VAT Rebates Coming Back for Textiles and Garments

While not announced yet by China, The South China Morning Post today has an article stating that VAT Rebates are coming back for textile and garment exports. This is a bit of a surprise move and is welcome news to those in the China textile and garment industries and for buyers seeking relief from higher prices.

For those unfamiliar with VAT rebates and their place within China sourcing, please have a look at this SourceJuice article Reminder: Understand VAT Rebates to Bargain More Effectively.

According to the article:

Various industry sources and tax experts say the mainland is finalizing a plan to raise VAT rebates on textiles and garments as much as 4 percentage points to 15 per cent. Generally, exporters are paying a value-added tax of about 17 per cent.

The plan also would increase rebates on viscose fiber - a key raw material in making fabric - as much as 1- percentage points to 15 per cent.

The plan signals a rescue of the country’s pillar industry, which is undergoing an unprecedented consolidation exacerbated by a United States-led global economic slowdown, a sinking US dollar and sourcing costs of raw materials, labour and crude oil.

When the VAT rebate returns, be sure to get the discount on your next purchase order!

July 10, 2008 | Filed Under Landed cost | 1 Comment 

Walmart Reinvents the Milk Carton - Adjusting Packaging to Increase Efficiencies

Walmarts new milk jug

SourceJuice recently wrote an article 4 Ways to Combat China Price Increases without Raising Prices to your Customer. Number 1 on our list was ‘Adjust Your Packaging Size, Colors and Materials’. While this may seem obvious on the surface, a recent example is sure to prove the point… that truly rethinking your product’s packaging can increase efficiencies and lower production and delivery costs.

The example is the 1 gallon milk jug and the forces behind the change are Walmart and Costco. The 1 gallon milk jug is a product that everyone, at least in the United States, is familiar with. We’ve grown up with it. Most people probably wouldn’t have ever thought about changing it. However with milk for the most part mass produced and trucked hundreds or thousands of miles to its final destination, the milk jug really isn’t the ideal packaging. So what are the changes exactly?

Superior Daily is the company responsible for designing the new jug and they’ve put together an excellent chart explaining all the benefits of the new milk jug compared to the old one. Click the chart below to make it larger.

Old vs. New Walmart Milk Jug

Is everyone loving the new packaging? Of course not. Some people are claiming that it’s harder to pour. Others are loving the new jug, particularly how it fits in the door panel of modern refirgerators. Either way, with the new jug reportedly saving about 20 cents per gallon of milk, they’re unlikely to be going away anytime soon.

“This is a key strategy as a path forward,” said Anne Johnson, the director of the Sustainable Packaging Coalition, a project of the nonprofit group GreenBlue. “Re-examining, ‘What are the materials we are using? How are we using them? And where do they go ultimately?’ ”

So what are you doing to rethink your packaging?!?

June 30, 2008 | Filed Under Negotiating & Strategy | 1 Comment 

Establishing a Sourcing Entity in China

Incorporating in China

China is in a constant state of flux, and the legal environment is certainly not immune to this reality. As a foreigner your behavior is often scrutinized more than a local so you need to constantly be aware of the legal bounds under which you and your business operate. This article attempts to provide an overview of typical legal set-up options for a sourcing company in China, including RO (Representative Office), WFOE (Wholly Foreign Owned Enterprise) and FICE (Foreign Invested Commercial Enterprise).

Choosing the proper set-up

The overall objectives of your operation are the most significant aspect to consider when establishing an entity in China. What are your short and long term goals? What types of products do you want to source? Do you want to distribute, assemble, or manufacture products domestically? Do you plan on employing local staff? The answers to these and other questions will help define your objectives so that you can formulate a legal strategy that best serves them.

It is important to note, that no one legal solution exists to accommodate all of your unique conditions. Therefore, the more detailed your understanding of your objectives, the better equipped you are to make good decisions. Further supplementing your understanding with proper due diligence is always important when making decisions of such lasting consequence. Let us now take a look at typical legal set-ups for trading companies.

Representative Office (RO)

This formation is popular because (1) the registration process is shorter in duration and usually easier to complete, and (2) there is no minimum level of capital investment required. An RO will be suitable if its planned functions are simply liaison, market promotion or research. For sourcing companies, it will mean you have to give up a significant amount of control over your operations. All transactions must originate from abroad, and you are required by Chinese laws to heavily rely on 3rd party services providers, such as an Import/Export agent, Logistics provider, and HR outsourcing agent.

International Trading Wholly Foreign-Owned Enterprise (WFOE)

With official minimum registered capital of RMB 100,000 for a single shareholder company (but closer to USD 60,000 to 70,000 in practice), an International Trading WFOE allows added control over your business operations. However, the enterprise must be located in a Free Trade Zone (FTZ) and it is usually limited to export activities. Those that wish to distribute within China must either use a 3rd party distributor or apply for a separate import/export license (which essentially qualifies them as a FICE in a FTZ).

Foreign-Invested Commercial Enterprise (FICE)

Unlike the Trading WFOE, a FICE has the ability to import and locally distribute on top of export activities and may also qualify for retail activities. Both have the same level of required minimum investment, but in practice the FICE necessitates substantially higher levels (about USD140,000). The registration process is also more complex compared to that of a trading WFOE. A major issue to consider when evaluating the advantages of a FICE is location. Specifically, operating inside or outside of a Free Trade Zone significantly alters the investors options.

FICE inside a Free Trade Zone

A FICE operating inside a FTZ enjoys freedom in its business scope, but at a price. The FICE is unlimited in terms of what can be traded so long as it does not belong to a prohibited trade category according to the Chinese laws. A major drawback from operating inside the FTZ is that VAT invoices can only be issued through the relevant governing authority, creating a fair bit of logistical hassle. Additionally, you will undoubtedly pay a premium to exist in the FTZ - costs of services, talent, office space, etc tend to be higher. Finally, it will be more difficult to establish branch offices in other locations.

FICE outside a Free Trade Zone

Outside a FTZ, a FICE’s trade activities are limited to those relevant to its stated business scope. But it also enjoys some advantages. Unlike operating in a FTZ, the FICE is able to issue its own VAT invoices, operational costs may be significantly less, and branch offices can be set up more flexibly.

Manufacturing + FICE

Enterprises looking to incorporate manufacturing activities with its trading business can explore setting up a Manufacturing entity with an extended FICE status. However, such entities must maintain an above-50% revenue stream through its manufacturing activities. Historically, this requirement acts as a measure to prevent enterprises from abusing such entity status to access preferential tax policies granted to manufacturing enterprises. Even though the new corporate tax law has scrapped most of such preferential treatment, the authorities may still scrutinize enterprises enjoying tax incentives due to their encouraged status (eg. High and New Tech Enterprises).

Business registration is a complex process that involves navigating China’s far-reaching bureaucracy. While it is not compulsory, using a specialist service that understands not only the legal environment, but also the objectives of your business is highly recommended. Selecting the optimal legal entity from the beginning is crucial to your success in China. Don’t proceed without a thorough understanding of the legal implications of your actions.

For regular news and updates about China’s business environment, check out and subscribe to JLJ’s monthly newsletter here.

For more information on establishing a sourcing entity in China, please contact:
Ms Lynn Ng
Manager, The JLJ Group
Email: lynn.ng@jljgroup.com
Tel: +86 21 5211 0068 ext 821

This article is contributed by The JLJ Group – a one-stop service provider assisting foreign companies to enter and grow in China. Over the past ten years, JLJ has assisted more than 400 international clients with their China entry and growth projects. Their client base includes Multinational Companies, Small & Medium Enterprises, Government Organizations as well as individual investors from more than 30 countries in Americas, Europe and Asia-Pacific.

June 23, 2008 | Filed Under Negotiating & Strategy | 2 Comments 

Importing a Pet into China via Hong Kong

Importing your dog into China

Moving can be stressful at times especially when you decide to move to a new country. You have placed things in storage and — OOPS! what about the family pet?!? Can’t live without Fido or Fluffy! The process of getting your pet to a new country is very tedious and can be quite costly.

There are many steps in getting a four-legged friend to a new country (your new home). Be prepared to allocate time and money in both the origin and destination countries. It is smart to have a person on both sides (current pets home and new pets home) to work through the process, making it all happen.

Selecting Your Airline Carrier

One of the main obstacles is to locate airlines that service your destination country. Many countries restrict pet cargo to only airlines with headquarters in their country. For this reason, Cathay-Pacific airlines is one of the few passenger carriers that can bring in pets. Within the last 45 days, Delta was unable to service a flight from Atlanta to Hong Kong. Delta’s suggestion was to call their sister airline, Korean Air (who were also unable to service HK). While some countries will allow you to bring the pet with you in the cabin, Hong Kong flights require pets to be booked only as air cargo. It is important to note that not all airlines have a cargo terminal in every city (even though there is a passenger terminal). If there is not a cargo terminal in your city, you will have to fly the pet to a different city and send them out from there.

Here is a short-list of airlines that service pets to Hong Kong (I used China Airlines)

Check with one of the above carriers for pricing and scheduling. As of 45 days ago, Cathay was shipping pet cargo at $19.36 per kilo. Continental is a little pricier. Make sure that they can move your pet when you need. There are restrictions on times of the year because pets cannot fly when the temperature will be too hot (above 85 degrees F) in the cargo hold. Beware that they charge by kilogram (there is some kind of formula: dog+crate weight X volume?), but do not starve your pet before the flight (there are other ways to save money on shipping fluffy).

Here are some good Pet-for-Thoughts:

Ok – so you have selected your airline - this can be an enormous task and you have now completed 10% of the process that will bring your pet to China.

Origin City Side

To complete all the tasks required to export your pet, you will need at least 2 weeks lead time (do not schedule your pet’s flight any earlier). Once you found a reputable cargo company, next you need to get your paperwork in order. You need a valid health certificate from your vet. I would suggest calling your vet before you show up for your appointment and verify that they have this certificate on hand. Also check with the USDA pet department and make sure you have all the necessary shots given before you go.

Our pet had these shots

Vaccine list for dogs

Once the vet has filled out the necessary certificate make sure you do not mess it up in any way shape or form or you will have some problems down the road with customs. Next you are going to have to go to have the USDA veterinarian approve it. You will need to make an appointment and have them review the health certificate and they will provide their embossed stamp of approval.

It is important to note that on each side of the equation (city the pet is in and the pets new home) there are companies that can facilitate all the processes for you. These companies can be worth their weight in gold. Due to the mounting costs associated with bringing the dog to China, we handled the Atlanta side ourselves.

On the US side, here are some companies local to the Atlanta area:
Animal Land, Inc.
Atlanta, Georgia (GA), United States
Office Phone :+1 404-812-1555
Fax :+1 404-812-1588
Toll Free :+1 877-379-8625
http://www.petmovers.com

Lucky Dog! LLC
Atlanta, Georgia (GA), United States
Office Phone :+1 404-551-5028
Fax :+1 866-373-4819
Toll Free :1 888-575-5025
http://www.luckydogtravels.com

Now you have your documents for your animal. Make sure you have filled out all the necessary paper work for the cargo company you have chosen and make sure they understand that it is a live animal you are sending. When you fax your copy of the health certificate make sure you use the carbon copy underneath and rub in on the embossed stamp or it will not show up. You also need to fax a copy of your animal’s current vaccinations and dates and you need to give an original copy to the cargo company as well.

Airline Liability Letter

Shipping dog via China Airlines

Shipper’s Letter of Instructions

Shipping dog letter of instructions

Shipper’s Certificate for Live Animals

Shipping dog live animal certificate

Once the cargo company has received the documents they can then begin to process their paper work as well. In the meantime make sure you have an animal crate that is airplane approved. Usually it will be indicated on the crate if it is or not. Look first and make sure your pet can fit comfortably inside and can turn around inside with the door shut. There are some great pads you can place inside of it that provide comfort as well as absorption in case the pet has an accident (you know what I mean, the dog can’t leave the crate for 20 hours). Beware your pet will need a bath when you finally get it to its new home. About 30 minutes before boarding the plane, my vet suggested giving my dog 2 Benedryl tablets. It is not advisable to sedate your animal unless your vet says otherwise. It can be quite traumatic for your animal to be sedated. Bendryl is best. Even through an 18 hour flight its OK.

Hong Kong Side

This is where it gets a little hazy – there is so much that goes into allowing the dog into the airport, out of the airport and into China. If you make any mistakes at this stage it will cost a lot of money to fix them (export the dog, reimport the dog, etc). I solely recommend using a Pet Import company like:

Pet Movers Hong Kong
Tel: (852) 3404 0061 / (852) 9198 4543
Fax: (852) 3404 0062
www.petmovershk.com

From the HK side, you must obtain a transit permit for the dog to legally be in Hong Kong. The transmit permit must then be sent to the cargo airline carrier back in the US before the dog can leave. Also ensure that ALL THE DOCUMENTATION that you have been working with are available in Hong Kong. If the documents were processed in the US, attach them to the doggy crate. All original documents are required for customs at the border to mainland China.

Import Special Permit

Import dog into China

Entry Into China - Why it’s best to hire an agent!

  1. Go to airline air cargo terminal (get there before noon, everyone goes to lunch and you will have to wait until after 2:00PM to pick up your pet).
  2. See your best friend in the crate and have the Hong Kong customs agent examine the dog for contraband hidden inside the dog. Do not touch the dog or get near the crate – looks suspicious!
  3. Pack the dog into the van that will take you to the Hong Kong border.
  4. Switch vans as the old van does not have double license plates to enter into China.
  5. Meet up with the Agriculture and Fisheries agent that will escort the dog into China.
  6. Take the dog through customs (bring 20 RMB for processing fees) and hope that everything is in order. If there is a problem at this stage, a dog can only legally stay in Hong Kong for 24 hours before it goes into mandatory quarantine or deportation.

And finally if all goes well…

Dog arrives in China

Amanda Blankenship

June 18, 2008 | Filed Under Logistics | 2 Comments 

Contacting a Factory Online; Lessons Learned from the Field

Request for quote strategy

Contacting a factory online is very common, especially with the growth on online directories such as Global Sources and Alibaba. However when most buyers contact a factory online using these websites, they are often frustrated by their experience.

Many buyers complain that the factories don’t respond to requests for information or requests for quotes quickly, if at all. Other buyers complain that when they do receive a response, the emails are very brief, don’t include the requested price quotes, don’t answer the questions that were asked, and in general don’t inspire confidence that the factory can meet the buyer’s requirements.

On a clear bright day in the spring of 2005, we made a decision to look East to procure building materials. At the time, real estate development in the United States was growing very fast as an industry. In particular, converting apartment buildings into condominiums was big business. We decided to launch Parkview Industries, which would help to increase our profit margins by importing building materials from China by acting as a distributor to our existing real estate development business.

Our top 5 qualifications when evaluating a potential factory were

  1. They had to have unique products.
  2. Specific models we were interested in needed to be available.
  3. The price had to be low. (After all, it always comes down to this in the end!)
  4. Ability to accommodate all export/logistics for the shipment was important to us as we didn’t have previous experience.
  5. Future capability for private label opportunities was important to us because we were considering starting our own brands.
  6. References needed to be available for review.

We learned very quickly that in fact we were not only qualifying factories but also that the factories were qualifying us as buyers. The factories we took the time to develop a relationship with were much more forthcoming with information and price quotes. The factories that were not convinced in our ability to put containers on the ocean were much less helpful.

At first we thought ‘well if a factory doesn’t want us as a buyer, then that’s their problem’. However in fact, the reality is that these are sometimes the better factories, and they are nervous that you might be a competitor just trying to get their pricing information.

When making initial contact with a factory online, keep in mind the following

  1. You are not only qualifying the factory; the factory is also qualifying you as a buyer. Validating your company in the minds of the supplier is of the utmost importance.
  2. The initial communication, preferably through email, should include a brief introduction to your company, your position within the company, and include a statement of adequate buying power resources.
  3. Showcase your company with a polished website illustrating your industry and experience. The site should generate a logical understanding, in the mind of the reader, of why your company would be interested in manufacturing in China.
  4. Ensure the email asks for the specific information you require. For example, you may ask, “May I please have a price quote for item …” or “What is your sample availability and process?”
  5. Include the specific item or model numbers you are interested in, attach pictures from the factory’s website or other sources, and in general be as specific as possible with your requests.
  6. Indicate available contact methods for further communication (MSN, Skype, email, phone). In addition to email, most Chinese factories are on Skype and MSN and this sometimes is better than email because the “back and forth” is quicker, once an initial relationship is already developed.

Given the experiences we have had with sourcing over the internet, there’s a lot more to each point we have made here in this article. We will expand on the key lessons presented here in an upcoming article that provides detail on what we learned and how it helped find us both good and bad suppliers. Stay tuned and thanks for visiting.

June 15, 2008 | Filed Under Negotiating & Strategy | 6 Comments 

Green Technology from China to World – Electric Bikes from Kinakontakten

green technology, e-bikes, china

As oil prices rise to new heights and the price of fuel for cars to trucks jump each day in the USA and Europe, many are considering the challenges and promises of alternative fuels. Additionally, many countries to organizations are promoting Green Technology and environmentally friendly alternatives to transportation. Bicycles have long been used around the world as an efficient and cost effective way to get from one place to another. In the last few decades and more recently, the evolution of electric bikes (e-bikes) have provided new ways for the public to acquire a cost effective solution for transportation.

For those of you who have been to China, you will recognize the picture above as something you see on the streets by the thousands. In China this technology is not generally considered green technology or environmentally friendly but rather a cheaper solution than gas or fuel powered alternatives like mopeds, scooters, and motorcycles. However, to the countries in Europe to North and South America, the need for such electric bicycles is booming and is seen as both an environmentally friendly option as well as a solution that makes financial sense. SourceJuice recently met up with the team from a Shanghai based exporter and buyer agent called Kinakontakten. The principals of Kinakontakten are Mats and Jens – two great guys who know much about electric bikes and a few other areas where they support medium to large European importers in the textiles and clothing area to sanitary products.

What Mats and Jens noted to SourceJuice was that in many of the European countries they serve, there is a great and growing demand for electric bikes due to the high cost of fuels and the concern by citizens of those countries for their environment and air quality. These citizens want green technology and want environmentally friendly solutions for transportation. That is why Kinakontakten got into the business. Being in China for half a decade with a variety of experiences coupled with the ability to converse and read, the team at Kinakontaken seized on the opportunity and is now supplying a variety of companies and retailers in Europe with electric bikes manufactured by them and their partners. Just how big is the electric market and what is driving it? Last year, the International Herald Tribune (which is the global edition of the New York Times) wrote a story on how electric bikes are growing in demand. In the Herald’s story “Electric bikes are taking off” it is written that…

From California to China, “e-bikes” are taking off as an alternate means of transportation, after years of being overshadowed by their muscle- powered cousins.

Propelled by a perfect tailwind of technology, high oil prices and the vogue for all things green, global sales of bikes driven by battery-powered electric motors have climbed nearly 20 percent since 2005, a trend projected to accelerate especially in developing countries, where the middle class is rising.

“E-bikes have been under the radar,” said Ed Benjamin, president of Cycle Electric, a multinational consultancy based in Fort Myers, Florida. “Now 20 million units a year sell. The business is young and growing crazy fast.”

How well are electric bikes (e-bikes) being accepted…well thank China again for promoting the adoption of them and whether it was directly intended by China or not, they actually promoted the export of green technology. Some call this clean technology, others call it green tech, but the interesting point is that it is from China. Out of all the places in the world, one wouldn’t expect green technology exports from China, but the facts are that China wants green as much as any other country if not more. We are not going to even go into the depths of the efforts China is undertaking to move towards environmentally sustainable solutions but for electric bikes look how it happened – read below from the International Herald Tribune story again.

But sales, especially in the United States, still fell far short of the 100 million pedal bikes made globally a year: Commuters just couldn’t figure e-bikes out.

As gas-guzzling SUVs became fashionable, U.S. e-bike sellers, finding little profit in the niche, started to abandon the industry.

That lull began to subside after China decided to get into the game.

Buoyed by a newly minted middle class and engine bans in some cities, China was producing about 10 million electric bicycles in 2005 for use in domestic and foreign markets, a figure expected to climb to 25 million by 2009, according to Cycle Electric.

Since then, others have sought to grab a piece of the market. Taiwan’s top two bike makers, Giant and Merida Manufacturing, are public and growing their e-bike businesses. (Giant plans about one million e-bikes a year by 2011).

Bangkok Cycle, Thailand’s biggest e-bike and bike maker, which sells bicycles to Wal-Mart and Toys “R” Us, is expanding in Southeast Asia, and may list too.

But it is China that now leads the world in electric bike production and sales. And many of its 450 million bike riders are increasingly trading up to electric.

In the United States, consumers are also migrating in greater numbers to e-bikes, drawn in part by lighter and more powerful batteries and practical aids like bike lanes and lockers. E- bike sales are forecast to double by 2009 to 200,000 from 100,000 in 2005.

Further afield, e-bike sales are up in Vietnam, Thailand, South Africa, Australia and Eastern Europe. And in bike-friendly Holland, cyclists in their 60s are opting for e-bikes to stay in shape with less strain.

And some more info from an article Tim Johnson of McClatchy Newspapers that should add some more context.

SHANGHAI, China—A lot of riders in the bicycle lanes of China’s cities and towns have given up pedaling and are zipping along on silent electric bicycles.

Sales have skyrocketed, and China is now the global leader in this inexpensive form of motorized transportation. At least 1,000 companies have sprung up to meet the demand.

Sales have almost doubled every year, said Ma Qingyi, the vice general manager of Shanghai Cranes Electric Vehicle Co., a major manufacturer.

Last year, Chinese bought 16 million to 18 million electric bicycles, up from 10 million the year before. Some see sales hitting 25 million to 30 million this year. But so far, the diandong zixingche, as the bike is called here, is a unique Chinese phenomenon, with limited export appeal.

“`Booming’ is maybe too mild a word,” said Ed Benjamin, the president of Cycle Electric, an international consulting group based in Fort Myers, Fla. “It’s a product that really suits the needs of the Chinese consumer.”

In many major cities, electric bicycles now make up 10 to 20 percent of all two-wheeled vehicles on the roads, a trend that could have an impact on the nation’s rising greenhouse-gas emissions and poor air quality.

Many Chinese cities, including Shanghai, with its population of 20 million, have banned motorcycles and motor scooters as dangerous and polluting, giving a huge sales boost to what the bike trade has dubbed e-bikes.

Rising gasoline prices, crowded public buses and congested roadways have contributed to the surge in electric bicycles, as has the emergence of a consumer class with climbing income that’s still unable to afford cars. The e-bikes enable people to commute longer distances, allowing them more freedom in where they choose to live.

A simple electric bicycle has a battery that can power a rider along for 25 to 30 miles before needing a recharge. Recharging the battery requires eight hours.

Riders find they can recover the outlay for electric bicycles over a year.

“They spend less than 2,000 yuan (about $260) to buy an electric bike, and they don’t have to pay for public transportation,” Ma said. “Some people pay 10 yuan (about $1.30) a day in public transportation. An e-bike costs just a few cents a day.”

Experts say e-bikes can run 30 miles on 5 cents’ worth of electricity, a rate of energy consumption that makes them even more efficient than fully occupied buses.

Mats and Jens could tell you a lot more about this industry, the variety of electric bikes and a few things about textiles in China that will having you realize you don’t know much until you deal with experts like these guys. Soon they are launching their new website to support their growing business for electric bikes. Judging from their character, good spirit, and upstanding professionalism, SourceJuice thinks these guys are in the right market.

Check out their site, contact them if you are in electric bikes to textiles and a few other things these guys have mastered – they are worth your time. Finally, SourceJuice was in no way paid for talking about these guys and their business. We contacted them after some research on housing goods to textiles and the men of Kinakontaken took their time to educate us – they shared their insight first and we are happy to know them and share them with our readers. Thanks to Jens and Mats and we look forward to sharing more news about them and some insights they have on China in an upcoming article about China prices how the Euro is getting to be the payment standard now.

Mats_Anderson_Jens_Christensen.jpg

1st picture is Mats Andersson
2nd picture (on right) is Jens Christensen

http://kinakontakten.com/
KinaKontakten – “China In Touch” in Swedish.

Stockholm, Sweden (headquarters)
Kinakontakten AB
Långrevsgatan 31
133 43 Saltsjöbaden
Sweden
Tel: +46 (0) 8 5592 1811
Mobile: +46 (0) 708 433 158
Fax: +46 (0) 8 717 43 42
Mail: info@kinakontakten.com

Shanghai, China (office)
Kinakontakten AB
No.182, Lian Hua Nan Road
Min Hang District,
200237, Shanghai
China
Tel: +86 (0) 21 5481 6311
Tel Mobile: +86 (1) 363 654 0552
Fax: +86 (0) 21 5481 6691
Mail: info@kinakontakten.com

June 12, 2008 | Filed Under Green Tech | 8 Comments 

CY (Container Yard) vs. CFS (Container Freight Station)

Container Freight Service

When working with a freight forwarder, there are a number of different container service options that you need to be familiar with to ensure you get the service you expect. To do this, there are 2 terms you should familiarize yourself with: CY and CFS. CY means Container Yard and CFS means Container Freight Station.

When a freight forwarder is giving you a quote, they will typically want to know if you want “door to door” service or if you want the goods to arrive at the destination port only, where you would be responsible to move the goods from the port to your final location.

CY/CY (CY to CY) Container Service
This is considered “door to door” service. The container is packed at the shipper’s location (factory) and sometimes at the actual freight forwarder’s location, depending on your agreement. The shipper in is the consignor and you are the consignee. The same container, not having been unpacked or modified in any way during the voyage, will be delivered to your final destination. Naturally this is the most expensive, but least hassle service.

CY/CFS (CY to CFS) Container Service
This is considered “door to port” service. Just like CY to CY, your container is packed at the shipper’s location and sometimes at the actual freight forwarder’s location, depending on your agreement. However, at the destination side, your container is emptied at the carrier’s container freight station. It is your responsibility as the consignee to take this loose cargo and move it from the destination port to your final location, whether that be a warehouse, distribution center, retail location, etc.

CFS/CY (CFS to CY) Container Service
This is considered “port to door” service. You would use this service if your factory will deliver loose cargo, or cargo in a container that is not the final shipping container to the port. Your freight forwarder will then pack the goods into the shipping container. At the destination side, your cargo will be delivered in that container to your final location.

CFS/CFS (CFS to CFS) Container Service
This is considered “port to port” service. In this case, cargo will be delivered loose to the shipping port, packed into the container by the freight forwarder, and unpacked at the destination port. The consignee (you) are responsible for arranging pickup of the cargo at the destination port and moving it to your final location.

Understanding these services will go a long way to ensuring you receive the service you are expecting. Many companies that are new to importing do not always understand their responsibilities at the destination port. In particular, if you’re using a CY/CFS or CFS/CFS container service, you need to understand how long you have at the destination port to pickup your cargo before fees begin to accumulate. You also need to make sure you know what it will take to physically take ownership of your cargo to make sure you have the right equipment prepared.

June 8, 2008 | Filed Under Logistics | 1 Comment 

4 Ways to Combat China Price Increases without Raising Prices to your Customer

dollar_toilet.jpg

Inflation in China is soaring and price increases are being exported to the developed world. Customers are finding that factories are increasing prices almost weekly or biweekly depending on the product. Customers requiring their price quotes in US Dollars are finding their quotes only good for one or two weeks.

On the other hand, your distributor or wholesale customers will not accept price increases every week, nor if you’re involved in retail will the final consumer accept this. Even if they did accept the price increases, it’s not cheap to update your catalogues, your websites, re-train staff, etc. Given the fact that inflation is real and that prices will increase, how can you best plan for this and minimize the negative effects to your business? Readers of SourceJuice are sending emails, asking what we recommend to help them through these difficult times.

SourceJuice recommends you to take a good look at the products you’re selling and sourcing and do an analysis of ways you can decrease production costs, while still maintaining the quality of your products. We’ve developed a top 4 list that can help get you started with your analysis.

1. Adjust Your Packaging Size, Colors and Materials
Packaging often makes up a significant cost of the final good you’re manufacturing or sourcing. There are many ways to adjust your packaging that can help you save on costs without affecting the final product, and possibly not even the perception of your product in the marketplace.

Are you using a metal case? Steel and other metals have increased in cost drastically. If you’re using metal in your packaging, can you switch to plastic? Can you produce a slightly thinner case if you need to continue using metal?

Regarding colors, printing in many colors and with varying textures can add considerable cost. Can you decrease the number of colors or textures in your packaging?

Regarding size, can you make your package smaller? Can you take out some layers of packaging? Can you requiring a smaller number of different materials to be used, thus gaining economies of scale and simplified assembly?

2. Decrease Transport Distance Required for Final Assembly
The price of oil and thus transportation is increasing. With oil now well over $130USD per barrel, look for ways to reduce transportation distances. The most obvious example is to source closer to your final customer. However, even when you need to ship the final product long distances, you may still be able to optimize your supply chain here.

For example, do you manufacture a final product that requires the assembly of components from multiple factories in multiple locations?

If yes, you might consider consolidating your factories within more of a reasonable distance. We’ve seen customers make their final product in Guangdong province but they have a ‘legacy’ factory in Tianjin for one of the components. Each time they want to run of a line of product, they must ship goods from Tianjin to Dongguan by rail or road. Once they relocate this factory to near Dongguan, they will save themselves costs on shipping as well as time.

3. Cut Out the Middleman
Trading companies and 3rd party companies have their place, especially when they act as project managers and quality assurance specialists.

However if your product requires multiple components and you are purchasing some components from trading companies that aren’t adding value, cut them out! Moving further back on the supply chain and working directly with factories will help you to get the lowest cost possible.

4. Push Back on Price Increases
Do not just accept any price increase that a vendor or factory comes back to you with. You need to make sure that the increases they are requesting are legitimate.

For example, if the price is increasing because of a VAT rebate reduction, you should reference the VAT rebate chart to confirm your product is actually effected. You should also try to have the factory prove to you that they actually even paid VAT in the first place, as many factories don’t and are using this issue as a way to increase profits.

With regards to currency fluctuations affecting price increases, try to start having the prices quoted in Chinese Yuan (RMB). Yes, you will still experience fluctuations in price, but these will be market driven as opposed to having to renegotiate prices regularly with the factory.

Additionally, if price changes are because of raw materials cost increases, reference back to global prices and make sure that the increase your factory is quoting you is in line, at least within a reasonable percentage, to the changes in the global market for that commodity.

May 30, 2008 | Filed Under Negotiating & Strategy | 3 Comments 

The China Price and why China should buy Wal-Mart

walmart_retail_china.jpg

Many know that the “China Price” has been, for so many years and decades, a reason why so many companies have come to China to source products from all over the world. It’s been written so many times that China is the factory to the world. Most people already know this. Most people also know the story of Wal-Mart and China. If you don’t, then do some searches on Google and you will find plenty of information that talks about how Wal-Mart sources a high percentage of their products from China and how, over the years. This along with their operational excellence in their supply chain has helped them to destroy their competition. Wal-Mart is possibly one of the largest driving forces of China being the factory to the world. Also, Wal-Mart is what any large scale supplier in China would wish to have – a connection to the final customer. The greatest amount of profit is secured through this demand chain and it is the final battle for Chinese companies that currently export to the world but have ambitions to go where Wal-Mart is today – being the end retailer to the world and not the low cost supplier. Look below on the reporting done by FRONTLINE in 2004 at PBS examining the close relationship Wal-Mart has with China and how Wal-Mart, as a retailer facing the customer and owning the demand chain, has changed the ownership of power from the supplier to the retailer.

FRONTLINE explores the relationship between U.S. job losses and the American consumer’s insatiable desire for bargains in “Is Wal-Mart Good for America?”. Through interviews with retail executives, product manufacturers, economists, and trade experts, correspondent Hedrick Smith examines the growing controversy over the Wal-Mart way of doing business and asks whether a single retail giant has changed the American economy.

“Wal-Mart’s power and influence are awesome,” Smith says. “By figuring out how to exploit two powerful forces that converged in the 1990s — the rise of information technology and the explosion of the global economy — Wal-Mart has dramatically changed the balance of power in the world of business. Retailers are now more powerful than manufacturers, and they are forcing the decision to move production offshore.”

“Wal-Mart has reversed a hundred-year history that had the retailer dependent on the manufacturer,” explains Nelson Lichtenstein, a professor at the University of California Santa Barbara. “Now the retailer is the center, the power, and the manufacturer becomes the serf, the vassal, the underling who has to do the bidding of the retailer. That’s a new thing.”

Let’s repeat the above one more time – “Now the retailer is the center”. Now to examine some trends and get back to our Wal-Mart perspective in a few minutes. Given the current conditions in the marketplace see our article on 4 reasons why the “China Price” is changing with increases from raw materials to labor and oil reaching all time highs, many are saying that the factory of the world will lose its customers to emerging markets like Vietnam, India, and even back to Mexico for many US companies. The pivotal point is that “customers” are moving and not Chinese companies (albeit many Chinese companies are even diversifying their operations to a variety of Asian and foreign countries).

Losing power to the retailer? Chinese suppliers being just another commodity? China, as a country, being another commodity and being replaced by countries like Vietnam, India, and Mexico? What is China to do? What can they do to not be just another low cost country provider?

This article by David Barboza published in the Global Policy Forum in 2005 relays the changes China has embraced to battle these changes. Take a look below.

“The future goal of the company is to make the name Great Wall known across the world,” said Liu Rengang, a spokesman for the state-controlled Great Wall Computer Group. A spokesman for Ningbo Bird, one of China’s biggest cellphone makers, sounded equally ambitious: “Our future goal is to become one of the top three cellphone manufacturers in the world.” China’s Ministry of Commerce reported this month that even though China’s exports are dominated by consumer products, few famous Chinese brands are involved in the export trade. Most goods are being shipped abroad with foreign brand labels.

To rectify the situation, the ministry called on Chinese companies to start exporting their own “famous brands.” Every region was ordered to produce its own famous brands. “We need to cultivate a group of independent famous brands that have international influence,” the report said. “Each industry needs to have its own famous brand for export.” The thinking behind the effort seems simple: imitate the foreigners.

So let’s add some background and analyze some other important elements in the world and about the business of retail and reach – reaching the customer is not easy to say the very least…

Massive Growth in Spending among Emerging Economies – Opportunity for China and Chinese Suppliers?
Massive growth in consumer spending due to emerging growth in the economies of Brazil, Russia, India, China (BRIC countries). This creates demand for products and services to say the least. There will be so many new companies in all these countries expanding into retail…but do they have the savvy to be leaders? Many of these national retail companies will have local expertise, but even that can be overcome for patient and visionary companies. The key aspects here is that many of these countries and the companies to entrepreneurs will come to China to source and buy products to import into their countries. This will be a rising trend even as the China Price is going up.

Massive Changes in Information Technology – is China keeping up? Can Chinese companies compete?
Massive changes in information technology – people have at their fingertips the power to reach beyond their resources. Using the Internet what can you not do? The Internet has made the consumer immensely powerful and the new generations of consumers are possibly the most incredibly informed group of people ever. This means you just can’t sell at any price in a large scale nor can you just setup a store anywhere and think you can get customers to come to your store because you are new or have great service. People have information and in the near future, this will be instantly available on their phone – they will know that your store is not competitive on prices and that your services were not well regarded by 10 customers just yesterday.

Operations, Logistics, Process Excellence – Do Chinese companies have what it takes compete globally?
Operational Excellence – You can’t hide a company’s lack of operational execution savvy with money or people for too long. Sooner or later you get beat by companies that excel in this capacity. Wal-Mart is known for operational excellence. They are known to execute at a degree of effectiveness and efficiency with a cost basis that makes competitors just wonder how they will ever compete.

Understanding Retail – Does China know how to service the final customer?
Retail Excellence – you need to understand your customer, you need to be able to forecast your demand chain, you need to be able to almost predict the future and shape consumer behavior if not cater to it with utmost efficiency and effectiveness. There is possibly, when compared in sheer scale of operations (Google is probably ahead of Wal-Mart in this capacity if not well ahead), no other company in the world that can even compete with Wal-Mart in terms of its depth and breadth of consumer measurement and intelligence. Wal-Mart is like a government of a highly successful country with some key differences being: Wal-Mart collects profit not tax (what is the difference anyway?), Wal-Mart probably measures their customers more than governments track and monitor their people, and Wal-Mart is seeking to extend services in their country (their store) that allows the consumer to spend every bit of all the money in their wallet or purse at the store if not more.

For those of you not in the business of retailing then we can’t even begin to describe how complicated and how complex and how rapidly changing the game of retail is and how the demand chain is not won by money or sheer strength – absolutely not. Now back to China and the challenge of their globally minded suppliers and corporations involved in selling products to the world. So…who has the size, the sheer scale, the infrastructure (global logistics, regional and national distribution centers, fleets of trucks, global telecommunication and network infrastructure, global work force operating under process driven management, global business intelligence network, global relationships, global financial management infrastructure, etc. etc. etc) to be the highway for China’s aspiring companies (Lenovo is already there, Haier is growing, others still struggling) to reach the final customer and reap the promised profits of opportunity? For now, that’s probably only Wal-Mart.

Let’s examine what FRONTLINE reported in 2004 at PBS:

“Wal-Mart has a very close relationship with China,” says Duke University Professor Gary Gereffi. “China is the largest exporter to the U.S. economy in virtually all consumer goods categories. Wal-Mart and China are a joint venture.”

So imagine…if China bought Wal-Mart then what could it do? What would that mean to sourcing direct from China? What would that mean to every company’s product in the world that isn’t in a Wal-Mart anymore because Wal-Mart is selling only Chinese (ok, ok, maybe some local country products as well)? Imagine the power of owning that demand chain…the power of owning the front door to the customer…

Once again and finally to what David Barboza published in the Global Policy Forum in 2005:

Japanese and South Korean companies like Toyota, Sony and Samsung made the moves from national to global brands quite successfully, but it took years. Analysts say Chinese companies do not have that luxury, because the rapid pace of globalization means that markets are now quickly won and lost.

“Chinese companies don’t have that much choice but to acquire overseas companies,” said Joe Chang, a China specialist at McKinsey. “Very few companies can build organically any more. If they wait 10 to 15 years, they could be dead.”

Being the world’s low-cost factory floor is no longer the country’s singular ambition, analysts say. That is perhaps why China Entrepreneur magazine recently devoted a cover story to the question, “Should China Buy Wal-Mart?”

China Buying Wal-Mart? Why not?

May 27, 2008 | Filed Under Sourcing Trends | 3 Comments 

Supplier Diversification and Your Exit Strategy

Diversify your suppliers in China

Having selected a factory and developed your product in China is only the first step in your sourcing process. It is important to diversify your supplier base. Throughout the procurement process, there will be times when unexpected delays can turn into extra months for producing deliverables. The natural process is to accept the reasons for delay and “hope for the best”. When doing business in China, having patience with your supplier is not always the best method for action.

It is important to lay out strategic plans of action with measurable milestones. See your end goal and put the invested emotional quotient aside. In conjunction with these plans, penalties for lack of execution on both sides must be implemented. Enforce these penalties, but also expect to negotiate during the time for payment. During an import venture mentioned below, the supplier had to come to the table with a signed contract entitling me a 65% discount.

While the delays were excessive, you cannot expect the supplier to lose all profit and even material/labor costs. If communication has broken down, take the high road coming to the table with an understanding of the supplier’s perspective, but only to the degree of reasonable doubt on the reasons for the delay. Do not take the reasons for the delays at face value.

Other common schools of action are complaining (many of us do this in the wrong manner) and while this will put new thinking in the minds of your supplier (that you will not accept further future delays), the deed has already been done. Maintaining the right kind of respectful relationship is key to any business endeavor (or even personal relationship) and complaining in the wrong way can damage this fragile, long distance relationship.

The foundation for my understanding of the business principles, included in this article, in China, was derived from a venture into importing private label modular cabinetry. In my case an intermediary was engaged to resolve some of supplier problems. Read in detail my experiences in this area and specific actionable items in Avoid the Middleman and Seek the Intermediary.

My experience in producing cabinetry in China tells me that having an exit strategy is key to making a bad situation transcend the fundamentals of a failed import venture. If you have selected the wrong supplier, the first delay is not the end, but only the beginning.

There are times when the smart business decision is to cut your losses for the time being, regroup and engage your second supplier. The supplier always has the upper hand in your dealings with them. They have your deposit, you need the product and having to switch suppliers midstream would incur delays and costs. This balance of power can be flipped if you are open to turning the tables with diversification.

If the end result is obtaining the product in the required schedule, the second supplier you had lined up may be your lifeline. In the mean time, you can resolve issues with the current factory and complete the order post the newly engaged factory delivers. This scenario works if you will need additional inventory or you can negotiate with the current supplier to reduce order due to your delays and having to engage the other supplier to accomplish the endgame.

May 24, 2008 | Filed Under Negotiating & Strategy | 1 Comment 

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