Archive for November, 2009

Be Absolutely Prepared For Your Business Negotiations In China

If you want to conduct business negotiations in China, you better be absolutely prepared. You are far from home and cannot just run across town to fetch a missing document or your contract if you forgot to bring it along. Of course, you may be able to ask your staff, at home, to send you the missing information by e-mail but you may already have lost your face with your Chinese counterparts because you were ill prepared for the meeting.

Therefore, first make a plan about what subjects must be discussed with each of the companies you are going to visit. After that has been established, you have to prepare a checklist of the documents needed for each meeting. If you want to conduct successful negotiations with favorable results for your company, you had better have everything on hand instead of guessing what else might be needed.

I suggest using a notebook computer during your negotiations. Notebook computers can store all of your previous communication with your supplier along with copies of any documents that might be needed.

Paper Documents

However, during meetings with your suppliers you still may need a paper version of the documents to provide to the participants. It is usually not very convenient to present documents on your computer screen when several people attend your meeting. The completely paperless office is still a future illusion so you need to have hardcopies of the most important documents ready for your negotiations. If more copies are needed, your supplier can make them for you.

Help Your Chinese Partner Prepare

The meeting may only last 2-3 hours total but your preparations will probably need much more time if you want to be successful.

It is also common for your Chinese business partner to request a summary of the intended discussion points in advance. This makes perfectly good sense so they can also prepare for the meeting and can ask for additional information if something seems unclear.

Chinese senior managers seriously dislike being confronted with details they were not aware of and for which they did not prepare themselves. If you wait until the meeting before disclosing key information, the Chinese decision maker will loose his face. The result will be negotiations that go nowhere despite your perfect preparations.

Unfortunately, the preparations were less than perfect if you fail to cover the Chinese side of the equation. Not helping the Chinese prepare for the meeting is a formula for failure.

How To Avoid China Factory Claims

The first thing you want to do, if you have not done so already, is to establish your own in-house quality control department. That is the first step to making sure that your company has the means to control the quality of all incoming samples or any other quality issues before you place any purchase orders.

At the beginning, you do not want to start with too large of a department because you will be learning from experience. Efficiency should be more important to you than size. The composition of your department depends very much on the nature of your import products. If you are in the textile business, you may want to hire a textile engineer plus one or two assistants. If you are in electrical or electronic products, you need to hire an electronics engineer plus one or two technicians.

To perform their quality tests properly, your specialists will need suitable technical equipment. A note of caution: do not jump the gun by establishing a fully equipped lab at this early stage. That would prove very expensive. The easiest way to determine the kind of technical equipment needed is to rely heavily on your engineers after they are hired. They will know what is needed and where to get it. A discussion about equipping the test lab can easily be included in the interview process for the engineers.

This is the most reasonable way to establish your own functioning quality control department at an affordable cost and in the least amount of time. The second step is to visiting your Chinese factories on a regular basis if you want to minimize your risk. As a businessperson, you regularly take precautions to protect your company’s interest and visiting your supplier’s factories needs to be included as an insurance policy.

If you want to avoid claims, you need to discuss your quality requirements in person with the factory management to make sure that they have clearly understood your quality requirements and will implement it accordingly during their production.

The third step is appointing an inspection company to perform an inspection for you. You can choose from the following three primary inspection methods:

  • Initial Production Inspection (IPI)
  • During Production Inspection (DPI)
  • Final Random Inspection (FRI)

The most commonly used inspection method is the Final Random Inspection which is executed when a consignment is 100% manufactured and at least 80% packed.The fourth step is to provide precise information in your P/O, L/C and any other accompanying documents. That is often overlooked and many claims result from insufficient information from the importer to the factory. Having discussed your company’s specifications with the factory management in person, does not mean that you can omit such vital information in your documents later.

The fifth step is to include a specific provision in your contracts with Chinese suppliers requiring them to obtain and maintain sufficient product and general liability insurance with a reputable international insurance carrier.

Such insurance should not be seen as a replacement of the other four steps but it can become your backup. Following this 5-step procedure will surely help you to prevent most but not all claims with your Chinese factories.

Ordering Samples From Chinese Factories

After making your decision about which supplier to contract with, order your product samples but plan to evaluate them after you return home.

Sample Preparation

Sample preparation, depending which kind of products you want to import, can take considerable time. Contrary to what many people think, factories usually do not keep samples in their warehouse that can be sent right away. The more complicated a product is (for instance home appliances or consumer electronics products) the longer it will take and the more diligence is needed from the factory to prepare the samples according to your specific requirements.

You have reached a turning point in your own quality control. The first step was your scrutiny of each supplier visited during the trip. You should have a good idea how each supplier will perform and how talented their management is.

Providing them with detailed information about your sample requirements could become the key to your success. Why is this so important?

When the Sample is Wrong

Imagine that you did not pay adequate attention to instructing the supplier about your sample requirements and they prepare the sample according their own factory standards. Timing however is important and you need the samples checked for compliance with your requirements in your home country. It needs to be right the first time.

If the first sample is incorrect, you could take a risk and place your order in hopes that the supplier will get it right the second time. It is not a good idea to take this risk because there cannot be a guarantee that the supplier will actually follow your new instructions.

It is best asking the supplier to manufacture new samples. Time starts to become an issue as you wait for new samples to be made and it will take 3-7 days delivery time to ship them to your home country. Add everything up and you have possibly lost a month. This could be crucial if your goal is to be among the first to promote the new products in your home market.

Never place any order with new suppliers before you receive acceptable samples with the proper quality and your QC people or an authorized lab has approved them. Anything else is a gamble and you do not want to begin production with that level of risk. Only after establishing a sound business relationship with your suppliers, can you be confident that factory will closely follow your instructions. It is important to set things right from the very beginning.

Have Samples Properly Packaged

When asking for samples, be sure to request they be packaged according to your specifications. This should be the same packaging the end consumer receives. At this point, they should workout the details to determine how many pieces fit into one 20′ or 40′ ocean-going container. Along with this, comes the details of how many fit into one export carton and if any inner packing needs to go into the export carton.

With this information, you can calculate the freight cost. It may be necessary to change the sales packaging size in order to fit more pieces into one container and save substantial freight charges. It makes a big difference if you can pack 1,400 coffeemakers in a 40′ container instead of only 1,200 pieces and it will certainly affect your selling price.

Samples are seldom free which is understandable because they are handmade and very labor intensive. Even if they are simple plastic products, the supplier has to follow your instructions and injection mold them in a certain color which is very time consuming because the plastic injection machines are usually running at full capacity and the injection is limited to one color at a time. If you ask for several different color samples, they can only make them when they have production in the requested color. Naturally, this increases the time it takes to receive the samples.

An alternative is painting the samples but the surface of a spray painted object looks different from an injected one and may mislead you into approving something that later proves to be less than perfect.

Order Plenty of Samples

Do not make the error of ordering a single sample per product/color because you need reference samples for several purposes. Common samples needs include:

  • Samples for your showroom
  • Samples for lab testing
  • Samples for photo shooting and gift box preparation
  • Samples for your inspection company
  • Samples for your sales managers to show to customers

That is only the beginning of a long list and believe me, large buying offices like hypermarkets, department stores, and other large volume importers ask for even more samples because they are aware of the extensive need when introducing a new product.

The worst-case scenario is if you give the only color reference sample to a key customer and after they place an order with you, you cannot determine which specific color to instruct the factory to begin with. It is a good idea to always keep one or more samples per color locked up in a safe place to avoid embarrassing errors. Due to the limited storage space, suppliers may not keep their reference samples at all after completing production.

You now have the information to better understand why suppliers are reluctant to provide free samples to new customers. In many cases, you can convince the supplier to refund the sample costs after you reach a certain order volume. It is good business to negotiate this in the beginning.

Besides the sample charges, you will be asked to pay the freight charges for the sample delivery. This can get expensive because samples are usually sent by air courier in order to make up lost time and stay on schedule. Suppliers do not want to pay these charges and it is often difficult to convince them to do so. If they do so, it is usually only after a successful business relationship has been established.

If you need the samples urgently, and that is usually the case, you are better advised to look for a compromise, otherwise you may lose the competitive timing edge in your home market.

Inspecting Subcontractor Factories In China

As you visit each of your factory’s various departments, you may learn a portion of the production is subcontracted to other factories. Unless special circumstances apply, the subcontractors are usually near by.

The factories find this to be a sensitive issue and may be reluctant to disclose it.

They may try pretending the other factory belongs to them and is an extension of the production of the factory you are in. There is probably nothing further from the truth. Often, relatives of your factory’s owner run the other factories and they doing each other favors. It is very common in China.

The problem you are looking to uncover is if the subcontractor has a totally different quality standard (if they have one at all). That means whatever quality assurance the factory has given to you may be contradicted or jeopardized through their cooperation with subcontractors.

The main reasons factories use subcontractors are:

  1. To save money by squeezing the subcontractor to accept lower prices than they are capable of achieving themselves
  2. To overcome a temporary production capacity shortage
  3. To do a favor for a friend or relative that does not have enough orders to run their factory efficiently
  4. Cover-up labor rights violations
  5. Access to production equipment such as injection machines, spray-painting, and mold shops that they do not have

The problem is you have no idea how well or poorly the subcontractor’s factory is managed without visiting. Your factory might not make this visit easy but you should insist.

Possibly your factory has several subcontractors. The more subcontractors, the more risk you will be taking that some of them have quality problems. This is a very good reason to insist on visiting them.

You cannot simply go wandering into the subcontractor’s factory. You are going to need cooperation from your factory. Most likely one of the staff will accompany you and your visit will probably be limited to the area of the subcontractor’s factory that is performing work for your factory.

Be sure to apply the same stringent quality and performance requirements as you did to your own factory. It is the only way you can protect your own business interests and to assure the quality of your imports from China.

How Often Must You Visit Your Factories In China?

This is often an economic decision because overseas trips are expensive. I would say that you should visit each of your factories at least once a year. Combining it with Trade Fair visits helps you save on costs.

Certainly, it also depends on the current quality and performance of your factory. A factory continuously causing problems for you should be abandoned. If you can’t walk away from them because they have unique products that you must have, you will have to visit them more frequently.

A Cost Effective Alternative to You Personally Visiting

Another choice which I suggest to you is using a Consultancy Service. Problems are often created by the language barrier and cultural differences which can be easily overcome by a face to face meeting. Your Consultancy Service is already in Asia and can take quick action to protect your interests. It is often essential to make fast decisions and they can provide the information needed.

Fast Paced Change at Chinese Factories

Do not try to convince yourself that a single visit to your factory is enough. China is changing so fast, that you would be surprised how much change occurs at the factories in a year.

A new factory manager can turn an inferior factory around and make it more competitive. The opposite can happen when a good factory manager leaves your factory and the successor fails to maintain control of operations.

Sometimes a factory experiences huge problems when a complete team of engineers leaves. The problem is twofold because both the manufacturing and QC process are seriously compromised. A factory’s sales often plummets when their engineering or management team moves on to a competitor.

Unfortunately, this happens more often than you would expect. Usually the only way to find out is either to wait until the effects are felt or be proactive by finding out during your factory visits.

This knowledge is essential to you because your business and reputation will suffer if you are unaware of the changes. You can always inform your customers at home about problems you are facing but if you let them down it will likely cost you serious money.

Since you will be visiting several factories during your trip, it is very likely that one of your factories will hint about other struggling factories. Rumors spread very fast in China but they will not reach you if you stay at your home country all the time.

In other words “been there, done that” would be a totally wrong approach since everything could have changed in the meantime.

Talk To The Right People During Your Trade Fair Visits In China

If you talk to the wrong people during your visit you will not get the best results, even if the rest of your Trade Fair preparations are close to perfect.

Making First Contact

It should be a straight forward task making contact with the companies your previously contacted from your home country. You should have the name of your contact person and will know whether he or she is attending the Fair.

Unfortunately, not every person at a supplier’s booth is the person you will be communicating with in future. Just grabbing some of the business cards laid out on the tables does not help much either if you do not know who they are from.

Exchanging business cards during your visit at the supplier’s booth is essential but less formal because time is money and the next visitors are waiting to be seated. Therefore, make your visits efficient and professional. Small talk is something you probably do not have time for nor do the suppliers.

About Trading Companies

There will be a lot of trading companies at the Fair and you cannot easily distinguish trading companies from manufacturers right away. Familiarize yourself with the pros and cons of doing business with trading companies before deciding if you want to do business with them.

Both sides have their merits and you have to ask yourself what is more important to you.

Pros

  • Easier communication for you with a single contact for several factories
  • They usually have a better showroom for product selection
  • They are experienced in dealing with customers from different countries
  • They sometimes invest in their own tooling and therefore have their own products
  • Their staff is more proficient in English which makes discussions and negotiations easier

Cons

  • Their prices are less competitive because you have to pay for their service
  • They may not be able to present you with the latest products because they do not want to take the risk of being first
  • They will try directing you to certain factories that they have trade agreements with
  • Solving claims with their help may prove more difficult due to their relationship with their factories. Since they have projects for other customers, the factories may be more important to them than your business

Getting to the Manufacturer In some cases, you are forced to work with an export agent simply because the factory does not have an export license or does not invest in extra marketing personnel.

It is not a surprise that you will find many suppliers offering the same products because the products are part of their general trading business. If you want to buy your products directly from the manufacturer, you will have to find him first and it could be that he does not have his own booth at the Trade Fair.

Several times, I have found the manufacturer present at the booth but shielded from contacting potential customers by a smart trading company staff member. These are usually the professional sales people, fluent in English and trying to attract your attention.

The small guy in the background that does not speak English is the real show-master, controlling the business and most importantly he has the money.

Talking to him is actually more important than listening to the “smart guys” that know exactly what you want to hear from them. Unfortunately, you cannot talk to the business owner at this moment but you can collect his business card and can come back with one of the interpreters that are available for hire through the Trade Fair operators.

Interpreters sometimes can do wonders if something of importance has to be negotiated and the language barrier stands between you and your supplier.

Wrong Exhibitor Names

Quite often, you will find names on the exhibitors’ booths confusing. For instance, a booth showing the name “Guandong Gas & Animal Products Company” may have nothing to do with gas but will have vacuum cleaners on display instead. That happens because some companies sell their booth allocations to other companies.

As you can see now talking to the right people during your visit at the Trade Fair in China can make a big difference.

Create Your Own Corporate Identity For Your Import Products

Branding Your Products

Many importers underestimate the importance of this step and get into trouble later on. Having your own brand name and a convincing gift box design (product packaging) could be the main key to success for your import business. Why is it so important to have your own brand name and gift box design? It immediately establishes your corporate image with Chinese manufacturers and the customers in your home country. It sets you apart from the rest of the crowd and gives it a professional touch.

Creating your own gift box design may seem like wasting money since many manufacturers can also provide you with their own design (usually a very simple one) at no extra charge. Unfortunately, they will provide this service to everyone who is asking for it and these goods may even enter your home market without your knowledge. You just become another look alike retailer in a crowded field.

The result is more competition and you become unable to achieve your planned profit margin. In other words, you wasted a lot of time and money without benefiting from it.

Selecting a Brand Name

But let’s start with the own brand name first. You will need some outside help with this because the brand name which you want to choose for your products may have already been registered somewhere else. It would be disastrous if you become entangled in legal battles with the legally established brand name owner after you have distributed your imported products in your home country.

Ask a lawyer to do this for you because they have the tools to do thorough research and can register your brand name for either worldwide or only local use. Theoretically, your chosen brand name may only be available for a certain kind of product but I suggest choosing one that can be used for a wide range of products. This supports your future expansion strategy and you don’t want to be stopped by not having the suitable brand name to do so.

Protect Your Brand

Another reason for having a custom design is that the Chinese Government has implemented quite a few restrictions that help protect you as an importer. The restrictions prevent factories from producing and shipping products with your brand to other than legal brand owners.

Once you have created a nice and professional looking gift box design, there is always the risk that some factory or other importer may copy it and use it for other customers not necessarily in your home country. There is not much you can do about it but you now can see why your own brand name is so important. Do everything you can to protect it from the beginning. When you become hugely successful, it will be very valuable.

At this point, your gift box design is only a concept about color combinations, graphics, use of photos, etc. The final design can be only created after you have finalized your product selection.

How Can Importers Save Cost During Their Business Trips To China?

The present economic downturn affects many facets of business including manufacturers in China and their overseas customers.

To completely stop importing is not an option because business must go on but perhaps on a smaller scale.

On the other side, factories in China are hungry for orders right now and starting an import business at these times is actually not a bad idea.

Cost saving is an important option to keep your business afloat even during difficult times.

Here is a summary of very effective methods of cost savings during business trips, that you may want to consider for yourself.

  • Book a standard hotel room instead of staying at the executive floor. If you book a standard room you can save a substantial amount of money and can still enjoy a good night’s sleep.
  • Negotiate room rates. Presently hotels are experiencing much lower occupancy rates and it is worth to bargain for a better rate especially if you plan to become one of their long-term customers.
  • Fly Economy Class. If you book an economy class flight with one of the airlines famous for good in-flight service, you will also end up with a decent meal, better than average leg space, reasonably comfortable seats, and can still save a lot of money.
  • Use public transport. Cities like Hong Kong, Guangzhou, Shanghai have an excellent public transport system that offers you a much cheaper and mostly faster alternative to taxis. Many hotels and fair operators offer free of charge shuttles buses to the exhibitions that you could use. You can save substantial money by staying further away from the exhibition centers in a comfortable hotel at a much lower room rate.
  • Online Registration. Use the online registration services of the fair operators and receive your free of charge entrance badge in advance and avoid queueing at the entrance.
  • Save on your meals. Why not try the much cheaper local food and reduce your dining expenses. A local noodle soup costs only a few bucks and tastes delicious. Instead of having breakfast at your hotel, you could visit one of the numerous coffee shops around your hotel area and get even a free coffee or tea refill.
  • Shorten your trip or reduce number of trips per year. If visiting fairs in China is a must for you, perhaps you should consider to focus on the most important ones. In many cases there is a spring and autumn version of the same fair and you may want to skip the spring version because it may not have the same importance than the autumn version.
  • Don’t miss out on anything by hiring a local Consultant. The American president is a very busy man and does not have the time to read all newspapers by himself. There are experts that do the clipping of vital articles for him and allow him to receive the necessary information. The same is true for importers. You cannot cover everything during your trip and you cannot visit every factory as it should be the case. In these difficult times you need the help of experts that are already on the spot. They can take over part of your duties even if you have decided not to travel to China. Their decades long experience with Chinese factories will help you to maintain your import activities and at the same time reduce your cost during importing substantially.

How Does The Present Economic Turmoil Affect Imports From China?

The good news for all importers is, there is no substitute to importing from China.

Products at more economic prices have become part of our daily life. Most of these products are made in China and have replaced locally made products that could not compete with them for various reasons.

The bad news is that China as the so called “Factory of the World” is seriously affected by the lower demand of the main import countries like the USA and the EC member states.

To counter the effects of the global financial crises, China has announced a US$ 586 billion rescue package to finance programs in 10 major areas like rural infrastructure, social welfare, etc. The amount will be spent until 2010. Included in the rescue package is a reform of the VAT (Value Added Taxes) rebate system for 3,770 items, that will cut industry costs by estimated 120 billion Yuan.

Since oil prices, raw material prices, and labor costs are in the decline, regular price increases as in the past, should be out of question for the time being.

As a result of the global financial crisis, a large number of small and medium sized factories,  already in difficulties before,  were forced to close. Largely reduced order volumes from overseas customers and lack of funding from local banks have driven these factories into the corner with no way out.

The result may not necessarily be bad for importers because as always in difficult times, only the stronger and better organized  factories will survive and they are usually the more trustworthy partners for importers.