In this chapter, I emphasize the importance of personally visiting your suppliers in China. You may have heard other consultants that do not see the necessity of going to China at all. They suggest their clients order samples and place orders based on the results of their sample evaluation. I strongly advise against this and will explain why. I have over 25 years of experience importing goods from China that tells me otherwise.
Of course, some very large manufacturers in China have solid QC organizations that can guarantee you a relatively constant level of quality products. If you choose one of them, you can probably afford to be a little easier going. However, chances are that they cannot offer you the most competitive prices because their superior QC organization cost money. Also, they likely already have a customer base in your home country distributing their products. This makes it less desirable to buy from them.
Most likely you will want to deal with smaller or medium sized factories. These companies need clear instructions from you and this can only be done if you sit down face to face to discuss your requirements and expectations.
Remember, this eBook is about assuring quality imports from China. How do you expect to achieve this without ever visiting your suppliers in person to explain and discuss your quality requirements? You need to go over designs and standards. You need to ask them pertinent questions and answer their questions to be positive they fully understand your requirements.
Besides, the Chinese business culture favors frequent personal contact with their overseas trading partners and visiting suppliers is the best way to do this. It will go a long way in developing a good working relationship that will pay off time and time again.
The smaller and medium size factories can usually offer you more competitive prices. Since you are getting into importing to improve your profit margin, they will most probably be the better partners for you.
By visiting your preselected factories you will be in the best position to decide with whom you want to deal with and whom you will entrust with your precious money, but only after you have concluded your negotiations.
During your factory visits, you will be in for many surprises. You may have to revise your first few judgments that resulted from your earlier communication with some of the factories. You will find that some factories are smaller than expected and have less production capacity available on their premises than you had been led to believe. They do not want to miss out on your purchase orders so they asked a subcontractor to produce for them instead.
This is totally unacceptable because the subcontractors are almost always inferior when it comes to quality management. More importantly, they care less about your orders because you are not their direct customer. If a factory has a policy of hiring a subcontractor without informing you, simply do not work with them if you want to stay out of trouble. I provide more information about this in chapter 8.
Hiring a Knowledgeable Consultant
Another way that you can achieve good results is by employing a neutral outside company as your personal consultant.
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Once you send your requirements to us, we will execute your project in the best possible manner. You will not need to be concerned about inferior factories because our proven and experience based DD process avoids them every time.
We have no special relationship with any factory and will always follow your clear instructions. Have a look at our Consulting page to see what we have to offer.
Visiting one or more factories is relatively easy because the factory will arrange ground transportation for you. The first factory does not even mind delivering you the second factory, their competitor.
Since transportation takes a lot of time, you will first need to make inquiries with the factories for their exact locations. If you schedule your meetings according to their suggestions, you can save substantial time that is better spent in discussions.
It should be obvious that it makes more sense visiting your supplier at their factory rather than meeting them in your nice hotel, which would be so much more convenient. A hotel meeting deprives you from meeting the entire team you are dealing with.
Before visiting any company in China, whether a factory or a trading company, make sure that you have your business cards ready. There is really no excuse for not having enough business cards with you. In all major cities, there are print shops that can quickly print business cards for you if you run out. In the Chinese business culture, it is very unprofessional when you cannot hand out enough business cards to your negotiation partners.
It would also be unwise, considering the high factory staff turn over rate. Key staff members change as they move on to other factories for better opportunities. If they have your business card, you can bet that they will contact you sooner or later. These people already know your requirements. Visiting them at their new factory could be very helpful because they will do everything to convince their management that your company is an important customer and you will receive better price quotes.
I recently read an article from another author stating: “In my experience, almost every sales person that I have met in China, who is not the owner of the business, has shown interest in either setting out on his own by ‘stealing’ his employer’s customers and product designs or simply doing his own deals on the side through friends, contacts, or family.”
There is some truth in that although I cannot fully endorse it, or maybe I have just been lucky all these years.
On the other hand, Chinese people want to be recognized and when meeting around a conference table you can only address them with their correct name after you have received their business card. For visitors from western countries it is usually quite difficult to memorize all the different names and without their business cards, you will almost certainly fail.
If you have a notebook computer, bring it along to all of your meetings. In case you do not have one, consider purchasing one. Believe me the purchase will be worth all the money you spend for it.
Your notebook computer provides you with all the information necessary to conduct business negotiations and enables you to show your company background information and your packaging concepts to factory management. You can also input information from your discussions without the need to later type your paper notes into reports. This is easier if you have a business associate, but with a bit of practice you can manage typing notes and giving the meeting your full attention. This saves you precious time organizing information when you return home or you could even send your reports to your head office on a daily basis, if further action is needed.
Upon arrival at the airport, it is not unusual to be greeted and escorted to the factory by both a driver and the supplier’s sales manager. The company owner might even show up to greet you and ride with you to the factory. The Chinese truly are good hosts.
This is a good thing because in most cases the driver does not speak English. It is also a good opportunity to use the drive time to make some small talk with the manager. You can begin developing your first in-person impressions before the meetings and negotiations begin. Use this time to learn the position your contact holds in the management hierarchy and who makes the final decisions.
That is important because the Chinese may want to delay decisions at the conclusion of your meetings. They will tell you that they have to wait for the final decision maker who is not available now. Since your whole purpose for visiting suppliers is to make a final selection of your future business partner, you should expect the decision makers to be present so that you receive their final proposal to base your decision on.
At the factory, you will be shown around the premises. Be sure you take your time studying the production lines, their QC arrangements, and the amount of technical equipment the factory is using. Additionally, you must check whether the factory is complying with Chinese labor laws that prohibit the use of child labor and extended working hours. You will definitely want to include a clause in your P/O about labor law compliance to protect your interests. Since you are only asking the factory to comply with existing laws, there is no reason for them to object.
As you make your tour through the building(s), be sure you check out what is currently in production and whom it is being produced for. Sometimes management may be reluctant to disclose this information but you can learn it from packaging materials or shipping cartons.
Do not be shy about taking photos. You should ask first, but I have seldom been prevented from doing so.
Look at the cleanliness and tidiness of the factory. If there is no space available to store the completed products before they are packed, you can expect that some of them will be scratched or covered with dust. Even if they clean the dust off before packing the goods, it will cause more scratches and damage.
Ask questions and investigate their QC processes. I typically begin by learning what they do when defects are discovered. Do they simply log the defect followed by reworking it or scrapping it without further action. Or do they investigate and correct the root cause of the problem? Because of the high employee turn over rate, a common cause of defects is a new and inexperienced employee. A little additional training or even making the employee aware of the problem often corrects it.
Whether the factory has achieved ISO 9000 or ISO 9001 certification is not critically important, as long as they take corrective action to improve production quality on a continuous basis.
Also, check if the factory has a decent or fully equipped lab. Of course this depends on the size of the factory and what kind of products are being manufactured.
Find out if the engineers are familiar with the regulatory requirements of your home country. This can be very important as it would be very difficult to teach them if they do not already have the necessary know how.
If you plan to import to the EC, the factory must deliver products that fully comply with the ROHS directives, otherwise you will be in deep trouble when non-compliant goods reach home. Ask for some type of guarantee if they claim to be in compliance . They should be able to provide lab certificates, or for electronic products, they must be able to show you approval certificates from internationally recognized labs.
Refrain from accepting certificates from local Chinese labs because they are too difficult to verify.
Inquire from management about their delivery times during the low and peak seasons to gain a clear understanding of how long it will take to manufacture and ship your products. It would also be good to ask them about their order backlog, which will give you an indication of how the factory is doing.
If they only have a few orders, there may be a reason behind it that will be important towards making your final decision. If the factory does not adequately explain the reason, there is a chance that their competitor knows, which proves one again how important it is to visit the factories in person. A trading company may have their own interests in mind and will not inform you that the factory has steadily been losing customers.
Another very important factor is whether the factory outsources part of their production. Common but critical production processes that should be kept in-house include plastic injection molding, metal punching, painting, PCB injections, etc. If a major production process cannot be done in house, there is always a risk that they cannot properly control the subcontractor. This can result in schedule delays and quality problems.
Factories are usually very reluctant to let you visit their subcontractors and mostly for a good reason on their part. The subcontractors work for their competitors and the factory you are visiting would rather not tempt you into investigating other companies. Of course, there can be many other reasons, labor law violations being one of them.
Some companies subcontract final assembly to maintain schedule if they have over committed their own assembly line capacity. By all means, avoid this practice because you will often receive inferior goods. It defeats the purpose of selecting a factory based on a positive evaluation if your products are not really being manufactured there.
Be sure to include a subcontracting clause in your P/O to protect your interests in the event a claim arises after the goods arrive at your home country. In many cases, the subcontracting factories are owned or managed by relatives. A very important Chinese business concept is called “Guanxi” which literally translates to “relationship”. Family demands to help each other can overshadow your need for stable production and acceptable quality.
Unfortunately, a bad Asian business practice is to obtain a purchase order before having a full plan of how it will be manufactured. So, you believe you are ordering 100,000 pieces produced at this particular factory, but what actually happens is this factory is only able to produce 20,000 pieces. They outsource the rest of the production to four or five other factories where they are not able to control the quality and you personally have little or no influence over what occurs at the subcontractors.
If you do not visit your factories, you will not be aware of these practices and may face serious problems later.
Since factories can use different ports of loading, you need to inquire which one is usually used. You need to know the applicable freight charges to accurately calculate your landed costs. Another reason to learn which port will be used is because some ports have only one container ship departing each week and you need this information if you are on a tight schedule. If you need to meet the Christmas sales season or have scheduled a major promotion for a new product, completing production on time but waiting an extra week for it to ship can turn into a disaster.
Also, some products can only be shipped by air freight. Notebook computers and MP3 players are typical examples. The key components of these products are ICs that fluctuate in price. At present, their prices are in constant decline. It is imperative buyers receive their goods within a short time otherwise competitors that air freight their shipment at a later date will easily be able to sell at a price that eats up all of your profit. This makes air shipment unavoidable.
When discussing the payment terms with management, ask them for their banking details. This enables you to do some background checking before you place your orders with them.
Finally, you need to negotiate the payment terms that are usually by irrevocable letter of credit at sight (L/C). This is usually the safest way to pay the factory and also allows them to obtain a bank loan to start production on time.
Never ever let the factory convince you to remit a down payment of let’s say 20 or 30% of the total order value by T/T to enable them to start your production. Ask yourself why are they asking for this? There is only one reason, which is that the factory has no money and obviously no other orders. They are also probably having trouble getting a bank loan. They want you to jump-start production with your cash. If something goes terribly wrong, and the likelihood is rather great that something will, you will lose your money and never receive a shipment.
Before you can negotiate prices with the factory, you need to inform them about your product and manufacturing specifications, quality standards, and any other terms or conditions. Failing to come to agreement first on these issues will likely result in very competitive prices, but for a substandard quality that will cost you dearly later on.
Most importantly, make sure that the factory management understands your specifications.
What sort of things do you need to specify? Included should be:
- Any special markings
- Packaging including the quality of cardboard
- Materials or components to be used
- Types and colors of paints and finishes
- Instructions in one language or several languages suitable for your clients? Instructions in Chinese don’t go over well in Europe or the USA.
Many importers use the Pantone Color Chart numbers to inform the factory about their color or color combination requirement. I can tell you from my experience that the results will not be very good. Especially if you have several factories involved that have to follow your color requirement.
It is much more practical and produces better results, when you use color chips instead. You can buy items that have the correct color in your home country and cut off some pieces of the plastic material. Always keep several reference samples for yourself and handover a reasonably sized piece to each factory. Reasonable does not mean a thumbnail sized cutout because it is not large enough for the factory to make the injection color accurately.
Also, consider the tests to be conducted during manufacturing and completion. Do you need CE or ROHS approvals for importing electrical goods to Europe? If wood is contained in the product or the packing, are fumigation certificates required?
Does the factory or supplier own the intellectual property rights of the product? Do not believe you can import well known international brands unless you intend to buy them from the brand owner. Gucci, Samsung, Sony, or Philips or any owner of a well known brand certainly won’t allow a Chinese supplier to sell their branded products at low prices through the back door! China is probably the world’s largest source of fake or pirated goods with well known logos and branding that are simply copies, or worse, just a logo stuck on a similar looking product.
Not only will there be little or no warranty, but worse, you risk serious legal action and possibly a criminal conviction if you cannot show proof of ownership of the brand name or that an agreement exists with the brand owner when you import under a brand other than your own or the factory’s. Even if it is the factory’s brand, you still need to have a written agreement with them to distribute it.
Please take this very seriously and do not even consider trying to import fake goods. It would destroy your reputation at home in addition to the possible legal proceedings.
Your requested specifications set all the standards for manufacturing samples, mass production, and inspection of your goods. This should make it clear why negotiations need to be done in person by talking with the responsible managers.
By using the same procedure when negotiating with every factory you visit, you will receive information that is directly comparable for each quote. This will simplify your decision making process. Since you will visit several suppliers during your visit, you will have current impressions about each factories’ performance capabilities in addition to the price quotes to make this important decision. Two of my other eBooks titled How to Make Business Negotiations in China More Successful and How to Make Chinese Factory Visits More Successful go into detail on the subject of negotiating with the factory management. What I have provided here is a summary of that information. If you want more information, these books are available from our website and are a must read literature for all importers.