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China Sourcing at Trade Shows – Top Q&A, Tutorials and Resources

Are you looking to start your China Sourcing at Trade Shows?

With the April 2017 trade show season in China/HK just around the corner, I thought it would make an interesting blog post to share with you the resources offered to the people I met at a October 2016 trade show. I hope you find it useful as you get you ready for the 2017 buying season & doing some China sourcing at trade shows! Don’t forget to attend this year’s conference on China sourcing if you are in Hong Kong come April!

 

Where to find the conference notes & video recordings?

Event Topic Recording/ Related Videos
Global Sources Trade Show (HK) How to Protect Business Secrets and Intellectual Property Covered in this video playlist.
Global Sources Trade Show (HK) How to Manage China Sourcing Projects from Afar Entire seminar + Q&A at https://www.youtube.com/watch?v=bjhnX98LfNk&feature=youtu.be
FBA Seminar (HK) Moving from supplier’s design to your design IP protection, Engineering and Vendor Selection covered here.
Austrian Chamber of Commerce (Guangzhou) Workshop: Advanced Supply Chain Tactics Similar content at https://www.youtube.com/playlist?list=PL_04teO1jjt7dusC4OrYhwoXaHP3jJSEt

 

International Sourcing Expo (Melbourne) Keynote Speech: “Sourcing in Asia Today: Effective and affordable strategies for overcoming challenges old and new” Entire seminar + Q&A at https://www.youtube.com/watch?v=_x0zPGeKV-Y      Recorded in HK.

 

If you like my China Sourcing Seminars, you may also enjoy the following:

China Sourcing Academy  A great resource for professional training.  I am honored to be one of the online instructors at the academy.

www.ChinaSourcingInfo.org   My blog for small and medium sized buyers.

http://www.psschina.com/china-business-blog/ My blog for large buyers.

The Essential Reference Guide to China Sourcing (available on Amazon) or learn more about my book here.

Where to find professional and affordable help for China sourcing?

Here is my full list of endorsed service providers as mentioned in the seminars.  QC, Logistics, Sourcing Agents, Contract Manufacturers…

 

How to ensure the seller is not a scam? (3 recommended tools)

Search www.SupplierBlacklist.com

A Corporate Assessment (CA) report can provide viability into the stability, assets & reputation of a target company.

Red Flag Assessment (RFA): Risk, Scams & Fraud exposure on a given transaction/deal when buying from a Chinese company.

Now a word from our sister company:

www.AsiaBridgeLaw.com  Affordable, Professional, English-speaking legal & business advisory services.

I am on their board of advisors and recommend them with confidence for:

  • IP Registration
  • Bilingual Contracts
  • Dispute Resolution (including Loss Recovery)
  • Business Advisory Services
  • General Legal Counsel

 

Sorry for the long post but I wanted to give you as many resources as I could think of to help get you ready for the 2017 buying season! If you have additional questions about China sourcing, feel free to contact me at your convenience and I will do my best to assist you.

Looking forward to being of service and wish you successful China Sourcing.

Best Regards,

Mike Bellamy (LinkedIn Profile)

Celebrating 20 years in Asia!

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China Sourcing 101: Contracts And Negotiations- Q&A Video

China sourcing tips Q&A in Melbourne training session

I have taken the liberty of creating a short series including video tutorials and expanded transcripts that goes into some detail about how foreigner buyers can protect themselves in China.

Let’s dive right in to today’s installment: “ Contracts And Negotiations: Q & A video.”

Local Business/Local Lawyer/ Local Language

I don’t care if you’re dealing in Pakistan, Bangladesh or Taiwan it’s just so valuable to have the contract in local language. You may be thinking, “why can’t I put in the English language contract that English is the official language of this contract?” Sure you can, but this is what happened to me early on my career when I was using an English language contract in China.

The Chinese supplier’s lawyer killed one year by debating every word in my contract, claiming the translation was not correct or not done right by the court appointed translator.

So if it was in Chinese originally and the supplier signed off- meaning that they agree that this Chinese terminology is accurate- they can’t use the stall tactic of debating if your English language contract is translated correctly when it goes to court.

Sign the contract and send the money to the right party if you want to be safe

Alright, I’ve said it twice so far in the series, and I’ll say it a third time because it’s so important. Please make sure that the name on your contract is the same name on the bank account, business license and ideally the factory gate.

Have you heard about SupplierBlackList?

There is a great website where buyers are helping each other by basically exposing suppliers that did them wrong. You know the open secret is that most of the mega website directories, they make their money from the sellers that list on those directories. So yeah, Alibaba and Global Sources do vet the suppliers on their directories, but a great supplier can go bad overnight. And at the end of the day, the suppliers are paying to be listed, so they have to be pretty bad to get knocked off these website directories. Since SupplierBlacklist is not making any money from the suppliers, they can just expose everything in an open way.

Q&A

Woman in the Audience: Can I register my IP in China on my own?

Bellamy: In China you can’t register the IP on your own online, but it is pretty easy. You just need to engage a Chinese patent attorney. Someone that is authorized to submit these documents in Beijing on your behalf. They’re pretty easy to find and affordable- a couple hundred Australian dollars to register a brand. A bit more if we’re talking about a utility patent or other types of intellectual property.

Woman in Audience: Why doesn’t everybody use Alipay and similar services to protect the buyer?

Bellamy: Yeah good points, let’s take Alipay, I’m pretty sure there’s caps to how big of an amount you can transfer at any given time. In my experience, it is mostly used for buyers who are purchasing orders under ten thousand dollars. Once you get larger than that then you’re dealing with bank transfers and maybe even letters of credit. So while that service seems pretty good at protecting your money on small orders it’s not available for normal and large orders.

Even if you are going to use those payment process facilities, it is still good to have a contract because it validates that the supplier understands your key terms. You might have a non-compete clause, you don’t want this supplier to sell to your competitor in New Zealand. So that payment processing is not going to have any protection for that. So the payment services you talked about, protect your money from disappearing but they don’t really help with the relationship with the supplier. It can’t hurt.

Woman in Audience: I’m pretty sure my competitors back home are trying to reverse engineer my product and have it made in China.

Bellamy: Maybe you’ve got a great Australian brand and you’re worried that this American with a lot of money is going to knock off your products in China or India. One way to stop them is, you’re going to register your product in the location where production is going to take place. And after your brand is registered you own the intellectual property you can actually go to Chinese customs authorities at the ports and say “this is my authorized supplier” and all other exporters are unauthorized products that should be confiscated and destroyed.

If you want to shut down a knockoff artist who is cannibalizing your business, the best way is to hit them in the pocket book. So I would wait until your competitor places a purchase order in China and has paid deposits, so that they have money in the pipeline. Then work with the customs authority to grab the container at the port before it leaves China. It will mess up the competitors supply chain big time. Because no one gets paid when the goods are confiscated or at least help up at port, it really hits them hard and destroys their relationship with the suppliers. Especially if their supplier did not even know that it was a counterfeit product that it was infringing upon. Keep in mind that it costs less than a 1000 USD to register your brand and the cooperation of the custom’s authority is free of charge if you know how to go about it!

Woman in Audience: I have been buying from China for many years. But I never got around to registering my brand. I want to change suppliers, but now I learned that the supplier registered my brand without telling me! What can I do?

Bellamy: Yeah, now you got your hands full, you’re in an uphill battle especially if it was predatory where a supplier, and this happens a lot, registers your brand as a means of manipulating you. For example, Australian company does not register their brand because they say “hey we got the brand registered in Australia, we don’t sell anywhere else in the world, who cares about China”. Then your Chinese supplier registers that brand a couple years later. One day you want to switch suppliers and now you can’t export your product out of China with your brand on it because the supplier owns the IP. So if you are in that situation, then it might be best to go to dispute resolution. But manage your expectations, the law is clearly on the supplier’s side as China is a first to register rather than first to market system.

Woman in Audience: I know somebody else owns the right in China for the brand for the item I want to buy, but I also know that the brand is not controlled by that party in Australia and want to produce an item under my brand in China to sell in Australia.

Bellamy: Know that the Chinese party could stop you if they knew that you were doing it. Maybe they are not savvy enough to tell the customs authority that they own that brand. But if it is in the marketplace and they see that “hey, you’re doing a good job, making a lot of money, going to trade shows”. Eventually they are going to figure it out and try to stop you. Maybe you’d want to sort this out in advanced, either by changing your brand if you are a startup maybe or negotiating a solution. Lesson learned, it is a lot easier to trademark first and then the system is working for you.

If take away just three things from this series on China Sourcing: Contract & Negotiations

  1. Use a formal document, reviewed by a local lawyer
  2. “Same name” on contract, bank account, business license & factory gate
  3. Contract in Chinese language & Chinese jurisdiction actually protects you better

 

[eBook] The Essential Reference Guide to China Sourcing

Not everyone that visits my blog or the PassageMaker website is in a position to hire PassageMaker.  In order to help them have a fighting chance at avoiding the common pitfalls of China business as they “DIY Source”, I wrote the book “The Essential Reference Guide to China Sourcing: A comprehensive guide to common pitfalls and best practices.”

The COO of NYSE listed GlobalSources.com was kind enough to write the preface to my book and I am happy to report that I recently paid for a small plot of land, indoor pool and bungalow in Thailand using the earning from this self-published book. With those milestones behind me, I thought it would share with you a bit more about the book, why I wrote it, what’s included and how you too many benefit from reading it.

Here is the official introduction to “essential reference guide to China sourcing” as found on Amazon:

Based upon a decade of continuous practice on-the-ground in China and feedback from his internationally recognized, industry leading, seminar series, this book is the only China sourcing reference written by an American with both sourcing and manufacturing expertise. 

It offers buyers a comprehensive understanding of China sourcing from a quality control, intellectual property, negotiations, supply chain management, manufacturing, engineering, finance and bi-cultural point of view.

– No other China sourcing guide offers supportive, empathetic insights from a buyer’s perspective.

– No other guide includes a full complement of templates, checklists and best practices at every step as the project moves from concept to delivery.

Even veterans of China sourcing will gain from this book.

PassageMaker literally wrote the book on China sourcing. Its now on Amazon

Official Page: http://chinasourcinginfo.org/book/

Amazon Listing is found here.

 

What makes the “essential reference guide to China sourcing” special?

Let me tell you a bit about why the Essential Reference Guide to China sourcing is different from any other guide book available at this time.

There are primarily two kinds of China sourcing books out there.  The first group is available at any major book store between 15 and 35 USD and make very interesting reading as we follow the authors on their China business adventures. These books do and excellent job of helping the reader get a feel for the dangers and opportunities in China. But they don’t go so far as to give practical tips in the form of templates and procedures to avoid the dangers and capture the opportunities they talk about in their book.

The second group of books are often in the form of e-books or puff files written by sourcing experts that do start to cover specific tips and check lists.  These materials range in price from free to 30 USD.  Some are junk and others are worth the small asking price if the reader needs some general and basic pointers to get started.

My goal in writing the essential reference guide to China sourcing was to provide the interesting stories and personal experiences like the first group of books, but I wanted to add actual procedures and best practices at a level of detail and professionalism not found in any of the typical e-books mentioned above.

 

Why would anybody listen to me about China Sourcing?

First off, China is so big and constantly changing that when somebody claims to be a China expert, I don’t always believe it.  I moved to Asia in 1993 and have been living her pretty much full time since then.  Early on in my career, I made a lot of mistakes.  I paid too much for products, I had my ideas knocked off, I missed delivery dates.. you name it.  So I’m not here to say I am perfect, but rather that “you can learn from my mistakes” and have a much better chance to achieve your goals for price, quality and lead time while protecting your intellectual property.

In 2001 I founded PassageMaker Sourcing Solutions with 1 client and 2000 USD on loan from a family member. When the economy was strong a few years back, we manage a supplier chain valued at over 200 million USD!

Besides a lot of hard work and learning by trial and error over the past decade, one key reason for the success of PassageMaker is my emphasis on standard operating procedures, templates and check lists for every action performed by the employees of my company.  The essential reference guide to China sourcing is based on the operation manual at PassageMaker which is 100’s of pages long and instructs my staff in great detail how to do things like prepare contracts, place PO’s, hold a factory meeting, conduct product inspections, manage projects, attend a trade show and such.   All of these tools and strategies are included in this guide book!

 

It’s a reference guide to China sourcing, with lots of details and templates.

The essential reference guide to China sourcing, is easy to understand, but it is NOT a quick 1 hour read! On the contrary, it is a comprehensive manual for every aspect of running a sourcing agency or purchasing office.  This book has real value if you are getting started in sourcing or if you want a benchmark for your existing sourcing operations.

Let me give you three examples:

  1.  Some of the other books may say “it’s important to find a good supplier”.

Nice tip, but what are the actual steps involved?  In my book not only do I explain how to define what is the ideal supplier for you, but I provide the actual template taken from my company’s operation manual and provide case studies walking the reader step by step thru a typical project roll out. Other books simply don’t offer this level of detail.   Let me give you two more examples of the level of detail provided in my book.

  1. Some guide books say things like “have a good contract in place that defines what you are ordering”.

That’s a no-brainer, but what should this contract look like you may ask? Well on page 100 in my book, you will find an actual contract template in both English and Chinese that you can cut and paste for your own business.

  1. Another guide books says “make sure to do a quality check before you ship”.

Also a no brainer, but you are left asking yourself “what should a product inspection cover and how to manage the details?”    On page 208 of my book you will find an actual inspection report that you can use as a template in your own business.

Thanks you for reading about my guide book and if you have any questions about the book or China sourcing in general, please do not hesitate to comment on this blog post or write in to me directly.

BTW, if you like the topics covered in this eBook, you will love my online course at www.ChinaSourcingAcademy.com.  The online course covers more topics in greater detail and the video format makes it easier to absorb information in a short period of time.

Glad to help.

Best regards,

Mike Bellamy

“China Sourcing Pitfalls” Interview with Australia’s Herald Sun

The Herald Sun, a subsidiary of News Corp, is Australia’s largest morning newspaper. Mike Bellamy is the founder of the PassageMaker Group and is an instructor at China Sourcing Academy. He will be presenting in-depth seminars at the upcoming International Sourcing Expo Australia in Melbourne.

Excerpts from Mike’s Interview with Sun Herald about China Sourcing Pitfalls on 12 November 2015:

Foreign model pitfalls

Quality at greatest risk

China Sourcing Information Centre director Mike Bellamy, who has worked with Australian, US and European companies to have good manufactured in China for the past 20 years, said those planning to source overseas should work through nine key points to ensure they secure a good deal.

A US native, Mr Bellamy who heads a company employing 200 people, studied in China and stayed in the region. He is one of the speakers attending the International Sourcing Expo in Melbourne when it begins next Monday.

More than 450 apparel, accessories and textile suppliers from Asia will be available to speak with prospective clients. Seminars featuring Mr Bellamy and other experts are scheduled.

Mr Bellamy said that anyone could find suppliers on the internet. “But it’s important to not only find them but to evaluate any new suppliers,” he said. Those wanting to do business needed to thoroughly check references before signing a contract. They must budget for at least one flight to China to truly understand the operation and what their finished product might look like.

Mr Bellamy warned that the first and only point of contact often was with a salesman working on commission who might make promises that could not be kept. For instance, he said a salesman might give undertakings about production capabilities but a visit to the factory might show those undertakings could not be met. Some would say anything to seal a contract but often employees were mobile and would move on.

“You might want to ask the question in five different ways,” he said. Mr Bellamy said while it was acceptable to haggle over costs, alternative quotes were essential when deciding if the quotes were viable. Further, it was important when getting quotes to ensure the products were comparable right down to thread count and colour, in the case of textiles.

Mr Bellamy said making general comments about wanting a “high-quality item” were not specific enough. “People need to nail down their specifications in a written document,” he said. He also advised that penalty clauses  be negotiated. For instance, a one-week dealy in shipment would trigger a 5 percent discount.

Mr Bellamy said intellectual property was now more respected in China. “But in China it is the first to register rather than the first to market,” he said. He said logistics and dispute resolution also needed to be covered. Mr Bellamy said he believed social compliance issues covering workers’ entitlements and conditions in China had improved.

The expo is at the Melbourne Exhibition Centre from Monday to Wednesday.

3 essential items when sourcing from China & elsewhere

3 essential items when sourcing from overseas

Excerpts from Smart Company’s interview of PassageMaker’s Mike Bellamy about sourcing from China.

Smart Co logo

PRC AUS flag and article header

Thanks to a massive improvement in quality, logistics and infrastructure over the past decade, it has become easier and easier for small businesses in Australia to expand beyond national borders and infiltrate huge consumer markets in purchasing powerhouses like China. However, it still can be a daunting task for small business owners to know where to start when it comes to getting their enterprises up and running outside of Australia. How do you choose the right suppliers? What countries offer the best quality and fabrics that you are looking for? How do you successfully communicate across language barriers?

Having worked with Australian customers for 15 years – at one stage they made up around 85% of my business – I’ve had the opportunity to observe first-hand the most common challenges small businesses have encountered when embarking on global expansion. Over the years I have developed a three-tiered approach, which I refer to as the ‘Holy Trinity’, for building a productive, mutually beneficial relationship with international suppliers to help take homegrown businesses to the world.

Mike Bellamy on Guanxi

I cannot express enough how important it is to build a strong, cohesive relationship with your international factories and suppliers; putting the human effort in is worth every cent. Mutual respect goes a long way and it’s vital for you to be regarded as a person, not just a purchase order number. I’ve found during my 20 years working as a Westerner in China that even the smallest things go a long way to developing ongoing, honest working relationships. It’s not necessarily all about learning to speak another language fluently or understanding all the cultural nuances; it’s about finding ways to connect and build a bond based on trust. Simple gestures like sending Christmas cards, encouraging your kids to be pen pals or visiting your factories in person are all great strategies for building on both your personal and professional relationship.

Mike Bellamy on Contracts

Small businesses can sometimes find the development and implementation of contracts overwhelming, especially when they face the challenge of communicating in a language (both figuratively and literally) that both parties can understand. Even if legal documents need to be bilingual, it is absolutely imperative to apply the common sense that you would use if you were doing the same type of business with an Australian company or supplier. Integrate simple and easy to understand clauses in all contractual agreements and if you’re working with China, ensure you register your intellectual property there before you even begin the sourcing process. Since the rise of the middle class and increase in China’s consumer market, there is a now a well-defined patent system in place that is cheaper and more streamlined than the domestic process. In fact, the most recent statistics from the World Intellectual Property organization show that 7% of international patents were filed in China.

Mike Bellamy on Supplier Verification

 When doing business at home, there is no way that you would commit your time and money to a supplier who hasn’t been validated and verified as operating within lawful industry parameters. In saying this, it is essential that when expanding your enterprise internationally you perform your due diligence and do your research just as you would at home. This can sometimes take weeks, or even months, but it can mean the difference between your business sinking or succeeding. The majority of companies and individuals who provide sourcing services or run a factory out of Asia are almost totally unregulated in terms of truth in advertising, codes of conduct and service standards.

Mike’s 10 quick tips for starting your international sourcing business:

  1. Know your product
  2. Understand where you want to sell it
  3. Establish access to the market that no one else has
  4. Ask yourself what is important to you as a buyer
  5. Think from the factory’s point-of-view
  6. Sell the factory on why they should work with you
  7. Structure payments to a supplier’s performance
  8. Request samples throughout the entire production process
  9. Manage your expectations
  10. If you find a good factory, hang onto them

Find the original article here.

Mike Bellamy is the founder of the PassageMaker Group and is an instructor at China Sourcing Academy. He will be presenting in-depth seminars at the upcoming International Sourcing Expo Australia in Melbourne.

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Interview with China Daily about challenges facing startups in China

Live interview with China Daily about challenges facing startups.

Watch PassageMaker’s live interview with China Daily about the opportunities and challenges facing startups in China.

China Daily Interview 2015

“China Daily launched a new program called “Tech China”. I was honored to be part of their first show. We covered tips and strategies for raising funds, protecting IP, dealing with suppliers, managing teams along with some general advice for people in the startup community of HK and S. China.” -PassageMaker’s Mike Bellamy

Here’s what Mike had to say:

China Daily has the widest print circulation of any English-language newspaper in China (over 200,000 copies per issue, of which a third are abroad). Mike Bellamy is the founder of the PassageMaker Group and is an instructor at China Sourcing Academy.

China Sourcing: Warranty Issues and Quality Systems

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Warranty Issues and Quality Systems

An importer of notebook computers and tablets writes in to get some advice on quality systems and warranty issues when buying from China.

I am currently importing from China and I am very interested in all that you have been teaching over at www.ChinaSourcingAcademy.com , now I would like to ask if PassageMaker provides certain premium services when it comes to linking warranty issues and quality issues altogether.

Assuming I use your service to import good to my country which is Malaysia, how will you deal with warranty issues? Let’s say for example if I were to buy 1000 tablets right now via your company and after having them shipped here, I realize that 2.5% of the goods are defective, how do I go about fixing this issue? Do you have any service which actually guarantees the quality of the goods or some sort of assurance that your clients get what they pay for?

I am actually thinking of buying tablets and other gadgets from China but the warranty issue does worry me a little as I have heard that factories don’t really accept the items back and even if they agreed to fix it, sending it back to them and spending all that money just for shipping the goods back would eat up most of my profits. I would like to know if you do have a solution to this and if so, I would love to use your services. Thank you, Mike.

Warranty Issues and Quality Systems

Yes, PassageMaker can help. We are a China sourcing agency that helps our clients find and manage vendors with particular attention to quality issues and warranty issues as you mention.

product certification and compliance in china 300x225

To be specific, outsourcing supply chain management is a service which includes a professional review of your agreements with suppliers to make sure you have clear QC standards and that the contracts protect you in terms of what happens if warranty issue arise due to non-confirming goods.

This service, for example, is designed to ensure non-confirming goods don’t get shipped.

Between those 2 services, you would be very safe. Fees are explained at the PDF download found here.

 Related Content for Warranty Issues and Quality Systems

Video 9: How to return defective merchandise to China

Do QC BEFORE the goods are loaded. Good luck sending defects back to China.

 

What is VAT rebate in China and how to negotiate a better price?

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VAT Rebate in China

Below is a typical discussions that happens when prospective clients contact PassageMaker for help clarifying the VAT rebates in hopes of negotiating a better price from their suppliers.

It starts with a simple question like “what is the VAT rebate rate in China on the products I am purchasing” but quickly moves to “how can I use this knowledge to negotiate a better price in China”.

We are always happy to help, and share the email below for your reference. While you probably aren’t in the shoe business, you may be thinking about similar issues. Hope you enjoy the blog post below and feel free to contact us if you would like more information.

Mike, Can you advise what the VAT rebate % is for footwear. If it is different for different types of footwear, please detail.

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I would be happy to have my staff look up footwear VAT rebate. I believe there may be different rates for different types of footwear. Do you happen to know the HS codes of the products you would like me to look up? That would help a lot. If not, send me a picture and description and I will have my team look up the HS code and then dig up the VAT rate for that code.

Our products fit into the 6402, 6403, 6404, 6405 HTS codes. We primarily do Winter boots in leather or synthetic, we do rubber boots, and we do sandals and shoes in leather and synthetic. so basically we cover most of the footwear categories

Good news. They are all the same VAT rebate. 15%.

If I could impose on you again to clarify something. Is the 15% rebate based on the invoice price, in which case you get back 15/17ths of what you paid ( almost the whole amount ) or is it based on 15% of the VAT that you pay within your invoice price, which is a much lesser amount.

Example:

The factory invoices our agent for $18.34 per pair. Assuming that includes VAT, the VAT included is $2.66. Is the export rebate $2.35 ( 15/17ths of $2.66) or $0.40 ( 15% of $2.66 )

Excellent question. That would be the logical way to do it. But it is a bit more tricky in China and there are lots of variables and assumptions. But for the sake of giving you a feel for how it works, and assuming the price paid to the supplier includes proper VAT-paid invoice (essential for the formula to work), then if you paid 1 RMB (inclusive of tax) your VAT rebate at export (assuming 15% rebate rate in your products case) would be 0.128

First step: calculate the price before VAT (1 RMB / 1.17) = 0.8547

Second: apply the rebate rate to that price 0.8547 X .15= .128

Those are the broad strokes.

We have found out that most of the factories we deal with have an import/export licence. We conclude that they are invoicing our agent at their Hong Kong address, and therefore they are collecting the export rebate from the China Govt. because they are the official exporter out of China. If that is the case, we have to think about how we approach them regarding our pricing, especially if it is the higher of the 2 amounts in the example

Yes, it is very wise to understand how VAT plays a role in your supply chain. As mentioned in a previous email, you may be able to save time and frustration if you engage PassageMaker to get some competitive quotes and do a VAT survey to see if you are being respected by your current partners. This can be done without making it public who is asking.

China Sourcing – Broken Down Into Straight Up, Actionable Advice

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An informal one-on-one talk about China business adventures

My good friend, and serial entrepreneur, Mike Michelini is the host of the fun, information and informative “Global From Asia” podcast “where the daunting task of running an international business is broken down into straight up, actionable advice”.

For episode 71 of the podcast, we sat down for a 40 minute exchange of China business stories and advice.

Here is the link:

http://www.globalfromasia.com/how-to-avoid-being-trapped-in-a-chinese-factory-scam-order/

mike bellamy globalfromasia podcast2 v3

Topics Covered:

  • What brought you out to China in the beginning?
  • Today’s topic – China Sourcing Due Diligence Tactics, Can’t think of anyone with more experience than you
  • Can you share with us various types of China sourcing – wholesale/ off the shelf, tweaked versions of pre-existing products, and fully customized
  • Let’s focus on fully customized today – What are some MOQ amounts normally required to do these?
  • What are the other costs many also don’t factor in that are essential
  • I remember you mentioning you have worked with some Kickstarter projects and other crowdfunding projects – what is the normal process for these guys – should they start to source from China before they list on Kickstarter, or when funded, prototype? any tips?
  • Process of narrowing down the overwhelming list of suppliers in your hunt for the right Chinese factory and supplier relationship?
  • Ways to show you are serious buyer to a Chinese manufacturer
  • Some “buzzwords” or keywords you should know when talking to a factory- FOB, EXW, etc
  • Last tips or things I missed for buyers venturing into China for their procurement

China sourcing: Rising costs & payment issues (an insider’s look)

China Sourcing Rising costs & payment issues (an insider's look)

I recently had an interview about China sourcing with a reporter from Thomson Reuters. Here are some excerpts on the following topics:

  1. Impact of economic slowdown
  2. Rising costs in China
  3. Payment issues between US buyers and Chinese sellers
  4. What leverage do sellers have? (in this section I explain the twisted logic of why sellers ship defects on purpose!)

Q: What impact has the economic slowdown had on US buyer/ China manufacturing relations?

Before the global financial crisis (GFC), simply being an American was enough to get the sellers excited about doing business with you. The US economy was strong and Chinese factories wanted to work with you to get orders flowing to the USA. It’s very different now for the typical small to medium US buyer. You have to “sell the seller”. What I mean is that you need to make a case for why you will be a good customer. Can’t just contact 5 factories online and say “give me your best price and quality”. 4 out of 5 may not even respond, unless you order is really big. I’m not saying you should inflate your potential order or trick the suppliers into thinking you are a bigger buyer than you really are…I’m just saying you need to show a vision for your business and find the right supplier that shares your vision.

It’s not just the lame global economy, it’s also the rising costs of doing business in China that are causing headaches when Sourcing from China.

Quality Fade: when tight margins encourage cutting corners

As margins get tighter, some suppliers may be tempted to cut corners with quality or ignore intellectual property. For example, you may have heard the term “quality fade”. This is where you have a few orders that meet your specs, then all of the sudden the next order has a bunch of defects. The buyer is thinking, OK, first 2 orders went well, 3rd should be ok too, right. Nope, because of the price pressure, the supplier may try to find hidden ways to make more margin. This means having a plan for independent QC is essential.

Where is the “next China”?

But it’s not like there is a “new China” in another part of the world ready to be the low cost alternative to China. Yes, low end products that have a high labor content (t-shirts and socks) are moving to places like Vietnam and Bangladesh, but when we talk about higher value products like electronics, there is no real alternative to China because China has the reliable infrastructure and proven supplier base. So the secret of successful sourcing, even in this economic slowdown is to find the right supplier (that is a good fit for your needs) and be diligent in watching the quality. That means doing the due diligence to meet with these suppliers in person, check references, run some test orders, get the engineering done to ensure your specs are very clear, setting up a plan to monitor the quality….all these things add to the bottom line, but not doing them could put you out of business. Imagine getting a truck load of defective products! So if you are sitting here saying, I don’t have the time or money to make a trip to China, or I don’t have a few 100 bucks to hire an agent or inspection company to check out my products…then you really shouldn’t be sourcing from China.

Q: How is payment between a Chinese manufacturer and a US purchaser usually structured?

It depends on purchase volume and relationship between buyer and seller.

For example, if you are a small buyer (10 tablet computers) you may be asked to pay up front. If you’re a really large buyer, you have the leverage to get terms. For example, some of my larger clients who buy millions of USD per month, get 90 day terms from the suppliers. Preferential terms are not given easily, regardless of your size. So if you pay on time, are a good client for the seller, I suggest you lay out a road map for getting better and better terms. Something like: “OK Mr. Li, this order is 50-50 as you requested, but assuming I pay on time and order X units each month as planned, I want to move to 25-75 then 25-75 next 15 then 25-75 next 60….”

Q: What action can a Chinese firm take if a US purchaser does not pay on time?

Not much. Unless the order is very large and a good contract is in place, it is just not economically viable for the Chinese side to fight a court case in the USA. Because the suppliers don’t have much leverage once the goods have left China, naturally they try to protect themselves and get as much payment in advance of ship date as possible. At PassageMaker we solve this problem by using our assembly/warehouse in China as a quality and payment gate in a way that benefits both the seller and the buyer. Because the seller gets paid before the goods leave China (after the independent QC check by PassageMaker) they are happy. Buyer is happy because they have the quality confirmed by us BEFORE payment is transferred to seller. So both sides are being safe.

Why some suppliers ship defects on purpose

Let’s say you don’t have an independent quality gate in place. Here is an example of a dirty trick suppliers pull and during my almost 20 years living in China, I’ve seen quite a few tricks the suppliers try to pull.

Because the margins are tight, the seller wants to lock in the buyer for multiple orders. Of course, the buyer won’t promise to place additional orders until the first orders arrive. Too many buyers forgot to have clear terms in the PO/Contract about how defects will be handled. Sellers can exploit this to their advantage in the following way:

When seller ships out the order, their “makes an error” and under-ship the number of units and/or they makes sure a certain percentage are defects. Since the buyer didn’t clarify what happens in the event of defects or under-shipment, the seller is now in the driver’s seat. Mr. Li will say “sorry for the defects, it was a mistake, won’t happen again, we’ll give you replacement products on the next order”. That’s how the seller gets locked in!

It’s easy to avoid this kind of drama.

  1. Have a well written, bi-lingual contract, under official chop. A custom contract can be done up by an English speaking Chinese lawyer for just a few 100 USD. So in my opinion, a buyer is just plain crazy to skip this important step.
  2. Apply a level of independent QC at the factory or consider having the product inspected 100% at an assembly/inspection facility.