Off-Shoring Chinese Style - The Next Wave

China Outsourcing

The United States and Europe have been outsourcing and off-shoring manufacturing and services for years… and especially in the manufacturing space, mostly to China! However, a trend is developing where Chinese manufacturers are now off-shoring their own work to other cheaper countries, mostly in southeast Asia.

Dan over at Managing The Dragon has an interesting article Trickling Down - Chinese Off-shoring explaining how this trend is picking up, particularly in the textile industry. Increasing costs in China and duties on textiles in particular are causing Chinese manufacturers to set up shop in countries like Indonesia, Cambodia, Thailand and Bangladesh.

An interesting twist is that unlike in the United States, where outsourcing and off-shoring is clearly seen as a negative, some Chinese companies believe this trend is good for China, freeing them up to focus on higher value added manufacturing and growing their economy stronger. Will Lewis over at Experience Not Logic, in the comments section, questions whether this is just an excuse for Chinese manufacturers to cut costs and wonders if the manufacturing will return once duties are lifted, expected in 2008.

February 25, 2008 | Filed Under Sourcing Trends | 1 Comment 

The Right Suppliers at the Right Price; RFQ Strategy and Cultural Considerations

Finding suppliers in China

Finding the best supplier to manufacture your product and negotiating the best price can be a lengthy process requiring a great deal of research, a bit of strategy, a dash of cultural understanding and perhaps even a touch of luck.

We came across an interesting company called PassageMaker, headed by a gentleman from the United States named Mike Bellamy. According to their website, in 2006 PassageMaker became the first (and perhaps only) medium sized, 100% US-owned, assembly/inspection company in Shenzhen possessing the following: In-house licensed custom’s brokers, Full import-export rights, and authorization by the Chinese government to process Value Added Tax (VAT) rebates.

Mike has done some speaking engagements over the past few years and one of them is titled, “Sourcing Strategies - Find the right suppliers, assure quality and avoid knock-offs on a limited budget”. The videos are posted on YouTube in 4 ten minute clips. We’ve watched the first two, which are quite good, and have our ‘takeaway notes’ for our readers to review. In addition, we’ll post links to the videos below for easy access.

GENERAL

1. China, although uniquely different from the West, is very open to western business practices and you should not be worried about cultural mistakes. The Chinese don’t expect you to know their culture or language and are very forgiving of mistakes and cultural misunderstandings.

2. There are many factories that make excellent products but aren’t good at marketing themselves to the world. There are other companies that are excellent at marketing but aren’t factories themselves and misrepresent themselves to potential customers to win deals.

3. The areas to focus on are the Pearl River Delta which is in the Hong Kong/Guangzhou area and the Yangtze River Delta around ZheZhang and Shanghai. They both have different histories. The Pearl River Delta was designed from day 1 for manufacturing for export. The Shanghai area has a long history of manufacturing but developed to service the internal market.

4. How to qualify a vendor on a limited budget - use web directories and trade shows to find new suppliers but visiting the production area and walking the line is the only way to see that they really make the product.

5. The issue with dealing with trading companies is that there is no direct line of communication when there is a problem. Trading companies may not understand the product as well as the factory and may not be able to handle the issues that arise.

6. Hold negotiations at the factory. To see if they’re really making the product, try to spend as much time at the factory as possible. Look for signs you’re being duped such as the business card addresses of all the people not matching or if the person who is giving the tour of the factory doesn’t seem to know all the people.

COSTS

1. Tooling and setup costs should be quoted separately and compare the quality of the tooling among factories. Often longer lead times are required for better quality tools with higher grade materials such as steel.

2. Gather your quotes using the same incoterms - Mike prefers to use EXW (Ex works), which essentially means ‘finished and available at the factory’. SourceJuice wrote an article comparing FOB and CIF, detailing what’s included and what’s not.

3. Be clear on your quality standards and acceptable levels of defects as this may significantly affect pricing and you want to be able to compare applies to apples across factories.

4. Specify the grade of the materials in your bill of materials. There are many grades of metals and plastics and you need to be clear!

5. Ask them to identify their VAT structure. Some of the smaller suppliers are not paying VAT on raw material purchases and thus not getting the rebate when they export. This is ok for small quantities but when you need to ramp up, they may not be able to keep the same deal. In this case, you can expect a spike of 10% or more! For large companies, if you dont ask about the VAT refund, they may pocket it. For more information on the recent changes (and a general explanation) on VAT rebates, check out the SourceJuice article 4 Reasons Why Sourcing in China Will be More Expensive in 2008.

NEGOTIATIONS

1. Orient yourself towards the decision maker and not necessarily the guy who understands you best because of language.

2. The guy at the top usually doesn’t speak as much English since he’s older and grew up when China was a closed society.

3. Watch the Bai Jiu!!! For those who don’t know, Bai Jiu is a traditional Chinese alcohol made from rice. It’s very strong and it’s typically part of dinner banquets and can be abused easily with repeated calls for toasts. You don’t want a lopsided agreement and if you start to drink and then stop you may offend. Better to just say you’re allergic or that you can’t drink. Mike commented that he brings a bottle of tequila and when they do Bai Jiu shots, Mike requests that everyone do a tequila shot! That stops the drinking!

4. If you’re looking for a little strategy, bring a translator with you even if you or your colleagues speak Chinese. Don’t speak any Chinese during the negotiations. After a round of price discussions, the translator should excuse herself to go to the bathroom. The Chinese factory may continue to talk about pricing strategy with you in the room. — Just be sure they don’t pull this on you with English!

TRANSLATION

1. Use a professional translator who is familiar with your field if you don’t speak Chinese!

2. Go over the technical terms in advance and make sure you’re in sync. Otherwise your translator may not know the details of what you’re trying to communicate.

February 18, 2008 | Filed Under Negotiating & Strategy, Sourcing Guides | 4 Comments 

7 Ways To Avoid Getting Scammed By Suppliers Online

Avoid Getting Scammed By Suppliers Online

Let’s face it - it’s a dangerous world out there! With plenty of scam artists trolling Alibaba and the like seeking to separate you from your hard earned importing dollars (or euros or…), how can you be sure that your supplier is for real? SourceJuice comes to the rescue with the top 7 ways to avoid getting scammed.

1. VISIT!
Don’t underestimate the value of seeing the factory and meeting the people yourself! If you’re about to embark on a large importing project, the time and money spent on coming to China for a short visit may pay off in spades. Round trip flights from the US can be had for just over $1,000, hotels and food are relatively cheap, and the factory will likely pick you up from the hotel, take you to visit the factory, and wine and dine you for free. For less than $2,500 and 1 week of your time, you can personally verify that everything is up to snuff.

2. Don’t Blindly Trust Website Certifications
Is it true that the chances of a factory with ‘TrustPass’ or similar is less likely to rip you off? Possibly. However don’t automatically assume that because a factory has website certifications that they are trustworthy. Many website certifications can be purchased and/or rely on a few brief visits or phone calls.

3. ‘Feel’ The Delivery Terms
Recognize the legitimate fees that go along with importing such as duties and shipping. If you find a supplier willing to lower the cost on the shipping documents to avoid fees or are willing to send the goods to you as a gift to avoid duty fees, what other types of shenanigans are they playing?

4. Avoid Purchasing ‘Too Good To Be True Items’
No there are not factories in China that can sell you lots of cheap authentic iPhones or iPods or Nokia phones or Nike shoes or… If you are trying to purchase designer items or brand name items, be careful as this is the area that most scammers operate.

5. Consider Using A Trading Company
If you can’t do your own due diligence because of lack of time or knowledge, hire a professional! Trading company fees typically range from from 3-5 % of the total order. If this is small potatoes for you compared to the potential of it all going wrong, let the man on the ground help you out.

6. Use A Letter Of Credit
Never send money Western Union or to a personal bank account. Watch out for Paypal, although sometimes it can be legitimate. Never pay in full up front unless someone on the ground has inspected the goods. Even the typical 30% up front for TT payment is risky when working with a new supplier. Using an LC is the safest way. The factory has the assurance of the bank and payment isn’t released until the goods arrive. True you still don’t have the ability to inspect the goods for quality issues before payment is released, but financially it’s the safest route.

7. Use Common Sense!
The old adage.. if it’s too good to be true, it probably is!

February 13, 2008 | Filed Under Sourcing Guides | 1 Comment 

China Got Expensive! Shall We Go to Vietnam?

Sourcing from Vietnam

SourceJuice published an article at the beginning of the year explaining some main reasons why China is becoming more expensive. In the never ending search for low cost (but high quality!) labor, Vietnam keeps popping up as the new ‘go to’ place for manufacturing. So what’s the deal with Vietnam?

China Briefing News has an excellent article by Chris Devonshire-Ellis titled Corporate America’s China plus one strategy. The gist of the article is that China has what we might call a perfect storm of inflationary issues and that US companies are beginning to have a “China plus one” strategy more so than just a China strategy.

The economics theory behind “China plus one” works like this: as China is getting wealthier, and its population older, it is getting more expensive to manufacture there. Wages are rising and so are the prices of commodities - China is experiencing some worrying inflationary trends right now that are pushing up the prices of everything from a bowl of rice to apartment rentals. Added to that, China unified its corporate income tax system last year, bringing the previous low rates that foreign businesses enjoyed up in some cases from 15 percent to 25 percent. Certain tax incentives also have disappeared, making other Asian destinations now more attractive than the PRC for the receipt of foreign investment. To compound this, the United States has quota systems in place for Chinese textiles, agricultural products and a whole host of other items, meaning once those quotas are used - and the annual quotas have tended to have been reached after just 9 months - there are no more permissible U.S. imports.

While Vietnam may never be the internal market that China is, many multinational corporations (Intel, Dell, etc) are finding Vietnam quite hospitable as investment opporunities and thousands of Taiwanese and Korean small and medium sized businesses have been manufacturing in Vietname for years.

Bill Dodson, founder of Silk Road Advisors, sums up the issue best in his commentary China Plus-One in Vietnam, too?. While Mr. Dodson does not view Vietnam as the be all and end all, his summary is quite right:

Why, after all, would you want to locate a new export manufacturing facility inland in China and away from the increasingly expensive coastal cities of Shanghai and Guangzhou, when you can have exactly the same plant slap bang on the coast in Vietnam or India, with an English speaking workforce and better tax investment incentives? You wouldn’t, and the savvy American boardrooms and entrepreneurs know this.

It would be interesting to hear from our readers whether they are currently sourcing from Vietnam, investigating doing so, not interested right now, and in general your experiences!

February 8, 2008 | Filed Under Sourcing Trends | 4 Comments 

Digging Deeper - Actual Landed Costs Examined Part 2 of 3

Source Juice Dig Deeper part 2

Sometimes when we dig deeper we only skim the surface. SourceJuice strives to write some great articles, but even the best content sometimes needs a summary of relevant parts. Digging Deeper continues by putting together the pieces of the import puzzle with this week’s “Actual Landed Costs Examined - part 2″.

As a recap from part 1 we will dig a little deeper into examining the different categories that make up your actual landed cost.

Another Examination
In part 1 of this article, we illustrated the import costs of a successful 2007 pre-fabricated granite import. For more information on the incredible profit margins available on fabricating and importing granite from China, check out SourceJuice article “Let’s Talk Granite - Pre-fabricated Granite Import Guide“. Suffice it to say, the numbers are incredible.

For our next trick, we will flip the tables and show how the numbers do not always produce favorable outcomes. Some of the most vital insight comes by learning from your mistakes. Below are some actual figures from a failed 2007 marble tile import venture.

At the time the product was purchased, Floor & Decor was selling the below 12×12x3/8″ marble tile for $1.73 per square foot.

marble-tile.jpg

A Chinese supplier was selling an identical marble tile for 63 cents a square foot. 7,500 square feet of marble tile was ordered.

TOTAL $13,849.44
per SF $1.84

Upon review of the concluding landed costs, it was determined that the venture was not cost effective because of the following reasons:

  1. Due to budget requirements for the import, the container was only filled to 75% capacity.
  2. No loading dock availability
  3. Excessive exams
  4. Storage
  5. Large US marble suppliers purchase product in high volume. Supplier product cost at 63 cents a square foot could have been even cheaper if more product was purchased.

Dylan Blankenship signature
dylan@sourcejuice.com // Dylan Blankenship

February 2, 2008 | Filed Under Landed cost | 1 Comment 

To FOB or CIF, That is the Question

FOB vs. CIF Incoterms

Most first time importers, and even those with experience, remain unsure whether to purchase from suppliers on FOB or CIF terms. FOB and CIF are two of the most popular incoterms and understanding them is important. First, FOB stands for ‘Free on Board’ and CIF stands for ‘Cost, Insurance & Freight’.

When calculating your landed cost, the largest gray area especially for new importers, is around the “on the water” portion of the journey. Therefore, you may want to consider placing your orders, or at least your first order, CIF instead of FOB if you want the least amount of surprises. Here is a clear explanation of what is covered with FOB and CIF:

Buyer & Seller Responsibilities for FOB vs. CIF

Services FOB CIF
Warehouse Storage Seller Seller
Warehouse Labor Seller Seller
Export Packing Seller Seller
Loading Charges Seller Seller
Inland Freight Seller Seller
Terminal Charges Seller Seller
Forwarder's Fees Buyer Seller
Loading On Vessel Seller Seller
Ocean/Air Freight & Insurance Buyer Seller
Charges On Arrival At Destination Buyer Buyer
Duty, Taxes, & Customs Clearance Buyer Buyer
Delivery To Destination Buyer Buyer

So… you may be asking why you shouldn’t always purchase product CIF instead of FOB? There are some good reasons. For example:

1. Comparing Apples to Apples Cost Across Factories - When factories quote CIF, you have no way of really knowing the breakdown of costs. They could potentially be padding a specific cost for extra profit or they may be artificially lowering the cost of the goods and transferring cost to the shipping/insurance side of the equation. If you’re looking to find the cheapest producer of the product itself across multiple factories, it’s easier to compare apples to apples using FOB.

2. Your Shipping/Insurance Agent May Be Cheaper - While larger factories typically have good relations with freight forwarders, shipping companies and the like, don’t underestimate your own ability to negotiate for good rates either. If the lowest landed cost is important to you, make some phone calls as well. We personally recommend based on experience Triple Eagle.

3. Opportunities to Build Relationships - Especially as you grow your importing venture, building relationships with the largest number of companies can go a long way. By putting all your eggs in the supplier basket, you’re tying yourself to that supplier. It may be harder to switch factories in the future if necessary if you’re unaware of all the details of your transactions.

As you can see, there are benefits to choosing FOB and CIF. It just depends on your own specific situation. However we hope this article makes this area a bit clearer.

February 1, 2008 | Filed Under Logistics | 6 Comments