move that helps right now. So, on behalf of us buyers who are able to get concessions out of the sellers for this rebate, we should say “XieXie Beijing!”

Related blog posts:

Central government to bring down costs of logistics. Good news for sourcing industry.

Reports of China’s death as a sourcing destination are highly exaggerated.

 Wishing you successfull China Sourcing!

Mike Bellamy

Owner, PassageMaker Sourcing Solutions

Volunteer, China Sourcing Information Center & China Sourcer e-magazine

Author, “The Essential Reference Guide to China Sourcing”

Blogger, www.AnotherChinaBlog.com

Join me on LinkedIn

PassageMaker helping out in Haiti

PassageMaker Sourcing Solutions — an American-owned, China-based company — didn’t just lend a hand to non-profit Global Family Philanthropy (GFP). PassageMaker lent them a chick.

Make that 1,000 of them — plush toy chicks that GFP is selling in the US to raise funds for its “Chicks4Children” program, a sustainable campaign that builds community chicken coops in Haiti.

To support GFP’s cause, PassageMaker provided its service — at no cost — to produce 1,000 plush toy chicks. PassageMaker, a third-party provider, helped locate the supplier and orchestrate the production, quality inspections and safety testing of the “Chicks4Children” plush toy chicks for GFP.

Chicks4Children is a sustainable campaign with a goal to end hunger and poverty worldwide. Chicks4Children coop recipients commit to share the offspring and provide community outreach. The result is a plethora of eggs and chicken to raise, eat, share and sell. For more information on the program, go to chicks4children.org.

The plush toy chicks are being sold at chicks4children.org and at globalfamilyphilanthropy.org.

About Global Family Philanthropy: Global Family Philanthropy (GFP) is a 501(c)(3) non-profit organization. Its goal is to provide a stable home, education, and family structure for orphaned and abandoned children. GFP’s first home is in Les Cayes, Haiti and the organization has adopted the children who live in the home. GFP’s philosophy goes beyond providing for the short-term needs of vulnerable children. Its goal is to provide a sustainable community where the children can learn and grow to realize their own dreams and potential.
www.globalfamilyphilanthropy.org

About PassageMaker Sourcing Solutions: PassageMaker is a US-owned, China based provider of 3rd party assembly & inspection to protect intellectual property and ensure quality. PassageMaker also provides services to find and manage vendors in China on behalf of client. Contact PassageMaker if you need assistance with China sourcing.
www.PSSChina.com.

I suck at blogging.  Dan Harris does it better.  Renaud Anjoran does it better.  Tom Lasseter does it better.  If you have not already done so, subscribe to those blogs.  Today.

I have not done much blogging this year, as the news has been so universally awful that I’ve been unable to summon the enthusiasm to comment.  Short version, it is ugly out there and it will only get worse before it gets better.  Plan accordingly.

However, as someone who works with entrepreneurs and inventors on a daily basis, there is reason for hope.  People keep coming up with cool new ideas they want to bring to market, and they ask for our help.  PassageMaker had a solid growth year in a bad economy, so I guess I should be Chatty Cathy these days, but a combination of so much work and so little global good news as dampened my blogging spirit.

My one comment for the day deals with bringing a new product to market.  Our contributions to the value chain – sourcing, supply chain management, contract assembly, logistics – are really the easy parts.  The hard work is building a brand and getting it recognized in the marketplace.

If you are thinking about launching a new product, PassageMaker can take the headaches out of the production process.  But we don’t (and can’t) help you sell it.

Too often in the last few years, I’ve seen clients invest thousands in engineering, patents, sourcing, tooling, etc., with little thought given to how to get the product in front of buyers.  If you are planning a new product launch, assume that you are the only one who thinks it is the greatest idea since the wheel and focus on how you are going to convince the rest of the world. And budget accordingly.

My advice:

1 – The internet is great, but not everyone knows how to use it.  If your plan is social media and SEO, make sure you are really the expert you think you are.  Or have the money to hire that expert.

2 – If you are going Big Box, understand what that means.  A PO from a major retailer can be a million bucks on paper and negative income in reality when you consider the lead-times, warranty agreements, performance penalties, etc.

3 – Advertise if you can.  Twenty-some years ago, Coca-Cola assumed that their brand was so strong that they could stop advertising.  They ultimately lost market share to Pepsi and had to spend a fortune to get back in the game.  If you are launching a new product, nobody knows who you are, so you have to get the word out.

4 – If you can’t do it yourself, bring in investors who can help.  I’ve seen businesses with ridiculous numbers of investors, none of whom contributed to making the business a success other than providing short-term financing.  If you are going to add an owner to the mix, make sure they have skills to make the company a success long-term.

The one mistake I see clients make over and over (twice today so far as it happens) is trying to get ANYTHING made without a complete design database.  This never works, and is of course also always my fault somehow.  This in large part is why I formulated Kelly’s 1st & 2nd Laws of China Sourcing.

CES just updated their website, so go take a look!

I told him that all the green energy projects in China were on top of all the new coal fired power plants.  As one wag put it, it’s like a 600 lb. man eating a 12 course meal and then finishing up with a Lean Cuisine microwave dinner as a bedtime snack because he’s “on a diet”.

This reminded me of an email conversation with one of our Endorsed Service Providers, who also has never been to China:

Our ESP – Hey, Whit.  Is it pollution, or fog in this website background?  http://ringvemedia.com/ [ed. - That's really cool website by the way. Make sure to click through.]

Me – pollution.

Ignore the hype.  Solar and wind won’t replace coal, oil and gas anytime soon.  Thorium may be another matter, but greens have a cow at the thought of anything nuclear, so my conversation partner wasn’t talking about that.

Face it, we outsourced our pollution.