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Import from China: What You Must Know to Ensure Success

February 2, 2011 Leave a comment

By Sara Cheng

China has been the obvious procurement destination in the past 2 decades. However, import from China is not always a happy story. Foreign businesses must bear in mind some must-knows and take necessary actions before and /or when sourcing from China:

 Check local import tariff and other trade barriers such as quality standard and international certification requirement for import from China. With rising trade protectionism globally, it is highly recommended companies do a careful cost and benefit analysis before looking at the import option. High import tariff and other trade barriers may eat up all potential profit gained from import. Also CE, UL or other accreditation and/or requirement on manufacturers may apply for certain products.

 Decide on going directly to manufacturers or dealing with trading agents. Though buying directly from Chinese manufactures may secure a better profit margin and ensure direct communications with suppliers, lots of established Chinese exporters operate on a large manufacturing scale and are mostly committed to mass production and “big” orders. Hence, it may be worth going to a trading agent who can combine small orders, secure a better deal and conduct pre-shipment inspection.

 Qualify suppliers before you place orders. China has an old term “suitcase company” which refers to one-man-band companies and in some cases scammers. Today there are still suitcase companies under the cover of glamorous corporate websites. Hence a background check on the company’s legitimate status is a must before you place your 1st order to the Chinese company. China does not have a central point where people can check scammers or legitimate status of all businesses, which makes it difficult for foreign companies to do background check. However, a general online search and research may serve as a starting point, or for high value orders you may hire a consulting firm to conduct a due diligence on the target Chinese companies.

 Understand Chinese manufacturers and negotiate a win-win deal. China is a competitive manufacturing base. In most cases, export-oriented manufacturers do not have a big profit margin but live on the mere margin gained from returned VAT for goods export. If foreign buyers do not understand the situation and bargain too much, they may end up buying products of crap quality if the Chinese manufacturers do not want to lose orders to their competitors and hence have to compromise quality to gain a reasonable profit margin for themselves.

 Communicate with Chinese manufacturers/suppliers on your product requirement again and again, and then check, check, check. Chinese companies may not fully understand the product functions, quality requirements and life styles in western countries and hence may manufacture “good” products to their satisfaction but not to your standard. To avoid this, you cannot just check samples, but need to conduct pre-shipment inspection, especially for the 1st order. You may consider engaging local agents or production inspection organizations for the pre-shipment inspection.

 Ensure a safe term of payment. Chinese manufactures usually accept 30% deposit and 70% upon shipment for a 1st order. However, this is a risky term of payment for buyers as it is based on commercial credibility rather than stringent 3rd party guarantee. Letter of Credit is a better guarantee for buyers as well as a fair term of payment for sellers.

 Protect your intellectual property and don’t make your suppliers your potential competitors. To guarantee quality, many western buyers generously pass on their technology know-how to their manufacturing partners in China, with little consideration of the potential risk of losing intellectual property and nurturing potential competitors in the global market. Hence companies need to put an IP protection mechanism in place both legally and commercially, which is far more complex than just having patent and trademark registered in China. Companies need commercial advice from China business experts to build a robust commercial mechanism to protect IP proactively.

 Acknowledge Chinese cultural nuances and build a long term partnership. China is a nation full of “guanxi” (relationship), self-pride (especially with China’s rising economic power in the global market) and social functions. Westerners doing business in China usually find themselves exhausted with after-work dinners, saunas, and patting on each other’s shoulders while calling them brothers and sisters. As the saying goes “when you are in Rome, do as Romans do”, to fit into the business environment in China and establish long term partnerships with Chinese suppliers, westerners have to understand and acknowledge these Chinese cultural nuances, though they do not need to give up their western cultural identity. Chinese appreciate foreigners who can say a few Chinese words, enjoy “ganbei” (bottom up when drinking) and quote a line of an ancient Chinese poem.

 Consider a phasing strategy and other models to source from China. Foreign companies have many an option to source from China: source through agents, import from manufacturers directly or set up an on-the-ground procurement centre in China. A popular model is for the overseas headquarters to import from Chinese manufacturers directly at the initial stage and then move on to set up their own sourcing offices in China at a later stage.

 Have a contingency plan and back-up suppliers. Never reply on a single supplier in China. Things may go wrong with the suppliers or the partnerships. With back-up suppliers, you have more stable supply and stronger bargaining power as well.

Import/sourcing from China is in most cases a complicated task. It is highly recommended that, before taking actions to source from China, businesses develop a clear sourcing strategy by mapping its business strategy, resources and market condition, and then do homework to identify competent and committed suppliers/manufacturing partners.

For more information or assistance with import from China, plesae contact Sara Cheng

How to Speed Up Your China Business ?

December 21, 2010 Leave a comment

 

Having assisted many Australian companies to do business with China, I identified a few must- have attributes of companies doing business successfully with China.

First, these companies objectively assess their unique sustainable competitive advantage in the Chinese market, smartly dodge head-on competition through differentiation, and target the right market where there is a gap they can fill or which appreciates their unique selling points such as advanced technology, unique product functions or green image, etc.

Second, these companies may have ambitious long-term plan for China but adopt a focus strategy at the initial stage. Focus, focus, focus. They focus on the opportunities in their target niche market and not be a by the huge scale and diversities of China; they focus on key contacts and are not immersed by the cultural nuances; and they focus and devote resources to result-oriented activities. With this strategy, companies are able to use limited resources efficiently and achieve cash flower quicker to subsidize the expansion plan at next stage.

Third, they find and leverage external complementary skills and resources to speed up the market expansion in China. They leverage established and committed distributors’ existing networks to tap into the China market; they hire Chinese managers or China business consultants to gain China market insight and capabilities to handle various tough situations in China; and they leverage joint venture partners’ financial resources to upscale their operation in China.

Fourth, these companies are flexible, nimble and quick to the changes in the Chinese market. Things which may take 5 years to happen in a mature western economy may get done in the Socialist Free Market in China within a year. Successful companies do not wait and see, but quickly navigate through the complicated Chinese market to grasp the opportunities.

Last but perhaps most importantly, these companies understand the drivers in the Chinese social, political and economic environment, understand the game rule and know the little things which make a big difference. Reading The Art of War, appreciating Chinese traditional paintings, being able to greet with a few Mandarin words and reciting a line of Chinese poem will be an absolute plus to glue relationships in China. While face and Guanxi (relationship) are must-knows, lots of successful companies even go the extra miles to further learn and grasp the fundamental philosophies mainstreams in China believe and appreciate. They are more like insiders and adapt their strategy to work more efficiently and effectively in China.

Strategies and Methods to Protect Intellectural Property in China

December 13, 2010 2 comments

I recently presented on IP protection in China at a business conference. Here are my notes on some strategies and methods I used as a reference at the presentation, which might be useful for those who are seeking commercial mechanism rather than legal actions to protect IP in China.

 Large companies: Being an industry leader and one-stop solution provider:
-Keep innovating to keep a leading position in the industry. It is a costly approach and work well with large companies;
-Bundle core products/services with non-core but related products/services so that you offer a one stop solution or a whole package for your customers. The demand for your core products/services will drive the growth for non-core business, as your customer will find switching cost or operation cost is to high if they use your core services while using someone else other services.
-Also you may charge for the products/services which are hard to be copied while providing for free other products/services which could be easily copied so that you will take all the market shares your IP infringer may get;
-Build the IP protection in the R& D or product development phase;
-Get involved in the process in industry standard or quality standard development and drafting. Chinese companies are most good at this to protect their IP and monopolize the market.

Vertical integration or horizontal integration: backward acquire your supplier to control the core knowhow or forward integrate with your clients to share risks and cost and better control your IP; or alternatively you enter related industry sectors by acquiring or being partially acquired so you provide a broader range of related products and services to lock in your customers and hence protect your IP;
Target the “right” market, .e.g Microsoft China focused on the market segments which are so concerned about their brand, legal position and market image and also those who could be easily tracked, such as Fortune 500’s subsidies, large Chinese private companies and Chinese government-owned enterprises.
Technical ways, such as dingo for software, online service delivery rather than providing it in the form of softcopy;
Internal IP protection through technical methods:
-Track your sales by offer free membership and free complementary services to your clients so they will not switch to others while you can track your sales and market;
-Firewall, monitoring of emails, back up of materials, etc;
-Leverage media especially online monitoring by brand promotion, online forums, blogs etc.
-Give incentives and retain your key staff who mater your core knowhow;
Protect IP from your stakeholders and Build a network of stakeholders who assist you to protect IP

-In lots of cases, your clients or suppliers are IP infringers so put certain terms and conditions in your contract with them to protect your IP or at least warn them the potential penalty of IP infringement;
-Sharing some knowledge while keeping the core knowhow so rather than taking the risk to infringe IP, potential IP infringers will focus on maximising the benefits as a “peripheral” partner. Microsoft adopted this approach;
-Leverage stakeholders such as clients, suppliers, media, end customers etc to monitor the market and potential IP infringement.
-Get more people to work with you on your IP protection by licensing the IPs or more creative way mutual licensing or multi-cross licensing so you work with a network of organizations to protect and benefit from each others’ IP.
Focusing and giving strategy:
-Look at the cycle of your products and services. If it is at the later stage of product cycle, you may consider the option to share the knowledge for free to beat the market share your IP infringers may get, and hence reduce their profit margins and dampen financial viabilities;
-Last but not least, if you have limited resources, focus on IP protection of your core technology knowhow or in the most important market, the one which you are most advanced, which is hard to be copied and which you can get the best profit margin.

Sara’s Presentation on Models for Outsourcing to China

December 9, 2010 Leave a comment

Must Knows about Outsourcing Manufacturing to China

September 16, 2010 Leave a comment

Are you considering outsourcing your manufacturing to China?

Before deciding, you need to:

  • assess the outsourcing opportunity
  • select manufacturing partners
  • protect your intellectual property
  • guarantee quality supply and,
  • secure a long-term commitment from your manufacturing partners?

You also need to consider the following:

Take a strategic approach

Outsourcing your manufacturing should be a strategic decision to enhance your international competency and create scales of economy so that you can harness your financial and human capital to concentrate on your core business and its competitive advantage.

Before making the decision to outsource you need to:

  • Determine the costs of outsourcing vs. in-house production / product purchasing
  • Assess your corporate goals when it comes to ownership, strategic fit, core competency, expansion plans, long term vision and business strategy
  • Look closely at your operations in particular performance controls, logistics, IP protection, what to outsource
  • Review your organisation and how outsourcing will affect your control, management efficiency, staff issues.
  • Choose the right cooperation model

Here are some options:

  • Buyer-OEM manufacturer: you simply outsource manufacturing to the manufacturer.
  • Strategic alliance: through commercial arrangement, you and your manufacturing partner share the production risks and profits.
  • Joint-venture: set up a contractual or equity joint venture with your manufacturing partner in China. Hence you partially own the manufacturer to better manage the manufacturing overseas.
  • Build a robust outsourcing contract
  • Contracts are crucial and need to be scrutinised.
  • Terms of payment: most popular terms include L/C, bank guarantee, D/A, D/P, down payment plus L/C or D/A or D/P. Letter of credit is a comparatively safer and fair term to start with.
  • Specify the requirements for quality and inspection authority: Chinese government agency conducts pre-shipment inspection by random sampling. However, many companies prefer to outsource to SGS or other third parties to conduct pre-shipment inspection on their behalf.
  • Legal arrangements for disputes: include in the contract the clause that International Chamber of Commerce rather than local industry bodies or government agencies in China will be the arbitrator in case of any disputes.

Protect your intellectual property!

  • Don’t rely on legal actions on IP to work for you in China! Be proactive and protective:
  • Keep core products/technology manufactured in-house.
  • Position your self as leading innovator and brand. Keep ahead of your competitors in technology.
  • Split manufacturing tasks to 2 or 3 un-related manufactures in China. Have a back up for each current manufacturing partner.
  • IP registration in a country rather than China does not mean you are automatically registered with China. Register your patent, copyright, design and trademark in China.
  • Invest in un-tangible assets: brand, business process, people and corporate culture.

Don’t compromise product quality

It’s common sense but lots of companies don’t apply for it: Put your QA system into place. The manufacturer manufactures for you and is supposed to do it to your standard. Ask yourself: does their QA meet your requirement? You need to have your own quality assurance system in place to monitor the manufacturing and conduct pre-shipment inspection. Fortunately, it may not be as expensive as you assume. Get a local QA service provider monitor your manufacturing partner on your behalf today.

Above all, be committed!

It’s common sense and here are some tips:

  • Conduct due diligence on manufacturing partners
  • Update information on the partners, competitors and the industry
  • Visit China and review situation often
  • Maintain your manufacturing partners’ commitment through frequent communication, profits/benefits sharing and steadily growing orders
  • Look for complementary resources and create synergies
  • Seek win-win solutions
  • Take advantage of the partner’s complementary resources
  • Maintain your own competitive advantage
  • Seek to evolve the relationship
  • Drive long-term strategy and growth

Engage China

September 16, 2010 Leave a comment

With the pace and dynamism of its growth and development, China today presents a good test bed for studying business performance. Despite the global economic crisis and come formidable internal challenges to growth, China has so far proven remarkably resilient. It seems that the force of China’s demand during its epoch making transformation into a modern industrialised economy will be a key source of world economic growth for decades to come. China has and will continue to have a profound impact on Australia, given Australia’s resources base and its small market influenced by global trends and shifts in world production patterns. Australia’s growth is likely to be tightly coupled with China’s. It is important to understand the most effective models of business engagement with China that can enhance Australia’s competitiveness and prosperity.

With this backdrop, the Australian Business Foundation undertook a study examining the current realities for Australian firms doing business with China. I was fortunate to work together with other three authors on the book, be responsible for the analysis of findings from 25 in-depth case studies and also contribute to the insight and conclusion of this study.

The experiences of the case study participants highlight the following significant issues impacting on business performance for Australian enterprises in China. They cover factors impacting the business environment in China, the management and operations for the business themselves and the nature of business opportunities and strategies.

Key findings are summaries as follows:

Business Environment : three issues stand out – culture, relationships and government.

• Culture saturates all aspects of business engagement in China at a level, depth and saturation point that is different from other markets. The cultural dimension is central to the execution of the business strategy and to achieving a return on investment in China.

• The importance of relationships is at the heart of Chinese culture. This is the concept of “guanxi” which literally means “relationship”. Relationships have primacy over rules. Unlike in Western culture, the social relationship more often than not precedes the commercial relationship. Demonstrating commitment and establishing trust happens first; only then moving onto business formalities likes contracts and agreements.

• Government means business in China. Governments administer and regulate almost all areas of China’s commercial environment, but their role and how the rules are applied are not always detailed, documented and transparent. This can be a constraint to business. But equally government can be instrumental in business growth, e.g. some case study companies aligned their business strategies with helping government achieve national priorities for technological innovation or training in new skills.

Business Operations: the study produced insights about key features of business operations in China, covering skills, quality, finances, intellectual property, communications, partners and customers, as follows:

• Talent and Skills: There is an indispensible need for the right mix of skills and for the local Chinese manager.

• Quality: Managing quality issues in China requires understanding of the trade-offs between quality and cost often implicit in the approach of many Chinese partners and suppliers. As perceptions and appreciation of the value of quality can differ between China and Australia, it is vital to communicate clearly about quality requirements and to manage expectations.

• Finance: China needs the usual due diligence to ensure the smooth operations of financial and banking transactions, including companies getting paid and being able to repatriate profits.

• Intellectual Property: Minimize intellectual property infringement by being a market leader and competing on design and innovation. This is a more effective alternative to legal redress.

• Communication: Effective communication is a vital tool of trade, not only for managing people in the business, but for productive relationships with suppliers, customers, and partners. It goes beyond access to specialist and competent language and translation services to understanding the social and cultural context of doing business.

• Partners: selecting the right partner is essential and challenging. It requires investment of time and due diligence to ensure that partners are legitimate and compatible with the business.

• Customers and Clients: Selecting the right customer is as crucial as selecting the right partner. Unlike in Western consumer markets where traditional customer segmentation and marketing campaigns are the norm, in China customers are often found through relationships and connections, both internal and external to the company.

Business Opportunities :Insights from the study questioned stereotypes about both manufacturing and services and produced some common threads on the business strategies that drive success.

• Manufacturing: While cost considerations are important, manufacturers are in China for other strategies advantages, not just low cost. Manufacturers are going to China to seek new customers as the Australian market matures, to source products at the right quality and price points, or in response to structural change in their industry as a result of globalization.

• Services: Services are an important and growing part of the Australian export success story, but are often unrecognized and overshadowed by large trade volumes in other sectors like resources. Many Australian service companies are proving themselves capable competitors in China. They have pioneered successful strategic alliances with Chinese partners, positioned their business offerings to align with and support China’s national priorities, and secured first mover advantage by adapting Western concepts of quality and standards to the needs of Chinese end-users. These are potential competitive opportunities for Australia to expand on in its future business engagement with China.

• Strategy: The following success factors are common threads in business strategy proving effective in Chinese markets:

– Engagement in the Chinese market is for the long-term. It requires a strategy for persistence and resilience in the face of potential problems and failures.

– Business strategies need to be focused, whether on a specific region, specialisation or niche business offering. This is vital to avoid being caught in the headlights of the Chinese market’s diversity and huge potential.

– If adopting a strategy as a niche player, make sure that the business offering is ‘best of breed’ with the specialist expertise and value to perform better than competitors.

– Agility, adaptability and an exceptional ability to learn, together with a tailored and well informed business plan, are mission-critical to successful business strategies for both large and small enterprises.

Overall, the main insight from the experiences reported by Australian businesses in China is that success comes from capitalizing on China’s massive change, diversity and scale with agility and fast learning. In particular:

• Whatever the particular business approach, enterprises must be able to deal with cultural differences, relationships and an ambiguous, complex and volatile environment.

• Enterprises must also provide ‘best of breed’ business offerings that are capably and efficiently managed and that present real value to Chinese customers and clients.

• Enterprises must be adaptable, but simultaneously, they must operate to their own well-informed business strategy and put in place all the fundamentals of doing business – operations, sales, management and finances. This makes it more likely that enterprises can secure a return from China’s substantial and growing demand and opportunities.

If you have any feedbacks or issues/questions in regard to doing business with China, please send your feedback/request to Sara Cheng, Manager-Greater China, Australian Business .

Email: sara.cheng@australianbusiness.com.au

Checklist for due diligence on Chinese Manufacturers / Suppliers

September 16, 2010 Leave a comment

China has been labelled as the World Factory for more than a decade. Whatever you can think of, it is most likely that you can find it being manufactured in China. Moreover, Internet provides a perfect tool to identify a long list of self-claimed Chinese manufacturers with decent websites in a second. However, foreign companies sometimes find themselves lost in a vast sea of choices, end up with fault products imported from China or work with a “suitcase” company- a Chinese term to describe fraudulent/fake businesses.

The key word is qualifying. Conduct due diligence on your Chinese manufacturing partners/suppliers before you sign the contract.

Here are some factors you must include in your due diligence on Chinese manufacturers / suppliers:

  • Is the business a genuine business? Obtain copy of their business licence and, if possible, check with local Commerce and Industry Administration Bureau on the legitimacy of the Chinese business.
  • Is the business a manufacturer? Smart Chinese middlemen understand you would like to cut down cost and go directly to manufacturers. Hence they may work on a manufacturing site picture, put it on their websites and claim they are manufacturing what you need. Again obtain the copy of their business licence to check their business scope and/or investigate with local government agencies/industry bodies directly or through China business consultant.
  • Does the Chinese manufacturer have surplus manufacturing capacity and capabilities to meet your current and potentially growing demand? Check with the staff of the company on their manufacturing capabilities. If you are placing big orders and/or look at working with a long-term manufacturing partner, it is worth visiting the Chinese manufacturers to better assess their manufacturing capabilities.
  • Does the Chinese manufacturer have quality control system in place? Do they have an international quality accreditation? Obtain a copy and check with the authorization organization.
  • Is the Chinese manufacturer a reputable business in the industry and protect clients’ intellectual property? Check with industry bodies, their clients and suppliers and conduct secondary research to find information on the company’s reputation.
  • Is the Chinese manufacturer committed to work with you? If your business is not vital to them, you are at the very bottom of the list when they prioritize orders and hence may delay the production or delivery for your order during peak time.

For further information and/or assistance with Chinese manufacturers/supplies selection and due diligence, please contact Sara Cheng, Manager-Greater China, Australian Business International Trade Services. Email: sara.cheng@australianbusiness.com.au

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