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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

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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

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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