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Great China sourcing content worth reading from June 2012

Great China sourcing content worth reading

Here is a list of the most popular pieces of content from the China Sourcing Information Center. Much of the content below was created by PassageMaker staff who volunteer at the CSIC.

 

Best of CSIC 5.22.2012 to 6.22.2012

1. “ask the experts”

Poor Quality Goods Already Delivered. What to do?

Dilemma of a start-up buyer

Contact for English Speaking Chinese Lawyer

Why some buyers get good quality and others don’t

Bought phone, missing IMEI number…was I scammed?

Importing luxury cars from China

My Supplier Did Me Wrong

Finding Chinese Investors

Small Buyer Beware

How am I to understand if the supplier is reliable or not?

2. “general articles”

Piggy Back on the Brands You Love (and your competition!) to Find Great Suppliers

Asia Sourcing: Future Trends & Models

3. “videos of the month”

Common Mistake #3: Failure to audit the factory/ Falling for the golden sample (Updated for 2012)

Common Mistake #8: Arm’s Length Buying (Updated for 2012)

Bonus Footage: Q&A session from the “10 Common Mistakes” April 2012 seminar

Buying from China: What New Buyers Need to Know

4. “White Paper of the month”

(not posted this month)

5. Mike’s China Sourcing Blog

Summer Blackouts: How you and your factory can get ready

Due Diligence and Verification

Not in my bed room!

Insider’s look at Alibaba Inspection Services

Why set up a HK buying office?

6. Sophie’s China Law Blog

China Business Operations: information that you need to know. (Part 1)

How to set up a New Business?

How to choose the China business’ structure? (Part 4 of 4)

How to choose the China business’ structure? (Part 3)

Great China sourcing content worth reading from May 2012

Great China sourcing content worth reading

Here is a list of the most popular pieces of content from the China Sourcing Information Center. Much of the content below was created by PassageMaker staff who volunteer at the CSIC.

 

Best of CSIC 4.24.2012 to 5.21.2012

“ask the experts”

Tips for Selecting a 3rd Party Service Provider

Learning materials to help get ready for China sourcing

One Stop Shops vs. Industry Specialists

Problems with unauthorized gray channel imports

What is the normal practice for requesting samples from manufacturers in China?

Clarifying the VAT impact

What needs to be marked “Made in China”?

“general articles”

Subcontracting by suppliers: Buyer beware!

Made-in-China: Quality and cultural divergences

“videos of the month”

10 Common Mistakes – Q&A

Common Mistake #10: ‘Not knowing which functions to outsource and which ones to keep in house’

“White Paper of the month”

The Facts about Production Costs in China

Mike’s China Sourcing Blog

trade friction: now even the kitchen sink affected

RMB’s exchange rate more flexible. Your risk just doubled. What to do?

Sourcing expert gets the smack down from a QC expert

More free resources: business guide to China’s provinces

Sophie’s China Law Blog

How to choose the China business’ structure?

Chinese-Foreign Lawsuits on the rise in China

China sourcing: Best of CSIC for April 2012

Great China sourcing content worth reading

PassageMaker is a proud sponsor of the not-for-profit China Sourcing Information Center. The CSIC in conjunction with PassageMaker offers a range of free educations resources to international buyers. Here are links to the “best of” CSIC content for this month. Enjoy!

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

What the depreciating RMB means for your business.

rmb usd

For the first time since I can remember, the RMB (AKA Chinese Yuan or CNY) didn’tappreciate today.

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.

rmb usd

But things are different now.

Yes, in the past there have been times when it didn’t move much- like when Beijing held the exchange rate in a very tight band during the Global Financial Crisis. But today is the first time in my memory, where the headlines (here are pointing out that the RMB actually depreciated in some markets.

Domestic and external conditions for yuan appreciation have changed dramatically compared with the past 10 years, leaving more room for two-way yuan fluctuation, instead of only appreciation.

What is the central government saying?

The real effective exchange rate of Renminbi may have reached its equilibrious level after rising by 30 percent since China launched the exchange rate reform in 2005, Chinese Premier Wen Jiabao said Wednesday.

Why should I care?

As buyers, a weak RMB is good for us, so let’s keep our fingers crossed that the RMB stays where it is or gets slightly weaker in the short and medium term.

Wishing you successful China sourcing!

References/Related:

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

Heavy hitters weigh in on future of China Sourcing

What lawn mowing methods tell us about the costs of labor in China

Contract manufacturing in China: Fight gray channel imports!

Contract manufacturing in China Fight gray channel imports

The following is a case study on how to protect your brand and prevent gray channels out of China from cannibalizing your markets.

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: Contract manufacturing in China

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 3rd party facility in China to avoid unauthorized production. (Visit  “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)

VAT rebate in China: Buyers, save more!

VAT rebate in China Buyers save more

China Daily ran an interesting article with the headlines “Export tax rebates will be increased this year in response to an export decline triggered by the European debt crisis”. Below are highlights from the article with my clarifications on how these items affect buyers and how we can take advantage of this opportunity.

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 VAT rebate in China works.

“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.

PassageMaker helps orphaned and abandoned children 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.

VAT rebate in China: Reclaim on sales to China?

VAT rebate in China Reclaim on sales to China

Jose wrote in with and interesting question about how the VAT rebate in China is processed on goods that are imported into the mainland. My focus is on exporting out of China, but as I deal in VAT everyday, I offered the following comments to Jose. I welcome feedback to confirm if my assessment is accurate.

Jose writes:

I would like to import China Espresso Making machines and Coffee from Italy.
Can your office provide import agent and logistics services?
My main question that I would like to ask of you is that when the Import Duty and the VAT is paid during the importation process at what point if any can I get a VAT Rebate?
I have been informed that I can get a VAT Rebate when the product is sold in the Chinese market, Is that correct? Please, help me clarify this point. Thank you in advance for your assistance.

My response:

While our niche at PassageMaker is helping buyers source products from China, our import-export license can be used to import products into China and manage the logistics. Can you give me some idea as to the scale of your coffee project (for example, do you already have buyers and steady orders, or just getting started?) and I would be happy to put the right person in touch with you from my organization to talk about how we can be of service.

Regarding the VAT, you are correct that import duty and VAT is paid upon importation into China. I am afraid that whoever told you that you can get a VAT rebate when the products are sold in China did not give accurate advice. But China is a big place and the laws change, so perhaps the person that gave you that advice knows something that I don’t. The following is my understanding, but if your advisor knows different, please let me know as I too would like to stay up to date.

As I understand it, the VAT rebate is applied for when good leave China. For example, if you were a China based legal entity (fully licensed to do trading and process VAT) and imported coffee and machines into China from your supplier in Italy, then sold the items to buyers outside of China, then MAYBE there could be some VAT rebate. But in the situation you describe above where you are selling to the China market for end use in China, there is no VAT rebate that I am aware of.

Understanding VAT in China: Today’s perspective on the 2007 changes

Understanding VAT in China Today's perspective on the 2007 changes

Douglas in the USA wrote in with the following question:

“I’m having a little difficulty understanding VAT in China and which products are eligible for VAT rebate. In 2007 there were a lot of products who’s VAT rebate was changed. Is there somewhere where I could find this list to see which VAT rebates at export from China were reduced?”

I can get the list of the 2831 items in Chinese, but I have not found it in English yet. But to help answer your question, here are the key items to keep in mind when looking back at the 2007 VAT rebate change.

1. The big announcement in 2007 was known as “Circular 90” and affected (reduced or eliminated VAT rebate) on 2,831 types of items in the following areas:

  • Garment and textile articles
  • Electrical and mechanic appliances
  • Construction materials
  • Base metals, minerals and their products
  • Chemical products
  • Animal and vegetable products

2. The items above were considered “un desirable” by Beijing because they were high-energy consuming or had pollution issues. Also the very low tech industries got squeezed as China hoped to use the VAT restructure to encourage businesses to move up the value chain.

3. Soon after Circular 90 went into effect, the Global Financial Crisis hit and in order to stimulate exports in a slow global economy, Beijing backtracked on some of the 2007 adjustments made to the VAT rebate system.

4. In 2010, there was another round of changes but not as sweeping as 2007.

5. So if you desire to know “what is the VAT rebate rate on a given HS code at present”, you can’t assume that the 2007 rate is still in place today. If you have some specific HS codes, I would be happy to look them up for you.

New 3D Printing vs. Old School Production for Sample Making in China

New 3D Printing vs. Old School Production for Sample Making in China

PassageMaker’s Whit and David are product development gurus who keep an eye out for the next big thing to reshape manufacturing. They recently sent me the following links about 3D printing which caught my attention.

http://youtu.be/ZboxMsSz5Aw shows how a fully functional tool with internal moving parts of different colors is created via a printer!

If you like that you will love that a company in Italy has built a machine that can print a house using a sandstone slurry like concrete but much finer. They can print pipes, conduits and ducts into the walls, any shape you like. http://www.popsci.com/scitech/article/2009-06/print-out-your-next-building

A dose of reality

Let’s say you are making a plastic widget and you need 10 samples to test before you move to full production. Yes, 3D printing has the capability to revolutionize manufacturing and I would love to have one around my shop for rapid prototyping. BUT for the moment (next 5 years at least, I suspect?) the cost of such technology is prohibitive. Especially when you compare it against the cost of opening a set injection plastic tools in China.

Until 3D printers are as common as the office Xerox machine, the following options may get the job done:

  1. Machine down a block of material into the shape you desire.
  2. Open tooling using “soft” metal. The tooling will wear out early, but if you are just conducting sample making in China and just want a small test run, this option may be economical.
  3. The original 3D printer: Stereolithography

In my experience, often the costs of doing #1 or #2 in China is less than paying for time on a Stereolithography in the USA.

Keep your eyes open for new technologies, but don’t forget about simple and affordable “old school” ways to make your samples and short production run parts!