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Behind the scenes: buying SD cards & flash/ thumb drives, China Direct

Mike Bellamy, with CSIC — Wed, 15 May 2013 05:22:25 +0000

Introduction

At the recent Electronics industry show in HK, we assigned our CSIC researchers to interview dozens of buyers and sellers dealing in SD cards & flash drives in order to get to the bottom of the following issues:

Why are buyers of SD cards and flash drives targeted by scam artists?

What common mistakes are made when buying SD cards and flash drives?

How is the supply chain organized among the manufacturers and wholesalers in China?

What are the popular new models of flash drives for Spring 2013?

How to find a reliable supplier of SD cards and flash drives?

Why are buyers of SD cards and flash drives targeted by scam artists?

We get more horror stories about scams and bad suppliers from buyers of USD Flash drives (thumb drives) and SD cards (especially micro version) than all other industries combined! To see some typical examples, visit the blog posts Factory Didn’t Ship the Right Amount, Now They Won’t Reply or Resolving a dispute: Demand letters and legal options or My USB Supplier is Letting Me Down or Fraudulent USB thumb-drives.

Most buyers of these products are working on tight margins and buying small quantities. Buyers tend to decide against doing proper due diligence in order to verify whether the supplier is legit; buyers end up regretting this decision.

Scam artists target the SD cards and flash drives because it is very hard for the buyer to confirm via emails and pictures if the product is legit. The blog post Fakes Abound displays the real deal next to a knock off. You cannot visually tell the difference. Since some buyers don’t come to China or engage a 3^rd party inspection agent to inspect the goods before shipment and before final payments are made, most of the time the scam artist will request final payment, receive the funds and disappear long before the buyer finds out he or she has a shipment of junk. Perhaps buyers don’t realize it only costs a few 100 USD to have an inspection agent inspect the goods.

Buyers of electronics have grown accustomed to buying and selling, online, back home, and have thus falsely assumed the same buyer protection is in place overseas.

Small buyers generally will not try to track down the scam artist and pay for a legal battle on a small order. Buyers should be aware that collection agents may be engaged if you have been ripped off.

Smaller buyers (especially new buyers) are too trusting of sellers. If the supplier says that they have 500 employees, the buyers take it at face value. If the seller says their standard procedure is 80% deposit and 20% at ship date, the new buyer assumes that is the norm, when in reality it’s typically, 30% deposit and 70% after 3^rd party inspection.

SD cards and flash drives are small and light weight. Most deliveries are shipped via air using express mail. Unlike larger orders sent via sea, most express mail packages are not inspected by outbound customs officials in China. The scam artists benefit in two ways:

A) A legit factory needs to present an export license when making an outbound shipment. Scammers know they will not get checked on the outbound, so even if they send a turd in the Fedex box, rather than actual product, it is likely Chinese customs will never get a whiff and the scammer is unlikely to get caught in China.

B) Express shipments are often not accompanied by the detailed documentation that goes with a sea shipment. In the event that the overseas party wants to take the seller to court, there is a lack of paperwork to support the case that the buyer was scammed.

What common mistakes are made when buying SD cards and flash drives?

In addition to the above mentioned mistakes of failing to do audits and inspections, buyers (especially new to China buyers) of SD cards and flash drives run into the following common problems:

Failure to understand the difference between “A” grade and “B” grade.

Factories and professional buyers understand that “B” grade flash drives may start to fail after 2 years. These “B” grade drives are trinkets and promotional items designed to be thrown away after a year or so of use.

“A” grade products are designed to last 5 to 8 years of regular use. Better technology and raw materials are used.

Too many buyers are getting a fair price for “B” grade but thinking they are buying “A” grade.

Luckily there are two simple ways to determine if a product is “B” or “A” grade. During a pre-shipment inspection, an independent inspector may use the equipment at the factory on the production line to check the quality AND memory capacity of the products you are buying.

If you are buying from a broker who won’t let you visit the factory, then you or your appointed inspector can use “H2 testing software” and a notebook computer to do a random sampling on site anywhere. You do not need to be on the production line. Regardless of which method you use, make sure to inspect the product before it ships and before you make final payment.

Licensing

Sellers may say they have the rights to use licensed brand names and images. Most sellers do not have the rights and most buyers do not double check until it is too late.

While the customs authority in China on the outbound may not care if a counterfeit SD card is labeled under the famous brand “Kingston,” “San Disk” or a flash drive decorated with Mickey Mouse, the inbound customs into your country will care. When you cannot provide the proof that you have been granted the rights from the brand owners, there is a high likelihood your products will be confiscated. Good luck getting a reimbursement from the seller.

At the show we noticed that the SD cards for sale at the trade show booth of a major factory have the San Disk “SD” logo printed on them. Many people (both buyers and sellers) are under the impression that the SD is for “SD card” but technically “SD” is a registered mark of San Disk. This could cause a licensing problem for the buyer.

Can you tell the real ones ((http://en.wikipedia.org/wiki/SanDisk) from the counterfeits?

How is the supply chain organized among the manufacturers and wholesalers in China?

The internet is flooded with websites offering China direct sales of SD cards and thumb drives. A few of these websites are actual factories or professional wholesalers selling decent product at a reasonable price. The vast majority are intermediaries offering various levels of garbage product at various price points. In this industry in particular, it is impossible to view the seller’s website and judge the legitimacy of their offering.

The hub of SD cards and Flash Drive manufacturing is in the Bantian District of Shenzhen. The wholesale hub of the industry is HuaQiangBei Road in Shenzhen. For more info visit: http://en.wikipedia.org/wiki/Huaqiangbei. This same road also happens to be the epicenter of fraudulent activity in the industry.

Lots of small offices housing two guys and a computer claiming they own a factory in China and even claiming that they make their own wafers. Actually, almost all the wafers come from Taiwan. The factories in Bantian and other places do the assembly of inserting the wafers into the housing along with the custom printing and packaging.

The wholesalers deal with multiple suppliers. So if you buy 100 units at the wholesale level you may actually be buying product made in ten different factories with ten different levels of quality. This makes QC essential.

Now some good news: MOQ

A lot of buyers don’t realize that the Minimum Order Quality in this industry for these products is fairly small. Furthermore, of the factories we visited, the MOQ ranged from 50 to 500. So it may be easier than you think to go factory direct and avoid the sloppy wholesalers who give the industry a bad name.

What are the popular new models of flash drives for Spring 2013?

While we were visiting with buyers and sellers in the industry, we took the opportunity to ask about hot products. The “classic” design pictured below is still the biggest seller. It’s cheap and easy to brand with corporate logos and such.

The following two designs don’t yet have the volume of the “classic” above, but they are are experiencing rapid growth in popularity.

The first design incorporates a stylist for manipulating a smart phone or touch screen on a tablet computer. The second design can incorporate a logo or wording into the crystal. When plugged into the USB, the image lights up.

How to find a reliable supplier of SD cards and flash drives?

At the April 2013 Global Sources trade shows we met with the following sellers. Based on initial interviews we believe them to be legitimate factories and reputable sellers. Contact the author via the “contact us” form at www.ChinaSourcingInfo.org if you would like an introduction to the sellers below.

Microflash (SD cards)

Dite (SD Cards & Flash Drives)

W&T (Flash Drives)

Reteck (Flash Drives)

Baishun (Flash Drives)

TriPower (Flash Drives)

In addition to the factories above, at the trade show we also met a HK based trading company focused on Brand name SD Cards. Golden City was honest in their approach to business. They didn’t try to trick our interviewers by claiming to be a factory and explained that their strength lies in providing high volume branded products at the wholesale level. MOQ is 3000.

Mary at Oriphie (Flash Drives) was kind enough to offer her pricing and order terms for our review. Into the quote below, I have added important notes for our readers.

Takes Payment in the form of: TT, Paypal, or western union, etc.

Note: It is a positive sign that the seller is willing to use Paypal, as Paypal gives some protection to the buyer. BUT, it is a common tactic in China to use Paypal in a marketing scheme, and later come up with some excuse as to why Paypal cannot be used when the actual order is placed. Regardless of the payment method, be sure to protect yourself by doing audits and inspections before final payment is made.

The payment terms are not addressed by seller. Do they want 100% or cash on delivery? How about 30/70? Buyers must negotiate critical details in advance and have them clearly stated on the PO.

Packing: polybag and others, I can send via other packing method if need be.

Logo on USB: can be silk screen, pad screen, full color printing or laser or emboss, free logo printing for more than 300pcs order, etc.

Note: See the points in the article above about IP, Licensing and counterfeits.

Shipment: we use FedEx to ship your orders.

Delivery time: for the urgent orders less than 2000pcs, 3-4days, for the normal orders, 6-8days.

Chipset: Toshiba real capacity and passed by H2testw, speed is write is over 3MB, read is over 10MB, can do the upgraded USB if customer has agreed and the price can be much lower than the quote.

Note: See the points above about “A” and “B” Grade products. So important to be clear about the expected quality level. The notes on Chipset should be listed in your Purchase Order (PO) and confirmed with signature/chop with the factory. Obviously you should be using a PO. Sending in your order in the form of an e-mail is a great way to ensure total miscommunication and have exactly what you didn’t want shipped to you!

Products: will make a sample first and take photos to confirm with you, then go to mass production, auto run free, no MOQ, upload data free.

Capacity available: 1MB-16MB-64GB.

Warranty is 2 years.

Note: On your PO, make sure to specify what this warranty actual covers.

Conclusion

The vast majority of failed orders in this industry can easily have been avoided had the buyer applied the tools above. If you only take away a few points from this article, remember the following:

Assuming the worst until proven otherwise. Good suppliers are out there, but you have to do your homework to find them.
If you don’t do audits and inspections, you probably shouldn’t be buying direct from China.
Structure payments to performance. Don’t pay the final payment until you have confirmed (yourself or with a third party) that the quality is to spec and actual product is ready to ship.
Shame on you if you don’t use a PO or Contract.

Resources/References

Contact the author via the CSIC contact page if you would like to be introduced to the suppliers mentioned above and/or reputable 3^rd party service providers (sourcing agents, inspection agents, logistics, lab testing, collection agents…).

Related Blog Posts

Going to a trade show in China, Part 1 : Getting there

Going to a trade show in China, Part 2: Selecting the Right Show for Your Needs

Going to a trade show in China, Part 3: Attending Your Show.

Learn how Global Sources can help you source

Hardware Is Hard

More Free Resources For Buyers (virtual trade shows)

Learn how Global Sources can help you source

Doing Business in China. May 2013 Seminars in California, Ohio, Georgia & Wisconsin

Mike Bellamy, with CSIC — Wed, 08 May 2013 03:25:05 +0000

China expert, CSIC contributor & HK-based businessman, Thad Mueller of Fiducia Management Consultants will be travelling to the USA from 11th to 22nd of May to host a series of workshops supporting US companies wishing to do business in China and Hong Kong.

Thad has extended an invitation to readers of our blog and their associates to attend the events in the USA free of charge.

San, Jose, CALIFORNIA Monday, 13^th May 2013. 10 am. Please email to Tom Bondi: TCBondi@bergerlewis.com

Cincinnati, OHIO Tuesday, 14^th May 2013. 8 am. Contact http://www.cshco.com/Events/

Manitowoc, WISCONSIN Wednesday, 15^th May 2013. 7.30 am. Contact www.schencksc.com/asiapacific/

Sheboygan, WISCONSIN Thursday, 16^th May 2013. 7.30 am. Contact www.schencksc.com/asiapacific/

Atlanta, GEORGIA Wednesday, 22 May 2013. 7.30 am. Contact John Yeager: jyeager@windhambrannon.com

Introduction to the speaker’s firm: Fiducia helps clients to set up and operate companies in China and Hong Kong. Their services include incorporation, accounting, trade support and executive search. Fiducia is based in Hong Kong, Shanghai and Shenzhen with a team of 100 professionals. Please visit www.fiducia-china.com for more information.

In addition to the seminar, an individual meeting can be scheduled by contacting Thaddaeus directly via his email: tmueller@fiducia-china.com or his mobile phone: +852 9686 0701.

Comments on: “Betrayed in China: One Entrepreneur’s Hard Journey East”

Mike Bellamy, with CSIC — Tue, 07 May 2013 03:49:16 +0000

Haven’t yet found the time to read the books “Poorly made in China” (reviewed here) or “Mr. China: A Memoir”? Well you are in luck. Take a few minutes and read “Betrayed in China: One Entrepreneur’s Hard Journey East”.

The Feb 2013 Inc. Magazine is pretty much an executive summary or cliff notes’ version of the aforementioned books. All the joys and sorrows of sourcing- but in an easy to read format.

If you are new to China sourcing, you will say “OMG”. If you are an active reader of CSIC you will say “been there, done that.” But both camps will find enjoyment and maybe even pick up a few tips from Adam Kasha’s “from-the-gut approach” to China sourcing.

Two of Adam’s realizations struck accord with me as I read the article.

Adam’s trust was abused by a local partner serving as an intermediary. Now he deals direct with China on his own.

Preach on my brother! I’m sick of Chinese traders (especially the ones in HK) and plenty of Western “consultants” who use scare tactics to imply that buyers can’t go China-direct without their help as an intermediary to bridge the so called “culture gap” and the “mysterious Asian ways” of doing business.

Yes, China is different from the US. But so are Japan, Mexico and even Canada! For some reason there is the misperception that China is “uniquely unique”. I don’t buy it.

Here at the CSIC we believe that if buyers apply the free tools and techniques readily available at www.ChinaSourcingInfo.org and other sites, these educated buyers will have a significantly shorter learning curve than the protagonists of the books and article mentioned above.

It’s not easy to set up operations in China.

The article explains:

…as a foreigner, he couldn’t legally do any of that–couldn’t open an assembly warehouse or hire Chinese workers or ship goods out of the country–unless he spent months and thousands of dollars setting up a Chinese corporate entity called a wholly foreign owned enterprise, or WFOE. He would also need an export license.

I agree that it’s not easy, but setting up a WFOE in China is a lot easier today than even 5 years ago. So if you desire a footprint in China, avoid the sneaky JV partner and consider setting up your own shop or use a reliable 3^rd party infrastructure and regardless of who you deal with, make sure to do the due diligence!

Video: Common Mistake #4: ‘Failure to conduct due diligence and verify key information’

5 Part Video Series:

Experienced or Not. Setting Up in China. Introduction to Series

Experienced or Not. Setting Up in China. Part 1 of 5

Experienced or Not. Setting Up in China. Part 2 of 5

Experienced or Not. Setting Up in China. Part 3 of 5

Experienced or Not. Setting Up in China. Part 4 of 5

Part 5 of 5 coming out in April 2013

Service provided by the author: 3^rd party assembly

About the blogger

CSIC volunteer Mike Bellamy is author of “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com).

Move over Shanghai Surprise. Meet the Zhejiang Screwjob.

Mike Bellamy, with CSIC — Tue, 30 Apr 2013 03:36:21 +0000

Back in January 2013 we alerted our readers to a scam targeting Chinese factories and Western buyer which was reaching epidemic proportions at the time of writing. At the peak of the outbreak, we were receiving no less than a report a week from CSIC readers who had fallen or almost fallen for the scam.

In 2012 and early 2013 the scam involved a 3^rd party hacking a factory email, pretending to be the factory, and accepting orders from buyers.

Payment was made into the hacker’s bank account and once the funds cleared, the hacker disappeared. The factory never knew there was an order. The full scam is exposed at Factory email hacked. 29K USD stolen from buyer. How to avoid it happening to you.

The key points to remember are:

Make sure the name on the contract is the same name as the bank account.

Don’t send large payments to private accounts.

Visit the supplier for audits and inspections during your order. If the buyer schedules an onsite visit to check an order, it will become clear pretty quickly if the supplier is not aware an order has been placed!

But like any nasty virus, this scam evolves and gets harder and harder to eradicate. Here is the new twist. A few weeks ago we were contacted by a European buyer who was scammed 300,000 RMB ($48,000.00 USD) by somebody who hacked the suppliers email. Looking for support, he asked me for introductions to China based English speaking investigators.

When I read the background, I assumed it was just another case of the common 2012 scam. However, the professional investigator had been around the block long enough to sense hanky-panky going on. The investigator offered the following tactics to flush out the truth:

Test One: Have a trusted 3^rd party contact the supplier and get the bank details to send money for a test order. Is it the same account as the one that was supposedly belonging to the hacker?

Result: Supplier gave the same official bank account that was originally given to the European Buyer. No proof of wrongdoing there.

Test Two: Have another trusted 3^rd party back home pretend to be an interested buyer and contact the supplier who said their email was hacked. During the order process is the buyer informed of a new bank account to send the money?

Result: You guessed it. The factory email was hacked “again” by some “unknown 3^rd party.” The new twist on the old scam is collusion between the hacker and the factory!

It’s still hard to prove it in a court of law and the money is probably lost. Even if the buyer wins a court case, it will be hard to receive financial compensation for damages done. So the moral to the story is, as before:

Make sure the name on the contract is the same as bank account.

Don’t send large payments to private accounts.

Visit the supplier for audits and inspections during your order. If the buyer schedules an onsite visit to check an order, and there is no stock ready to ship…big red flag something is not right.

If you have fallen victim to a scam and need help, contact me and I will be happy to introduce the investigators mentioned above.

Help me name this new scam

All the nasty modern viruses have a cool name or acronym. I think it helps spread awareness when the name is catchy. Any ideas on what we should call the new scam above to help warn other buyers?

I came up with “The Zhejiang Screw job” inspired by the “Montreal Screwjob” of professional wrestling fame.

There are different interpretations of the events of 11/9/1997 but essentially the actors in the ring agreed in advance on the choreography and outcome for the title match. At the last second, Canadian Hero Bret Hart was to break out of Shawn Michaels’ Sharpshooter hold and go on to retain the title. Keep in mind that Bret was planning to leave the WWF for rival WCW, so Vince McMahon pulled what is known in the wrestling’ biz as a “shoot screwjob”.

In collusion with referee Earl Hebner and Shawn Michaels, when Bret was in the Sharpshooter (pictured above), McMahon has the ref call for the bell on a short count before
Bret could break free. As a result he had to leave both that evening’s squared circle and the WWF itself without the championship. In front of his hometown crowd in Montreal, no less. That’s just wrong. And so is tricking a buyer in China.

In this Montreal- Zhejiang analogy, Vince McMahon is the factory owner. Shawn Michaels is the hacker and the foreign buyer getting pinned is represented by superstar Bret Hart. I guess that means the short count from the referee represents the lack of transparency in China; while Bret’s lost title symbolizes the failure of the legal system in China to do anything about it.

Is this reference too abstract? Probably.

My co-worker suggests Guan-geria (Guangzhou meets Nigeria)

Anybody got a better name?

About the blogger

Mike Bellamy is author of “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book), founder of PassageMaker Sourcing Solutions (www.PSSchina.com) and student of pro wrestling culture.

Now the story behind the story.

In the early 1990’s the author and friends in Washington DC were looking for job. They also happened to be fans of the WWF pageantry and submitted various characters and storylines to WWF management.

Characters in their interconnected storyline included:

“Preacher Man” (finishing move called “final call”)

“The Drinker” (finishing move called “last call”, signature move “keg stand”)

“Politician” (who utilized a sleeper hold while reading names from the yellow pages until the opponent passed out- called the “filibuster” of course)

“Lobbyist Lawyer” (“hidden agenda” and “PAC money” were his signature moves) was the handler/ tag team partner of “The Politician”.

If you were a fan of 90’s wrestling and don’t remember these characters…there is a reason- not one of them was selected by the WWF. And that’s when the author decided to move to Asia as an exchange student in the early 1990’s. So we thank Mr. McMahon for keeping Mike away from a life in the pro wrestling game. True story.

Warning Signs of a Chinese Scam

Mike Bellamy, with CSIC — Tue, 23 Apr 2013 09:56:46 +0000

My friend and fellow contributor to the CSIC, Louise Kern of www.Glo-bis.com, works with the US Department of Commerce to help identify scams. Here is her short list of BIG red flags if you are contacted by an Asian buyer that wants to do business with you.

The Chinese company contacted you off the Web.

They have “Import/Export” or “Trading” in their name.

They want to conduct a very large volume of trade.

They insist your senior executive travel to China immediately to sign the contract with them in person.

They request money prior to the trip to pay for a reception in your honor, and/or, once in China, they request money or goods to grease the wheels with local officials.

They ask you to share a ‘notarization fee’ based on a percentage of the contract price.

They have been in business for less than one year.

They can provide no verifiable references.

Here is a case study of a UK company that was not yet aware of the red flags above: Beware of business scams in China –UK buyer tricked by Grace Profit Holdings Limited trading as Shenzhen GT Industries Co Ltd

For more tips and tutorials related to scams and due diligence, enter “scam” or “verify” into the key word search on our CSIC home page.

About the blogger

Mike Bellamy – author of “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

First time sourcing? Q&A with an Australian buyer of Chinese products

Mike Bellamy, with CSIC — Tue, 16 Apr 2013 09:38:13 +0000

A CSIC reader in Australia recently contacted me with her questions about QC, MOQ, Payment Terms and Import Regulations. I want to share the highlights of my discussion with her for two reasons:

One: having read some of the content at CSIC, I am happy to see this reader is asking the right questions upfront as opposed to rushing into China and making common mistakes.

Two: many of our other CSIC readers are in the same situation as this buyer in terms of concerns and order size.

The buyer below is coming to China for the trade show season and is interested in gifts and household products.

Please see my list of products and order volume. The total will be about 3000 USD. A few of these, a few of those…just to get started. How to ask the exhibitors about the minimum quantity to order.

You have a range of products rather than a single target product. At that volume it will be hard to set up direct-to-factory sourcing. But when you are at the show, if the exhibitor says there is a MOQ problem, don’t try to trick them and say next year your orders will be huge, simply say you understand the MOQ and ask if they know of any brokers or authorized distributors/ wholesalers that would be a better fit. Also, while you are at the show, check out the sourcing conference that I host as it is designed to cover the questions you ask about in detail. But to help, in the meantime, here are a few comments on your current questions.

Will the manufacturer deliver the goods after we pay deposit around 30%?

How do I know if the supplier will deliver the goods in good conditions and on time?

It is import to verify the supplier is legit and get references before you place the order. Here is a blog post on that topic: Essential sourcing skills: Supplier Verification

If you can’t make the trip to China yourself, it is still essential to have a trusted 3^rd party inspect the good at pre-shipment phase to confirm no red flags. Structure your inspections to verify conformance before final payment and before the goods ship out. These show videos will provide some more information:

Video 4: Project Management and Quality Control
Video 8: Avoiding Scams
Video 9: Returning Defective Products

What about the customs and regulations to import the goods into my market?

So important. Glad you asked. It’s up to the buyer to explain the standards to the supplier. Don’t assume the factory knows your nation’s regulations, even if they say they do. You or your agent can contact your government or more likely the government appointed lab to get the regulatory standards and set up a testing process to make sure your order achieves those standards. This is a lot of work and needs to be done regardless if you are buying 3000 or 3 million USD worth of product. As you can tell, the small buyers face a bigger challenge when going China direct.

Can I afford the support of a sourcing agent? I don’t want to risk not having a purchasing agent on the ground for me in China. Tell me how your agency works.

The agency I founded called PassageMaker (www.psschina.com) is based in Shenzhen. In your case, the potential problem is that they charge a fixed fee based on the level of project management involved rather strictly a % of PO value. This ensures all clients, big and small, receive 5 star service. But it also means that the service fees to process your initial small order of 3000 USD, would be about the same as the value of the order itself. Great deal if you are ordering 300,000 USD, but hard to finance if you are only buying 3000 USD of low margin goods.

If your business model allows you to retain professional support, then I suggest you visit with multiple sourcing agents to get a feel for how they work. The following white paper walks you thru the process: Selecting Service Providers to Support China Sourcing Projects

If your business model doesn’t allow for professional support, then I have the following options:

Check out my book at http://chinasourcinginfo.org/book/ which was written to help buyers large and small. It will give you the tools to DIY.

Read/watch the free buyer tutorials at CSIC.

Attend the China trade show and explore your options. I’d be happy to meet with you as we have a booth at the Global Sources trade. Plus I host the sourcing conference there. Here is the link: http://chinasourcinginfo.org/china-sourcing/tradeshows/

Although, I am beginning to import goods and thinking this is a good opportunity for me to develop, explore and make a relationship with business people who are also sourcing. Thanks for your help.

My pleasure.

Mike Bellamy

CSIC

Advanced sourcing skills: WFOE’s and other options for a China presence

Mike Bellamy, with CSIC — Tue, 09 Apr 2013 04:28:29 +0000

Introduction

When the volume of goods sourced in China is large, the buyer may start to ask the following questions:

Should I set up my own operation in China?

What are my options?

How much would it cost?

Over the years in China, I have had ownership or a director level position in 8 WFOE’s and 2 JV’s. I don’t claim to be a business formation guru as I still take advice from the experts when it comes to legal and accounting issues. But in this article, I’d just like to share some of the key lessons I have learned from my particular experience.

First off, for those readers who are not yet familiar with the term, “WFOE” stands for “Wholly Foreign Owned Entity”. There are many variations to the WFOE, such as “trading WFOE” or “manufacturing WFOE”. But what makes the WFOE special is that this type of business structure does not require any local partners, yet the business is on a level playing field with Chinese owned businesses (at least in theory, from a legal perspective).

For those that want their own team on-the-ground in China, let’s take a look at the question “what are my options?” I arrange the options below in order of the upfront capital investment needed to launch the business.

WFOE Manufacturing

WFOE Trading

Representative Office

Outsource the sourcing to China-based service provider

Rent a serviced virtual office

Hire freelancers

In separate articles I will cover the pros and cons of using options 3, 4, 5 & 6. But in this article, I would like to focus on the WFOE.

The common reason large buyers shift from simply buying China direct to having their own WFOE are as follows:

For manufacturers:

Distributors and wholesalers may desire to move up the supply chain and become a manufacturer
A manufacturer back home may move to China to reduce costs and/or be closer to key customers in Asia

For traders/importers:

An entity on the ground in China with dedicated staff allows for closer control of the supply chain. It’s a lot easy to jump in a car and visit a factory than fly half way around the world!
It takes people to manage the supply chain. Having them based in China vs. EU/N. America saves costs

Lessons learned

The main advantage of having a WFOE is that you are in control of your own destiny. It’s your people on the ground.

Setting up a WFOE in China is a lengthy process. For example, even after you have a company set up, it can take additional time to get the “normal tax payer status” and then you can apply for the right to process your own VAT. In my experience the full process can take from 8 to 18 months.

If you engage an agent to help set up your WFOE, be clear about what you wish to accomplish with your WFOE, and make sure they can give a quote for the whole process. Too often the client goes with a low cost agent only to find out the cost was low because they agent is handling some but not all of the critical steps.

A WFOE requires a significant upfront investment. Two big investments are Registered Capital and Physical Space.

The PRC government uses the registered capital requirements to achieve two goals.

First, by having a large capital requirement they are raising the bar and preventing smaller and underfinanced companies from setting up in China. China’s economic development was based on attracting large companies with experience and deep pockets. (Experience to knock off and deep pockets to dip into some may say).

Second, having a high registered capital threshold ensures the investment dollars are spent in China. This money can’t easily be pulled out of China while your WFOE is being formed. So it can sit there for months or years if you really screw up the application!

It’s a bit of a catch 22, but one counter intuitive aspect of the WOFE process is that you can’t get approved to do business unless you have a formal contract for rent or land purchase. But you can’t start doing business until your WFOE is approved.

So if you make the investment in land and buildings, you want to make sure that your application process is running in parallel with your building schedule. If not, you could end up having a beautiful factory that sits there idle while you wait for your paperwork.

Even if you are renting a space in China, you will need to sign a lease with the landlord first and start paying rents upfront while you wait for your WFOE paperwork to together. Landlords know how the system works and it is very rare that they will let you sign a lease now, but start paying rent later.

You can make the most of this downtime by re-decorating, setting up the production line/ office and recruiting initial staff. But technically you can’t hire people until the WFOE is done, so it’s very much a gray area, be careful.

Some in-process WFOE’s go so far as to cross the line between testing to trial production. If you go that route, don’t expect to actual ship any of the goods out of the country until your WOFE paper work is fully completed. And realize that if an audit takes place, the local official will have the right to fine you or reject your WOFE application is you are perceived to be running production rather that conducting training and setting up your shop. To add insult to injury, it will be next to impossible to apply for a VAT rebate on items that were produced in your shop in advance of the completion of the WFOE.

There are fundamentally three routes to take when applying for a WFOE. But in my opinion, setting up a WOFE is very technical and the most important thing you can do is get a good registration agent to advise you on the process.

DIY

I have been in China almost 15 years, speak the language, have plenty of intelligent local friends to lean on BUT I would never try to set up a WFOE on my own without the help of a registration agent. This isn’t like setting up a company in Delaware where you can register the business online overnight. Overlooking the tiniest of details can have catastrophic impact on the ability of the WFOE to perform as planned. Legally, yes a foreigner has the right to apply for a WFOE on their own. We also have the right to jump head first off the Great Wall of China. That’s doesn’t mean it is a good idea.

Let your Landlord or Local Government do it for you

In order to get you to buy land or rent factory space in a certain area, the landlord or local government may entice you by offering to handle the WFOE formation for fee or at low cost. This can be very dangerous. It may sound good at first, but your incentives are not aligned. They have the goal of rushing the paper work to get your investment. You should have the goal of structuring a WFOE that protects your long term interests.

It’s very naive to think they will put your interest ahead of their. Maybe I am jaded after living here so long but when I hear “let’s do a win-win deal”, it usually means the local partner plans to win twice! I once had a bilingual contract handed to me where the Chinese language said what they wanted and the English language said what I wanted. But this is China, so of course the Chinese language is the binding language in event the English and Chinese differ.

Additionally, be extremely careful if the landlord introduces a registration agent and/or if the landlord is the local government. It’s very hard to negotiate with the municipality and almost impossible to sue them if they mess up your WFOE. Keep in mind the judge on the case will be a government employee. Good luck with that!

Engage a Registration Agent

I make no attempt to hide the fact that using a registration agent is the best option. For me, the real issue is not to use or not to use an agent, but rather, which agent should be engaged. There are basically three choices.

Generally speaking, the large multinational consultants and accounting firms (you know who they are from the adverts on CNN) will do a fine job. But the fees they charge can be as big as their billboards at the airport. Just because you use those firms back home for your accounting, doesn’t mean they are the right choice for your WOFE set up in China. Explore all your options and make an educated decision.

Next we have the “local-western hybrid” registration agents. These firms are often owned and managed by Westerners, but focused exclusively on China business. I like using these kinds of agents because they have the local knowledge, but also have the western mind set for customer service. Unfortunately, their pricing can be all over the place, so make sure you ask around and deal only with a reputable firm.

To be fair, I should also point out that there is no shortage of Chinese registration agents in China. Once again, there is significant variation in price and professionalism within this group. But as a general rule of thumb, you can expect the services of the local firms to be priced lower than the other two options above. But you often get what you pay for.

Regardless of who you choose make sure you ask four essential questions:

What is and isn’t covered in their fee structure?

Can the service fees be linked to the key project gates?

Do they have their own staff on the ground and/or experience in the district where you wish to set up the WFOE? Notice I said “district” and not “city” or “province”! Local knowledge is critical for a smooth WFOE set up.

Can you get a few references from their clients who have used their services to set up a WFOE?

All in costs for a WFOE

Here is an overview of fees to set up in South China:

Registration Agent: Depends on the agent. But I don’t know of any professional agents that charge less than 16,000 USD for the full service WFOE set up.
Registered Capital for Manufacturing WFOE in Guangdong is 140,000 USD in most cases.
Government costs/fees + Tax fees + Application fees depend on the location and exact details of the WFOE but can range from 4,000 USD to 10,000 USD.

The physical set-up costs depend on location, buy vs. rent, size of factory, equipment and decorations.

The on-going costs of the WFOE depend on # of employees, salary, taxes, BOM, utilities, rents and such.

8 Critical Items for WFOE set up

For your reference, here are some of the items that some business people often overlook when thinking about setting up a WFOE.

Trading WFOE vs. Manufacturing WFOE. Which one is best for your needs?
Scope of Business. If your WOFE is set up to export shoes and later you wish to do electronics, you may have significant roadblocks to deal with.
Additional Licensing (domestic sales? Import/export? VAT?)
Are there location or industry incentives offered by China government to the WFOE?
China Tax Planning. In China the WFOE has to report monthly and annually, so not only do you need good tax planning, but you also need to budget for the man power to process all the paperwork.
Global Tax Planning. The tax rates in HK, PRC and your home country are not the same. Structure your business in China to avoid unnecessary tax exposure while not breaking any laws in any of the jurisdictions where you operate.
Plan for Profit Repatriation. Making money in China is nice. Spending it is even nicer. Make sure you have a plan for how to get your earners overseas into your pocket back home.
Budget. Get a firm handle on the true costs to set up and run your business. It is not uncommon for the investor to sink money into a WFOE only to lose that investment because they were underfinanced and never got the point where the doors were open and revenue could be realized.

Conclusion

Having your own WFOE can be a wonderful thing- more control over the supply chain, reduced costs in the long run and improved protection of IP. But a mistake in any of the 8 areas above can be devastating to the business causing great loss of money and time. So plan accordingly and do your homework.

About the author

Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center (www.ChinaSourcingInfo.org). He is also the author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com).

Related Topics, Resources and References

Why set up a HK buying office?

How to choose the China business’ structure? (Part 2) (there are 5 articles written by a Chinese lawyer in the series)

Experienced or Not. Setting Up in China. (article introduces a series of 5 video interviews with a registration agent. The videos are also posted at CSIC)

Readers may contact the author of this article (Mike Bellamy) via the Contact Us page at CSIC if you would like to be introduced to his endorsed service providers for business formation, accounting, tax advice and legal support.

Essential sourcing skills: Supplier Verification

Mike Bellamy, with CSIC — Thu, 04 Apr 2013 19:32:59 +0000

“I found a supplier online. They look good. But how can I be sure the supplier is legit and will meet my needs?”

That is by far the most common type of question sent in to the CSIC from the buying community. In this article I will give our readers simple, effective and affordable strategies to answer that essential question.

In the China sourcing industry, when we talk about verifying the legitimacy of a factory we are generally looking at two aspects:

Quality Audit: Does the supplier have the ability to product the products I want to buy?

Due Diligence: Is the company a legitimate business with good reputation and not a scam or business on the verge of bankruptcy?

While Quality Audits and Due Diligence both fall under the category of supplier verification, they are two distinct professions which require radically different skill sets.

For example, Quality Audits require auditors who are trained in ISO and familiar with the tricks of the trade on the production lines of Chinese factories. These auditors go out in the field to visit the factory.

Due Diligence on the other hand requires researchers who are skilled at desk research, data analysis and accounting tricks in China. They conduct interviews by telephone with the company and collect documents & data from the court systems, the real estate manager where the company is located, the media, business associates, banks and the local government office where the factory is based. The subject company is not even aware that they are being investigated, rather they believe they are participating in a general survey on companies in China.

In essence, field research and desk research are two complementary methods. When combined they give the buyer a comprehensive answer to the question “is this supplier legit?” I sleep better at night when the feedback I get from my Due Diligence (desk research) matches what it coming back from the Quality Audit (field visit to factory). If there are discrepancies, I look a little harder until I am satisfied with the answers.

Type 1: Quality Audit/ Factory Audit

This service is designed to ensure the supplier has the equipment and experience to make a given product. Audits can be conducted by the buyer, but usually 3rd party experts are hired to do the audit as it is a specialized skill.

There are various types of QC audits, but most buyers need not spend more than a 300 USD to have a proper assessment done on-site at the factory by a professional 3^rd party. I’ll provide QC audit sample reports and pricing in the reference section at end of this article.

Most simple factory audits (SFA) cover the following:

Quality System: on-site visit to confirm if there is a QC system in place. If yes, we’ll give you our general impression of the system

Factory Profile: official business name, ownership, organization chart, contact details, production line status, production capability and capacity

Employees and Workforce: overview of HR policies, management style and workers situation

Experience: trade history, client information, available samples

Verification of Documentation: review of licenses and certificates

Type Two: Due Diligence is an investigation of a business prior to signing a contract to ensure the supplier is who they say they are.

There are various levels of due diligence a buyer can conduct. Here are four options:

It doesn’t cost any money for you to ask for references from the seller and contact those references. It’s a very bad sign if the seller can’t give you at least one happy customer to talk to!

www.SupplierBlacklist.com is also free and lists bad suppliers. (I think the site is down for repair for a few days at time of writing.)

For a few 1000 USD, investigators like www.CBIconsulting.com.cn can go undercover to investigate the seller’s business.

For under 500 USD, there are research firms who can access corporate filings, conduct interviews and check the factory for any red flags in China. The reports are in English and easy to follow. I’ll provide links to sample reports and pricing in the reference section at end of this article, but a Due Diligence report should cover the following:

Reputation: How do customers, employees and suppliers view the factory?

Financials: Are the in sound shape and not likely to close their doors in the middle of your order?

Legal: Do they have any court cases, past or present?

Confirmation of Factory Profile: Does the picture of their business given to you by their sales team and website match the information on record with the local government? This could include: scope of business (trading vs. manufacturing), ownership, size, history, export experience, registered capital and so on.

Freshness

Things change fast in China. If key managers leave or the product line is changed (for example, I had a textile factory try to get into electronics with no prior experiences simply because they thought the margin would be better) good suppliers can go bad overnight. Speaking of margins, as a rule they are very tight in China. This means most businesses cannot withstand a downturn if it lasts more than a few months. Several months after the global financial crash in 2008, some Chinese companies just sent their workers home and closed their gates, but were still confirming POs with their clients. Last year a chemical company in Shandong suffered such a debilitating explosion that it shut indefinitely down – but they were still communicating with clients as if they could complete all orders. So make sure your factory audits and due diligence is as fresh as possible.

Managing Expectations

The tools and techniques outlined above will significantly reduce the risks of entering into business with a bad supplier. However, audits and due diligence are just a few of the tools buyers should have in their sourcing toolbox. As buyers, we need to be vigilant and keep an eye on our suppliers at all phases of production, not just the initial supplier selection phase.

Conclusion

In my opinion, doing both the due diligence and QC audit is an essential step when sourcing from China. Perhaps I am jaded after living here in China for a long time, but I assume the worst unless proven otherwise. Trust BUT verify.

Resources and References

Asia Quality Focus and Glo-Bis have been kind enough to let me share samples of their Quality Audit and Due Diligence reports with the CSIC community. Here is the reference pricing (accurate at time of writing) and links to sample reports:

Quality Audits

AQF-SFA-Sample Report – clothing Simple Factory Audit (US$298, one man-day, inclusive of travel to factory)

AQF-EFA Report Sample – Mobile phone Extensive Factory Audit (US$596, two man-days, inclusive of travel to factory)

Due Diligence

GloBIS BCR Sample Business Credit Report (US$255; 9 business days)

GloBIS ICP China Sample International Company Profile Report (US$435; 11 business days)

Readers may contact the author of this article (Mike Bellamy) via the Contact Us page at CSIC if you would like to be introduced to his endorsed service providers for Quality Audits and Due Diligence.

About the author

CSIC readers offered free diagnostic of their QC systems

Mike Bellamy, with CSIC — Wed, 20 Mar 2013 07:29:47 +0000

Friend of the CSIC and QC training guru Hubert of AKA Outspring is offering international buyers a ½ day free diagnostic of their QC Inspection practice. The deal runs until April 2013 and is limited to the first 10 respondents. To get a feel for Hubert’s QC Philosophy, here is a link.

Interested parties can contact CSIC and ask to be introduced to Hubert. Or contact him directly at:

AKA Outspring^TM

Transmit, Do and Act.

www.akaoutspring.com

Factory email hacked. 29K USD stolen from buyer. How to avoid it happening to you.

Mike Bellamy, with CSIC — Tue, 01 Jan 2013 05:16:29 +0000

I just received an email from an overseas buyer of Chinese products who is the victim of a common China sourcing scam. They even did a formal factory audit and confirmed the supplier was legitimate. But it wasn’t enough to prevent a growing scam.

Here are the details:

Buyer and legitimate supplier have an established relationship
Supplier email is hacked
Hacker pretends to be supplier representative and directs payment on next order to a new bank account which is the hacker’s personal account
Funds are received, account closed, hacker disappears
Buyer senses something is wrong, contacts supplier via phone or other email and learns supplier was not aware of any order or recent communications with buyer.

Unfortunately this is a common scam happening in China. Here are the red flags to look out for.

We always stress to our readers at CSIC to

a) Make sure the name on the contract is the same as bank account.

b) Don’t send large payments to private accounts.

c) Visit the supplier for audits and inspections during your order. If the buyer schedules an onsite visit to check an order, it will become clear pretty quick if the supplier is not aware an order has been placed!

If you happen to be the victim of this scam, the outlook for recovering funds is bleak, but here are some outcomes from past cases:

1. In one case the factory felt bad because it was their email that was hacked and they offered a bit of compensation to retain the client and get the next order. But legally they are not responsible as the factory didn’t scam the buyer.

2. The person who hacked the email and set up the new bank account is probably long gone. But if that account is still active, that would be the logical place to grab the scam artist.

3. Even if the hacker has closed the accounts, he needed to show some paperwork to open the account in the first place. This may be the trail for the police or a private investigator to start tracking him down.

4. In many cases, the hacker is in a 3^rd country and not Chinese. For example, we learned that a Brazilian hacker set up a bank account in HK and succeeded in hacking multiple PRC supplier emails and stealing payments from multiple buyers across Europe. In this situation, it is next to impossible for the victims to coordinate police forces in China, HK, EU and Brazil to capture the criminal.

Here are some related resources:

Red flags to suspect the supplier is not legit

www.SupplierBlackList.com

About the blogger

Written by Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com). Read about him in the Financial Times: “A Foot in Both Cultures”

Reports of China’s death as a sourcing destination are still highly exaggerated

Mike Bellamy, with CSIC — Tue, 25 Dec 2012 07:39:06 +0000

The topic of “where is the next” China remains hot. There are some recent articles in the US press claiming that manufacturing is moving back to USA due to cost issues in China. Those articles even suggest that this is the start of a larger trend.

But it is shear sensationalism, and not based in the reality, to claim that the recent actions of a few players (for example, Apple setting up one production line in the USA) is the start of a larger trend which will witness an exedous of production from China.

The only production that is moving back to the USA is for items that have very little labor with a BOM dominated by raw materials and compenents which are made in the USA.

Those products should have never gone to China in the first place. And these cases are very few and far between.

Yes, the costs along the Chinese cost are going up. So the “Next China” is “Interior China”. Read all about this trend at this post “The Big Picture 2010-2013”

Yes, some low end, very labor intensive products (mainly textiles) is moving out of China to SE Asia. But South and SE Asia are certainly not right for companies that need a complex BOM, skilled labor and quality.

The publication “Week In China” has a well-researched article explaining what is really happening. Here is a highlight:

…pressing priority is figuring out how to reduce costs in China itself. Foxconn, Taiwan’s best-known manufacturer in mainland China, seems to have taken a similar view, opting to move inland to less-developed provinces in search of lower costs for its contract electronics business. And some firms are already back in China after trying their luck overseas. Zhang Yuanheng, a shoemaker from Taiwan, told 21CN Business Herald last month that he knew of a number of Taiwanese manufacturers who had already returned after an unsatisfying stint in other markets, with cultural differences, lower productivity, unconvincing infrastructure and logistics costs largely to blame. So don’t write-off that ‘made in China’ label just yet…

Resources:

“Week In China” is available exclusively to HSBC’s corporate and institutional clients. But if you visit the blog post “Psst, I got a secret to share” you will learn how CSIC readers can access the publication for free compliments of HSBC

About the blogger

CSIC team in Johannesburg to help buyers

Mike Bellamy, with CSIC — Tue, 18 Dec 2012 06:55:47 +0000

On behalf of the CSIC and the local buyers who attended the presentations, I would thank Whitwell Kelly and Godefroy Delteil for making the trip to South Africa to man the CSIC booth and host the www.GlobalSources.com conferences on doing business in China.

CSIC speakers Whit and Godefroy joined by Conference organizer Desmond.

You will find below the presentation overview, speakers bios and a link to Whit’s slides.

Conference #1: Steps Small Businesses Must Know on Importing from China

Whitwell Kelly, Global Sales Director, PassageMaker Sourcing Solutions
Godefroy Delteil, Customer Service Director Europe & Africa, Asia Quality Focus

Back by popular demand, this introductory level course on sourcing from China includes topics such as:

1. Managing expectations: Sourcing opportunities and common pitfalls

2. Qualifying suppliers & communications

3. Quality control essentials

4. Supplier contracts and payments

Whether you’re a new or seasoned buyer who wants a fresh perspective on the subject, this seminar will give you valuable advice on sourcing more productively and profitably. Gain China sourcing information that will continue to pay off for years to come.

Conference #2: Avoiding the Top 10 Common Mistakes in China

Whitwell Kelly, Global Sales Director, PassageMaker Sourcing Solutions

The program will offer case studies and solutions to the following mistakes:

Poorly defined specs
Not knowing the all-in cost of the “China price”
Failure to audit the factory/ Falling for the golden sample
Failure to conduct due diligence and verify key information
Who’s the project manager?
Payments not linked to performance
Leaky contracts
Arm’s length buying
Stolen intellectual property
Not knowing which functions to outsource and which ones to keep in house

This intermediate-level course is designed to continue and further discuss some of the topics from the entry-level seminar entitled Steps small businesses must know on importing from China. It is recommended that interested parties take part in both seminars to gain more valuable insights on sourcing from China.

Slides can be downloaded at http://s.globalsources.com/TRADESHOW/IMAGES/CONFERENCE-STEPS-SML-BIZ-MUST-KNOW-IMPORT-CHINA.PDF

Here is some background on the speakers:

Mr. Whitwell Kelly is the Global Sales Director for PassageMaker Sourcing Solutions and CEO of PassageMaker North America. Whit is a 20-year veteran of the automotive industry as a Tier 1 supplier, and has been living and working in Asia on and off for over 15 years. He was PassageMaker’s first customer and within a few years began promoting PassageMaker’s Model of Trust & Transparency. He joined the firm full time in 2008 and manages sales people and clients on every continent from his home in Salem, VA, USA.

Mr. Godefroy Delteil is the Customer Service Director at Asia Quality Focus (AQF), handling the accounts of European and African buyers. He has been dealing with quality control issues in Asia for almost 5 years. Before returning to Paris, he was based full time in Hong Kong and Shanghai with a major inspection company. While working with world class clients, he gained a strong sense of quality and a keen knowledge of his clients’ key issues.

In 2012, Godefroy joined AQF, a third party quality control company that provides inspections and audits in China, India, Bangladesh, Pakistan, Taiwan and much of Southeast Asia. Supply chains serviced include textile, toys, furniture, electronic & electrical products, home wares, kitchen wares, DIY products, construction materials, packaging, cosmetic, automotive and lighting. Godefroy’s accounts include Auchan, Carrefour, Cora, Walt Disney, Coca-Cola, Peugeot, Porsche, Black & Decker, Leroy Merlin and more. Godefroy has a Master’s degree from EDHEC Business School in France. He speaks French, English, Spanish and Chinese, and enjoys visiting China and helping clients with their quality control strategies.

Here are the Global Sources shows scheduled for CSIC in 2013. Check out the conference and meet up with Whit, Godefroy and the rest of the CSIC presenters.

Johannesburg	Hong Kong	Dubai	Miami	Sao Paulo	Mumbai

About the blogger

Who gets the VAT rebate?

Mike Bellamy, with CSIC — Tue, 04 Dec 2012 06:12:06 +0000

A buyer who is purchasing from various suppliers in China via sea and even overland, asked me a few questions about the VAT system and how the VAT rebate is sorted out between the government, exporter and buyer. Here are some highlights:

Buyer: I’d like to receiving data about size of VAT compensation based on nomenclature of china-made goods and China Good’s Code (used by Customs)

Mike: I believe you are referring to the HS codes which are used globally as well as in China. Send us the HS codes and we can look up the VAT rebate rate on the products in question. If just a few codes, I can do it for free.

Buyer: How to get data on terms, time length, way of compensation regarding VAT to the importing company?

Mike: Technically, the China based exporter (assuming they are registered and run official book keeping in China) receives a VAT rebate from the Chinese government after the goods have left the country. How much of this VAT rebate (if any) the exporter shares with the buyer, is up for negotiation between seller and buyer.

A buyer of Chinese rugs recently asked me a similar question to what you have asked, here is my full response: Confusion about VAT…Where does it go? What should I expect? (http://chinasourcinginfo.org/2011/07/17/confusion-about-vat-where-does-it-go-what-should-i-expect/)

Buyer: I would like data on the way by which VAT is compensated in the case when the seller is a company in China Mainland and the buyer receives the goods transported overland to Russia or Hong Kong for example. What is it is sent by sea or air?

Mike: If you are referring to the amount of compensation given to the exporter from the China government in form of VAT rebate, then the amount is the same regardless if that exporter exports overland or via sea or via air.

However, the amount of VAT rebate can be different for different exporters even if they are exporting the same product. For example, an exporter exporting under a “trading license” has a slightly different rebate than an exporter exporting under a “manufacturing license”. This (fairly technical blog post) explains why if you are interested: http://chinasourcinginfo.org/2011/09/22/vat-rebate-differences-between-trading-and-manufacturing-companies/

Furthermore, the size and experience of your exporter also plays a big role in how much rebate they get back. The experienced exporter will be able to negotiate the best rate, as often the HS code and applicable VAT rebate is up for discussion/negotiation with government. There are also different rates and calculations for “small scale tax payer” and “normal tax payer” status. As small scale exporter under small scale tax payer doesn’t get the full VAT rebate given to a normal tax payer.

If you want to learn more about VAT system in China, here are links to some of my recent blogs on the subject:

VAT scams exposed

Confusion about VAT…Where does it go? What should I expect?

What is VAT and why should I worry about it?

Crash course in Chinese VAT

Our supplier won’t give us the discount for VAT

VAT rebate differences between trading and manufacturing companies

With multiple contracts, how is the VAT and VAT rebate processed among multiple parties?

After the Import Duty and VAT is paid during importation, when can I get a VAT rebate?

How can we collect the VAT rebate if our manufacturer is the exporter?

Does VAT apply to tooling for customer owned tools, purchased from a supplier in China?

VAT rebate differences between trading and manufacturing companies

With multiple contracts, how is the VAT and VAT rebate processed among multiple parties?

After the Import Duty and VAT is paid during importation, when can I get a VAT rebate?

How can we collect the VAT rebate if our manufacturer is the exporter?

Does VAT apply to tooling for customer owned tools, purchased from a supplier in China?

Feel free to contact me if you have questions.

About the blogger

S. Asian Factory Fire’s impact on Sourcing

Mike Bellamy, with CSIC — Wed, 28 Nov 2012 03:32:45 +0000

The following highlights are from an interview with two key subjects:

The impact of the recent factory fires in S. Asia on sourcing.
General sourcing trends as we head into 2013.

Here are some excerpts:

Q: Are new emerging production hubs such as Bangladesh that are pegged as alternatives to China really prepared to meet the high standards / demands of the sourcing industry?

Mike: Different industries and different buyers have different standards. Is Bangladesh and other S. Asia/ S. E. Asia sources ready to be the next China in terms of production standards, overall cost, product availability and quality? Absolutely not. Is Bangladesh a serious option for lower quality, simple BOM (bill of material) cut and sew products (socks and underwear for example)? Absolutely yes. Here is a look at the reasons China will remain the premier sourcing destination for the majority of products for the next 5 to 10 years:

China Sourcing Trends: The Big Picture 2010-2013

http://chinasourcinginfo.org/2012/10/23/china-sourcing-trends-the-big-picture-2010-2013/

Heavy hitters weigh in on future of China Sourcing

http://chinasourcinginfo.org/2011/08/02/heavy-hitters-weight-in-on-future-of-china-sourcing/

Q: Are more of your customers (or other buyers you come across) nowadays considering to switch part of their sourcing from China to Bangladesh?

Mike: Not really, unless they deal in lower end, cut n sew products. At the sourcing agency I own, we help our clients source globally, so we are not against sourcing outside of China, we go where the orders are, but we have yet to see more than a trickle, let alone a mass exodus from China sourcing to other markets for the reasons explained in the two links above. Furthermore, the few cut and sew projects we have going in Vietnam use raw materials sourced in China! So the only reason for even thinking about putting production in a place like Bangladesh or Vietnam, is strictly the human labor component of the all-in-price. If your product is not labor intensive (think electronics rather than socks) then moving production from China is a step in the wrong direction.

Q: Do you think the Bangladesh factory fire will make big retailers rethink their sourcing practices / strategies there?

Mike: Perhaps. But more importantly it will remind those who purchase in Asia that due diligence and monitoring is a key part of the sourcing process. The good news is that China-based service providers of inspections and auditing also have set up offices in these new markets. www.AsiaQualityFocus.com is the inspection firm I use on a global basis. Visit their website and blog to learn their first-hand experience on the ground in these emerging sourcing destination. The amount of orders in these new markets is a fraction of what is done in China, but because the conditions are so bad in these new markets, inspections and audits are essential if the buyer wants to sleep at night knowing the supply chain has no red flags.

Check out the full article:

Safety concerns aside, low-cost Bangladesh will continue to pull buyers

http://www.globalsources.com/NEWS/Bangladesh-fire-112912.html

About the blogger

China city on the verge of bankruptcy. – Good or bad news?

Mike Bellamy, with CSIC — Tue, 30 Oct 2012 06:05:39 +0000

I was recently forwarded an article entitled “A Chinese Mega City Is on the Verge of Bankruptcy” which explained how many municipalities in the Pearl River Delta are in financial trouble. Here are some of the more juicy parts:

China’s province of Guangdong, which is somewhat surprising. With over 100 million people, a GDP of nearly $1 trillion – the biggest of all Chinese provinces, this South China Sea adjacent territory is perhaps China’s most important economic dynamo. One of the key cities of Guangdong is Dongguan.

After three decades of spectacular growth, Guangdong’s boom town of Dongguan is on the brink of bankruptcy.

Up to 60 per cent of its villages are running up deficits and will soon need a bailout from the township, researchers at Sun Yat-sen University have discovered.

It is a dramatic turn of fortune for Dongguan – one of the richest cities in China – and could foreshadow a wider fiscal crisis as the country’s economy cools.

Bai Jingming, a senior researcher at the Ministry of Finance, estimated in 2009 the total debt of village authorities could total 10 per cent of the country’s GDP, but there is no official data.

What’s really going on in China?

Sensationalism sells. Many of you praying for a speedy global economic recovery have pinned your hopes on the Chinese economy to power a rebound. So seeing bankruptcy crop up in the PRD would scare a lot of readers- unless they understood the following.

Calm down and see the big picture

China as a whole is still growing at one of the fastest rates among major economies and to put it bluntly- the central government is not short on cash. In other words, if certain pockets of the country are cash strapped, it is because Beijing wants it that way.

The perceived reverse of fortune for Dongguan should be no surprise to China watchers. The central government has made the following points loud and clear for many years:

Develop the interior even if it hurts the Coast

China has a massive discrepancy between the standard of living along the prosperous coast and the rural interior. A nation of “haves” and “haves not” arranged along geographic boundaries is a recipe for social unrest. That is not good for China or the world.

Kick the addiction to exports

When the economies of Europe and N. America went sour during the global financial crisis, China was hit hard because at the time they were heavily dependent upon exports. The central government vowed to not make the same mistake twice. They are actively encouraging a rebalancing of its GDP. Dongguan is the poster boy for an export oriented economy. If you want to kick the addiction, the Pearl River Delta is a great place to start.

The mountains are tall and the emperor far away

To understand China, you need to realize that it is more like dozens of small radically different markets and regions tied together by the central party, rather than a single entity uniform from north to south. Simply put, it helps to think of China more like a Europe rather than a United States.

Beijing is the puppet master pulling the strings but as regions like the PRD grew in economic strength they also gained more and more autonomy. Beijing’s mandate to rule is based on their ability to keep all the puppets stepping in the direction that benefits the nation as a whole. One area can’t be allowed to get too rich if other areas remain poor. Places like Dongguan were getting silly rich.

Chinese leaders feel the weight and draw from the experience of 5000 years of history when they make decisions. While it is not part of Beijing’s official message to the general public, historically speaking, distance plus linguistic and cultural differences have complicated the central government’s ability to control the deep south. Even in the Chinese press, the headlines of the past 12 months have been filled with accounts of riots between locals and “outsiders” in the Pearl River Delta (PRD). Most often the locals are the wealth factory owners and the outsiders are the migrant workers coming to the delta for work. The central government understands that ethnic and regional conflict may flare up on a small scale, like these factory riots, but it can’t be allowed to get out of hand if Beijing wishes to maintain a stable China. A dangerous prosperity gap among the providences/ ethnic groups may have been allowed temporarily, but reducing the severity of the problem is clearly a big part of the current plan in Beijing.

Beijing is proactively encouraging the transfer of wealth to the interior of the country, even if that means popping a few bubbles along the coast.

What does this mean for Buyers of Chinese products?

Here is my perspective as a 12 year PRD resident, owner of 2 PRD factories and general advisor to foreign buyers.

There is no question that costs have been going up along the coast. This hurts the export business. Moving factories to the interior helps bring costs down in the long run. Having those factories move to Hunan from Guangdong is a lot less disruptive to the supply chain than if they moved to another country. But in the short term, a factory move, even if across the street is a nightmare to manage. Quality and Lead-times are the usual casualties. Maintain open communications with your vendors in hopes you learn about the move in advance and can plan accordingly.

Gone are the days of “easy sourcing” when foreign buyers could come to China, visit a few factories in a coastal city and expect to achieve significant savings. Today, research should be conducted on a national level and a trip to China is more likely a few weeks long rather than a few days long. Here are three short videos about how to find and manage vendors in this new reality.

Video 1: Finding Suppliers
Video 2: Evaluating Suppliers
Video 3: Negotiations

China Sourcing Trends: The Big Picture 2010-2013

Mike Bellamy, with CSIC — Tue, 23 Oct 2012 05:53:24 +0000

Christmas orders shipped from the factories in late summer and October was the trade show season in China. With new orders in hand from the shows, November 1st start of next annual production cycle for many manufacturers, exporters and importers. So I thought this an ideal time to look back at the past few years and bring out my crystal ball for 2013.

Big Picture

Let’s start by stating the mind set of most of the typical buyer over the past few years:

2010: “OMG, China is getting expensive and factories will leave China. The sky is falling, the sky is falling. Where is the next China? I better get some production going in SE Asia to be safe.”

2011: “China is even more expensive than last year. But wait…, why aren’t the factories leaving China? This doesn’t make sense. BTW, why is my production still not online yet in SE Asia?”

2012: “Damn, I had no idea how hard it would be to get production running in Cambodia. Ouch, China is still getting more expensive”.

Here is what I think they will be saying in 2013.

“Unbelievable, China labor and production cost are still rising. But now I see what is happening- factories are indeed moving, but they are moving to the interior of China, not overseas. China is the next China.”

Winner and losers

When the global economy heads south, brands owners are often forced to cut costs to retain market share. This is an opportunity for some and a nail in the coffin for others. Let me explain:

Those brands who have long ago established a China supply chain have most likely been twisting the arms of their suppliers for many years. Now they find themselves in a real jam, because as labor and production costs rise in China, the Chinese boss’ arm can’t be twisted much more if he stays at his current location in coastal China. To make matters worse, in most industries, exception being low end textiles and footwear, there simply is “no next China.” The mainland will remain the workshop of the world for at least 5 to 10 more years in the majority of production classifications because China has the manufacturing experience, access to capital and established infrastructure in terms of logistics and legal.

Side note:

Yes, it may come as a surprise to say that China’s legal structure is well established, but just try to set up a wholly foreign owned factory in Vietnam or Cambodia, then let’s compare notes with China about lead times, regulatory hurdles, legal transparency and corruption. There is no painless place to do business among the low cost Asian countries, but China is a headache while Vietnam is a migraine and Laos is a lobotomy.

There is no “next China”

There is no alternative to China for a huge portion of the buyers who have come to China for production during the past 20 years. It is also worth pointing out that as China moves upstream in terms of providing more of the all-important “value add”, the products they export are less and less labor intensive. Think DVD players and refrigerators as opposed to socks and underwear. For a growing number of products, the increase in the labor rate does not have a major impact on the costs of the final product.

And even when the labor rate does have an impact on the final cost of the end product, because it is not a simple matter to move production out of China, the most common solution is that suppliers will look for ways to be more efficient in production. Luckily, because China has had the “throw another body at it” mentality for production for most of the last decade, there is plenty of room for improvements in efficiency and automation. But it will be hard to make up for the rising costs of labor and exchange rate through production efficiency alone, so I’m willing to bet that the prices will continue to rise out of China and there is not much brand owners can do about it other than to pass the costs on to the buy side at one point or another. In other words, attention K-Mart shoppers, get ready for a price hike.

The “next China” is Western China

For the reasons explained earlier, factories are not leaving China. But factories are moving inland. The press and many professional buyers were right to sense a shift is taking place, but many got the destination wrong. It isn’t Mexico or Indonesia, it’s Hengyang, Hefei and 100 other cities you have never heard of in the interior of China. HP, Samsung and Foxconn didn’t leave China; to the contrary, in the past few years they invested big in places like Chongqing and Xian in the west of China.

The question we should be asking

In my mind, the more interesting question is “why aren’t more factories leaving the coast for the interior?” I own and operate 3 wholly owned foreign enterprises with a payroll of about 200 full time employees in Shenzhen on the coast of China. (Small operation by Chinese standards.) If labor and land costs continue to rise, while tax breaks dry up, at some point in the next few years I will be forced to move some or all of my assembly lines to the interior. But it hasn’t happened yet for the following three big reasons:

a) I’m concerned the savings in labor would be offset by the increases in logistics.

b) Margins are so tight that a project’s profit and loss may be determined by the amount of VAT rebate received back from the government at exportation. We know the people and process involved at our local port. If we move inland we start the process all over again. As the VAT rebate can be as high as 17% of export value, delays or lack of refunds can be catastrophic to a business.

c) I’m not sure I can find employees with the professional and language skills I need at this time in the interior.

A look in the crystal ball

While the large companies are already making the move, someday there will also be a tipping point for the mid-sized factories like mine where it makes sense to move to the interior. Samsung and HP are making the move now, but for the smaller guys, my gut tells me our move is 3 to 5 years away. Glad Hunan dialect is a lot easier to learn than Vietnamese when you already speak Mandarin.

Tough times call for new strategies. The situation at my sourcing agency.

The slow global economy does have a silver lining for innovative sourcing agents like PassageMaker. As mentioned earlier, when the global economy heads south, brands owners are often forced to cut costs to retain market share and margins. For those brands that have been sitting on the fence about China sourcing, they now must source from China in order to stay in business. While big buyers in the US got off the fence many years ago, there are still large players in places like Australia, S. Africa, S. America that have not yet gone China direct. But in the slow economy, they too are jumping off the fence and on to the China sourcing bandwagon. 5 years ago, 70% of PassageMaker’s revenue was from USA clients. Today, some of our biggest clients are from Australia and our fastest growing segment is among Spanish speakers. Revenue from US clients is below 40% of our total revenue in 2012. To demonstrate my theory that the rougher the economy is back home, the more important outsourcing becomes, in the past 3 months we have added 6 projects for clients in Spain. Last year we had no Spanish clients. Know anybody that speaks Greek who wants to work in China?

We are even doing project management out of China in Spanish to keep up with this growing side of our business. Luckily, with job prospects bleak in Spain, we have not had problems finding highly qualified native speakers of Spanish to work as managers in our China offices. The interesting things is that these Spanish clients have been buying from China for many years, but in the past they were happy to work w Spanish trading companies and brokers as the seller’s margins in the past could afford the extra middlemen. Today, those middlemen are cut out as the large Spanish buyers are forced to go China direct to keep costs down. As PassageMaker is a buying agent in China, rather than trading company or middleman, we pick up the clients that want to “outsource their China sourcing” rather than deal with brokers back home or face the supply china on their own.

About the blogger

Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

How much have margins come down in the past ten years?

Mike Bellamy, with CSIC — Tue, 16 Oct 2012 05:49:31 +0000

The answer depends on who you ask- manufacturers, brand holders, trading companies or sourcing agents. It also depends on the industry, but here is the big picture.

At the macro level, the trading companies and sourcing agents are getting cut out of the supply chain unless they provide real value. If they provided real value, then they have been able to hold their margins for past few years by working with the brand holders to put the squeeze on the manufacturers. The manufacturers in China have had their margins cut more than the others in the supply chains, but because 5 to 10 years ago was the “golden era” of China sourcing, there were a lot of manufacturers running sloppy shops (throw bodies at production rather than aim for efficiency) making fat margins. Those days are almost over, and the manufacturers that remain need to learn modern production techniques and grasp the basics of custom service if they want to keep the orders from going to their Chinese competitors who do understand what international buyers expect. So for the manufacturers, the sloppy shops need to get professional or go out of business.

About the blogger

Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

Selling to China. Push vs. Pull strategies

Mike Bellamy, with CSIC — Tue, 09 Oct 2012 03:57:25 +0000

I realize it is outside of the traditional China sourcing topics, but so many friends and family have asked me about how to open the China market for western products, I thought I would offer some comments to our readers who are contemplating a sell to China strategy.

The following cases involved wine and spirits, but the same principles apply to many other industries from pet food to appliances. A friend of a friend in Tennessee recently got a distillery up and running. He asked me about what prospects might the China market hold for his product. Here is my response:

We have a sister company called www.SPimports.com that focuses on bringing in western products to China. So I do have experience with beverages, both alcoholic and non-alcoholic. The good news is that the China market for imported wine and spirits is huge; the bad news is that the China euphoria has caused every distiller, brewer and vineyard to try to make a China play and at the moment, only two types of companies are successful:

a) PULL STRATEGY

The big brands with huge marketing budgets that pull in the clients. For example, in China, they don’t buy by the glass at the bar. To the contrary, the bars and clubs are almost 100% bottle service. A group of friends or business associates sit around a table at a bar, club or KTV. That means everybody around the table sees the brand and this will give face (so important in China) to the person ordering for their friends. The only guy at the bar ordering Jim Beam is me, because I put taste over face. Chinese want the high-end Scottish stuff! Most local consumers can’t taste the difference between a good whiskey and a bad one, but they know the brands from the TV ads and that is what they order. So the brand “pulls in the buyers.”

b) PUSH STRATEGY

Less famous brands (of various price points and quality) don’t have the budget for a national PR campaign in China, so they utilize a push strategy where they set up relationships in a key market (one city at a time) or key channel (KTV bars in a certain city) with key players to push the product. For example, work with a chain of bars or a KTV house (they can have 1000’s of KTV rooms in a single district!) to push your brand. The adverts are local inside the establishment, the staff is trained up on how to promote this brand and most important, everybody from the boss down to the KTV girls gets a piece of each sale.

This push strategy is VERY hard for the following reasons

a) Every level has problems with corruption and bribes

b) You still have to find a way to get the product imported into China. Legally or illegally, it will cost money. Assuming you went the legal route, you would need to register the product in China, convert the labeling to Chinese, and get the product safety tested and so on.

To make a long story short, unless the TN company has a product so unique that one of the major brands allow the TN brand to piggy back, the you are looking at a push strategy in one form or another. It could be small scale focused on a single district or it could be multi city depending on the budget. But to get 1 bottle or 100,000 bottles into China legally, you still have the upfront costs mentioned above in terms of registration and labeling. If the TN company has 100’s of thousands of USD to open the China market, then perhaps we can offer some suggestions, but if they don’t have the budget and plan in place, I would advise not to make a China play at this time as this industry is one of the most dangerous in terms of shady practices and business pitfalls for the uninitiated western businessperson.

I wish I had better news for you, but I wanted to give you my honest opinion.

About the Author

Next (safe) step for your idea on a napkin

Mike Bellamy, with CSIC — Tue, 02 Oct 2012 02:57:18 +0000

With the global economy in the doldrums, it is natural that many of us out there are coming up with inventions and business ideas as a means of complementing our day jobs and supporting our families.

At least once a week, weather it is in the board room or over a drink at happy hour, I am asked to give my thoughts on somebody’s new invention. Sometimes these ideas are well thought out, have a solid business plan and I end up investing my own time, resources and capital to get behind the project. But more often than not, the idea is at the “back of the napkin” stage and there is not enough information to tell if it is a winner or loser.

Unfortunately, many of these napkin-stage inventors are so excited about the idea that they jump in bed with the first partner they can find without thinking about the long term consequences of their actions.

Here is a real example.

Today I was contacted by an inventor who had a pretty good idea for a keyboard that integrates larger keys and LED lighting to assist the visually impaired. He contacted me in hopes I would help him find a Chinese factory to engineer, produce and distribute the item globally. Sounds easy, but with only an idea on a napkin and no blue prints or intellectual property (IP) protection in place, he was about to go swimming with sharks and I am almost certain China would have eaten him up alive.

Here is my response to this inventor.

The idea sounds interesting, I’m honored you have brought it to my attention. To help you out, I have a couple of questions/ideas/suggestions for you.

Before you tell too many people about the idea, you need to do two things

a) Confirm that the concept has not been claimed by another inventor

b) If the answer to A is “no”, then make sure your Intellectual Property (IP) is protected ASAP. In your home market AND China.

With the IP I place, then you can safely start talking to partners and I think your first stop should be with an engineering firm to nail down your designs. I highly suggest you don’t ask a potential supplier in China to do your engineering because if your partnership with them doesn’t work out, they may still try to move forward on the project without you, regardless of who owns the IP because they know a startup like yourself can’t easily monitor or enforce your IP in China.

Having said that, if you registered your IP before you got knocked-off, then if you found yourself in a position where you needed to enforce your IP in China or USA, you would at least be on a level playing field.

In summary, it sounds like a good idea, but until you have a design and IP in place, it would be hard for a company like mine to organize the supply chain and/or introduce investment partners.

If you feel your “idea on a napkin” has real potential, then do yourself a favor and register the IP and nail down the designs before you start poking around China for suppliers and investors. Unless you don’t mind a Chinese company taking your idea to market first.

Here are some more videos and blog posts on the subjects above:

Where can I find a partner to help distribute a product under my license for the IP?

Video 5: Protecting Your Intellectual Property

You must freeze the design

Engineering in China

About the author:

Vendor Code of Conduct (part 5 of 5)

Mike Bellamy, with CSIC — Tue, 25 Sep 2012 04:20:15 +0000

Per reader request, in this series of blog posts, I have provided in English a template (compliments of www.PSSchina.com) for the key terms and conditions that should be in a professional Vendor Code of Conduct for those who buy products in China.

In this final installment of this series, I will offer some tips to improve the effectiveness of a Vendor Code of Conduct.

Many buyers put a vendor code of conduct in place simply to satisfy their clients who require such a document to be present. So having the policy in the first place is good for marketing. But the document won’t enforce itself in China, so if you really are concerned about social compliance, you will need to get involved. Here are some tips to help ensure your vendor code of conduct is respected.

1. Find the right supplier in the first place.

When you are selecting suppliers, know that if you pick one that doesn’t respect the items on your list; you will most likely have a hard time convincing them to improve. It can be done, but it is not easy or inexpensive. Rather than trying to teach an old dog new tricks, when you are looking for suppliers upfront, add “social compliance” to your list of desired features in an ideal supplier. These videos here and here

2. Make violation of the terms a loss of face for the factory boss.

Make sure the terms are in Chinese so there is no excuse for not understanding what is being signed. Sign off on each item one by one. Most importantly, when you are signing the agreement, try to get as large a group as possible in the room for the signature. This way if the terms are broker unilaterally by the boss, his staff will know he is not a man or his word. Sometimes the desire not to lose face among their peer group is more powerful than the threat of legal action.

Speaking of signatures…Here is the template for the signature section. Make sure the company chop (Chinese ink seal) is also used. Confirm the person signing is the legal representative of the company by checking the business license that should be hanging on the wall. Confirm that the company under signature is the company you are buying from. Sounds obvious, but with so many trading companies in the mix, it is not always transparent. Check out this blog post explaining the dangers of not taking that precaution.

Vendor Agreement

Buyer is dedicated to full and complete compliance with all laws and regulations applicable to the conduct of its business and expects its vendors, and buying agents utmost cooperation and commitment with such efforts. It is therefore requested that the owner, president, managing director, or chairperson for your company sign and return a copy of this letter thereby confirming your understanding of its contents and agreement to undertake the obligations it sets forth.

In closing, we highly value the relationship with your company and believe that you share our compliance concerns. Thank you in advance for your cooperation and we look forward to continually strengthening our relationship for years to come.

Name: _________________________ Title: _____________________

Date: __________________________ Signature/ Chop: _________________

3. Consider periodic social compliance auditing.

The good news is that it costs 100′s not 1000′s of USD if you hire a professional 3rd party. And the factory will know you are serious about the issue. State in your contracts that if the factory fails the audit, they pay a penalty, such as 3X the cost of the audit. If the factory passes, great, you pay and sleep well at night knowing it was money well spent.

4. Consider investigative social compliance monitoring.

Know that employees can be coached on how to pass a social audit, but you will be happy to know that for a reasonable fee, undercover investigators can be engaged to monitor your suppliers without the suppliers knowing they are being watched.

The firms I use for the overt auditing is www.AsiaQualityFocus.com while www.CBIconsulting.com.cn is who I use for the covert monitoring of suppliers. Contact me if you would like an introduction.

5. Confirm that the code of conduct is in the vendor’s employee handbook (in Chinese) and clearly posted in the facility.

6. Have a hotline/ email for whistleblowing.

7. Deal with outsourcing.

All the tips above are a waste of time if your factory outsources production to another factory where there is no social compliance or a code of conduct. So in your memo of understanding with the factory, you need to be clear that if outsourcing is to take place, you have the right to know about it and audit that facility in advance.

Hope this tips help you! Let me know if I missed anything.

Wishing you successful China sourcing!

About the blogger

Written by Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

Vendor Code of Conduct (part 4)

Mike Bellamy, with CSIC — Tue, 18 Sep 2012 04:17:59 +0000

Per reader request, in this series of blog posts, I will provide in English a template (compliments of www.PSSchina.com) for the key terms and conditions that should be in a professional Vendor Code of Conduct for those who buy products in China. In the final installment of this series, I will offer some tips to improve the effectiveness of a Vendor Code of Conduct

Legal Requirements

Vendors shall comply with all legal requirements applicable to the conduct of their businesses, including those set out above.

Monitoring of Compliance

Vendors authorize Buyer and its principals to conduct scheduled and unscheduled inspections of Vendors’ facilities for the purpose of ensuring compliance with this Code of Conduct. During these inspections, Buyer and its principals shall have the right to review all employee-related books and records maintained by Vendors and to interview workers.

Corrective Action

When violations are found, Buyer and the Vendor concerned will agree on a corrective action plan that eliminates the problem in a timely manner. If it is determined that a Vendor is knowingly and/or repeatedly in violation of this Code of Conduct, Buyer and its principals shall take appropriate corrective action, which may include cancellation of orders and/or termination of business with the Vendor in question.

Wishing you successful China sourcing!

About the blogger

Written by Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

Vendor Code of Conduct (part 3)

Mike Bellamy, with CSIC — Tue, 11 Sep 2012 04:11:07 +0000

Wages and Benefits

Vendors shall provide wages and benefits that comply with all applicable laws and regulations.

Working Hours

Vendors shall not require workers to work, including overtime, more than any maximum number of hours per week established by applicable laws and regulations.

Freedom of Association

Vendors shall respect the right of workers to associate, organize and bargain collectively in a legal and peaceful manner.

Wishing you successful China sourcing!

About the blogger

Written by Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

Vendor Code of Conduct (part 2)

Mike Bellamy, with CSIC — Tue, 04 Sep 2012 04:07:38 +0000

Non-discrimination

Vendors shall employ workers solely on the basis of their ability to do the job, and shall not discriminate on the basis of age, gender, racial characteristics, sexual preference, maternity or marital status, nationality or cultural, religious or personal beliefs or otherwise in relation to hiring, wages, benefits, termination or retirement.

Health and Safety

Vendors shall maintain a clean, safe and healthy workplace in compliance with all applicable laws and regulations.

Environmental Protection

Vendors shall comply with all applicable laws and regulations in respect of protecting the environment and maintain procedures for notifying local authorities in the event of an environmental accident resulting from Vendors’ operations.

Wishing you successful China sourcing!

About the blogger

Written by Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

Vendor Code of Conduct (part 1)

Mike Bellamy, with CSIC — Tue, 28 Aug 2012 04:04:33 +0000

Child Labor

Vendors shall not use child labor. “Child” is defined as a person who is not older than the local age for completing compulsory education but in no event is less than 15 years of age. Vendors must verify the age of their workers and maintain copies of their workers’ proof of age. Vendors must follow all applicable laws and regulations regarding working hours and conditions for minors.

Involuntary Labor

Vendor shall not use involuntary labor. “Involuntary Labor” is defined as work or service which is extracted from any person under threat or penalty for its non-performance and for which the worker does not offer himself or herself voluntarily.

Disciplinary Practices

Vendors shall not use corporal punishment or any other form of physical or psychological coercion or intimidation against workers.

Wishing you successful China sourcing!

About the blogger

Written by Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

Case study: how some factories are surviving the storm

Mike Bellamy, with CSIC — Tue, 21 Aug 2012 10:25:54 +0000

In the following blog posts I outline how suppliers are reacting to the challenges of the current market place (lack of demand in US and EU, rising costs in China, increased competition, labor shortages…):

Reports of China’s death as a sourcing destination are
highly exaggerated.

Exclusive look at data from one of the largest Chinese
supplier surveys ever conducted

Heavy hitters weigh in on future of China Sourcing

Labor Shortage in China

In a recent article entitled “surviving economic changes in industry” I was happy to see that many of the predictions I made in the blog posts above are coming true as Chinese suppliers are starting to rise above the old “throw another body at it” philosophy of manufacturing and finally thinking lean and getting creative to capture market share and be better suppliers for us buyers.

Here are some of the article highlights about a shoe company that has made some big changes recently:

In a factory in the city of Wenzhou, Zhejiang province, Luo Li, vice-general manager of shoemaker China Juyi Group, talked proudly about how new laser machines have helped to improve its productivity.

Before, she said, it took a skilled worker an hour to make hollow patterns on a shoe’s leather upper wrap. But with the laser machine, everything is done in two seconds.

By constantly improving its technology, Juyi managed to grow from a 20-strong workshop to a modern manufacturing base with 5,000 employees and annual exports of more than $100 million.

While many other local shoemakers have collapsed, Juyi has become bigger and stronger.

Beijing’s Plan?

The transformation of Wenzhou’s shoe industry is what Beijing has been advocating in recent years, and comes amid growing realization that the labor and resource-intensive growth pattern that drove China’s miraculous economic development over the past 30 years is no longer sustainable.

Labor costs, for one thing, have shot up significantly over the past few years, pushing up manufacturing costs.

The Ministry of Human Resources and Social Security said that the minimum wage increased by an average of 21.7 percent year-on-year in 21 provinces last year.

Raw material prices are also surging, as is the yuan’s exchange rate against the US dollar.

The combination of these factors drove many of the country’s low-end manufacturers to the brink of bankruptcy because their business model gives them a thin profit margin and little bargaining power over export prices.

Chinese manufacturers are in a pivotal period, said Luo, when many will die and some will come out much stronger. “And the way to survive is to stick to what you are good at and do it really well,” he added.

Wishing you successful China sourcing!

About the blogger

The Truth About Project Management in China

Mike Bellamy, with CSIC — Tue, 14 Aug 2012 03:07:14 +0000

In my blogs and video tutorials (here and here) I explain that the placement of the Purchase Order is the beginning, not the end, of the sourcing project. Because many factories, even large professional manufacturers in China, lack basis project management skills, in many cases the buy side ends up having to take point on fostering communications with the factory to ensure project goals for price, quality and lead time are achieved.

You may be surprised to learn that many factories simply don’t bother to update clients on project status, unless the clients ask. In China, no news is usually NOT good news. The last thing you want is to hear about a problem AFTER the ship date has been missed.

But there are tools and techniques to overcome the lack of project management at the factory side. Agents can get involved to represent the buy side on the ground in China. And if you are thinking about hiring an agent, you will do your company a great disservice if you don’t read this white paper called Selecting Service Providers to Support China Sourcing Projects which explains the tricks used by agents in China.

If you wish to roll up your sleeves and deal with the factory on your own rather than engage an agent, I would like to offer some tips:

Consider having a member of your home office join the Project Management Institute. www.PMI.org offers training materials and courses on professional project management. I have been a member for over 5 years and have encouraged my staff to get certified with PMI. It pays dividends for all involved.

While PMI is excellent at offering training on general project management, for an intro to the challenges of China Sourcing project management in particular, the following 10 videos are a great start. They are free and available in streaming video at the links below.

Video1: Finding suppliers
Video2: Evaluating suppliers
Video3: Negotiations
Video4: Project management and quality control
Video5: Protecting your intellectual property
Video6: Learn how Global Sources can help you source with more confidence
Video7: How to find and manage partners for logistics services
Video8: Be careful of this scam if you think you are buying famous brands direct from China
Video9: Returning defective merchandise to China
Video10: Resolving a dispute: Demand letters and legal options with Chinese suppliers

Those videos are based on content from my book “the essential reference guide to China sourcing”.
Hope these tips get you pointed in the right direction.

Wishing you successful China sourcing!

About the blogger

Burberry vs Buebelly

Mike Bellamy, with CSIC — Tue, 07 Aug 2012 09:55:41 +0000

Last week I shared some pictures of “MFC” , the ballsy Chinese outfit to knock off both KFC and McDonald’s at the same time!

I’ve got another picture of another knock off retailer to share this week. And like last week, the picture is taken at a distance as the staff ran me off before I could get any interior short.

Say Buebelly ten times and tell me if it sounds like another brand!

If you like British “Burberry” you gonna love Shezhen “Buebelly”! Not!

The logo font, interior decor and products are all knock offs!

If you want to learn more about the state of Intellectual Property in China, and how to protect yourself, check out the following blog posts, articles and video.

Michael Jordan forgets to register his IP. Learn how not to make the same mistake.

Land Rover fails to register their IP (lessons for buyers)

Where can I find a partner to help distribute a product under my license for the IP?

IP theft

Protecting IP

Wishing you successful China sourcing!

About the blogger

Written by Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

McDonalds vs KFC vs MFC

Mike Bellamy, with CSIC — Tue, 31 Jul 2012 09:40:43 +0000

Back in March I wrote a blog post about the state of intellectual property protection in China and referenced the movie “Coming to America” where McDonald’s is knocked off by “McDowell’s”.

While traveling in China, I recently came across “MFC” which is a knock off of both KFC and McDonald’s!

Here is the picture of the front door, taken at a distance, as they didn’t like some American taking pictures of the inside.

If you have been to China, you will note the Chinese words used to describe MFC are in the same font as KFC China uses and the M is the “Mc” from McDonalds. The best translation would be “McTucky.” The lay out, menu and uniforms are also straight up knock offs of the two big brands.

If you want to learn more about the state of Intellectual Property in China, and how to protect yourself, check out the following blog posts, articles and video.

Michael Jordan forgets to register his IP. Learn how not to make the same mistake.

Land Rover fails to register their IP (lessons for buyers)

Where can I find a partner to help distribute a product under my license for the IP?

IP theft

Protecting IP

Wishing you successful China sourcing!

About the blogger

Written by Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

How did scissors get inside this soft toy?!!!

Mike Bellamy, with CSIC — Tue, 24 Jul 2012 07:34:38 +0000

Case study on the dangers of hidden outsourcing by Chinese suppliers.

This is a real case but some details have been changed to protect identities of buyer and factory.

Earlier this year I was brought in on a project to support a buyer who received from their supplier in China toys with sharp metal pieces inside, including scissors and needles. Luckily nobody was hurt, but the situation could have been very bad for all involved.

Until that point, this supplier had been a decent vendor for past few years. The following blog post is based on our discovery session into what went wrong. I hope that readers may be able to learn from the situation and avoid similar horror stories with their suppliers.

Scissors in a plush toy is far beyond a critical defect. This kind of issue can hurt people and put companies out of business. So I was very eager to get to the bottom of things by visiting the factory.

From past visits to the factory by the buyer, they knew the factory had a metal detector at the end of the production line and that the factory had a written operations manual. I had the following hunches as to what went wrong.

Possibility 1: Metal detector was not used.

Possibility 2: Metal detector was used by not calibrated correctly.

Possibility 3: Metal detector was used but foul play took place after the product went through the metal detector. For example, a disgruntled employee purposely putting the sharp objects into the toy.

At the factory to start the discovery session, I was pleasantly surprised to find the factory owner involved and visibly concerned about this problem. Usually, denial is the normal reaction among local vendors. It turns out the factory owner also suspected foul play and wanted to get involved in the meeting personally in hopes of finding clues as to which person in her organization was to blame.

Our agenda for the meeting was a bit different than hers- even if there was foul play, how could such pieces still make it out the door of the factory, considering that 100% of the products go thru the metal detector before going into the master boxes?

But at least the factory owner and the buyer were aligned in the determination to get to the bottom of things.

Here are some key pieces of evidence:

1. The thread in the needle found in toy was not the normal color used in her factory.

2. The strap on the scissors found in the toy was not the normal strap used in her factory.

3. Both the needle and the scissors were tucked into the middle of the toy, it would not be possible for a disgruntled employee to get into the warehouse, open up a master pack, open up a toy, insert the objects into the middle, and then sew it back up without being noticed. There are cameras and locked storage areas to prevent this.

I was pleased to see the factory had records for the machines calibration and records of which lots went through the machine. There were even records of our order going thru the metal detectors.

typical metal detection machine used in a toy factory

Realizing that all future orders were on the line, the factory owner finally came clean having reviewed the evidence in detail as we conducted the discovery session during the day. The following root cases all had a role to play.

1. Due to the rising costs of labor and rents in coastal China, the boss is setting up a new factory in a different city 12 hour’s drive inland. She is spending at least half of her time at the new location to help get the new operation set up. She is flying back and forth these days. Her original location ran well when she was there to monitor every aspect, but she lacks a good factory manager to look after the shop while she was gone. Her mid-level support time is almost non-existent as she was owner, GM, shift supervisor and QC director when at her factory.

2. While she was away, she received a call from her team that during final QC check of this product in question, which took place AFTER the products went through the metal detector, her QC department discovered that the tails were not sewn on correctly and needed to be re-sewn. But they were over booked on orders and didn’t have the staff on hand to make the adjustments and meet the ship date and get paid. So the owner authorized that the rework would be done next door. That outsourced factory uses the same color thread, same needles and even the scissors found inside the toys.

3. It was uncomfortably hot the day the rework needed to be made and the outsourced factory did not have proper ventilation. Plus staff were paid on a per-piece basis and had little regard for quality. When the reworked parts were delivered to the original factory, they were rejected for poor quality. The outsourced workers on the outsourced line were not happy to have to “re-work the re-works” in the heat and with no additional per-piece compensation. Some workers on that line vented their frustration by placing sharp objects in the toy.

4. Even if outsourced, the original factory has an obligation to take responsibility for the workmanship of the product they are selling to the customer. There is no excuse for even outsourced product to have sharp objects in it. The ultimate root cause of this disaster was that the factory that outsourced their production didn’t have procedures in place for how to handle goods re-worked outside by 3rd parties. This was outside the normal operations covered in their written production manual. So the young low level managers, with no written SOP to tell them what to do, simply packaged the goods up rather than sending them thru the metal detector as would have happened with products made in-house, and the owner was away so she wasn’t on-site to catch the error.

Here are the takeaways from this experience.

Corrective Actions:

Contract has clear penalties in place should this happen again.

Buyer has hired a 3rd party to visit the factory and watch over critical steps during production. Especially to confirm that all product, re-worked or not, outsourced or not, goes thru the metal detector.

3rd party also validates the calibration of the machine.

For the foreseeable future, the supplier is responsible for paying back the buyer for the costs of this 3rd party.

Production is to take place only inside the original factory, until agreed in advance by buyer. Buyer will have authority to monitor any outsourced production and reject facilities not suitable.

If the buyer continues to do business with this supplier or not is the subject of another blog post and highly dependent on how serious the owner takes her responsibilities.

What other actions would you suggest the buyer take?

Wishing you successful China sourcing!

About the blogger

Written by Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

Buying at wholesale level in China

Mike Bellamy, with CSIC — Tue, 17 Jul 2012 07:30:37 +0000

In my blog post “Too small to go factory direct?” I explain that the hard reality is that not all buyers have large enough orders to build a successful buying experience with a China factory. That article also helps buyers evaluate if they are small or not.

At the recent Global Sources China Trade Show in Hong Kong I had the opportunity to visit with many smaller buyers. When I meet them, many of them were almost ready to give up when they learned the factories at the shows were not interested in their small orders. Luckily, part of one of my seminars at the show was on the topic of “strategies for small buyers” and I walked the small buyers through their option.

For example, if you are too small to go factory direct, don’t waste time trying to convince a factory to do business with you, consider checking out the wholesale markets instead. Granted, buying on the spot is a whole different ball game from buying factory direct, but it can work out.

Here is a case study.

A small business in Australia desired to buy a few 1000 kaftan dresses per season which will be sold via “buying parties” where girlfriends get together to talk about fashion and buy products in the comfort of their homes. Kind of like a hip version of a Tupperware party.

The cut n sew is simple, no intellectual property to protect and not large enough to interest a manufacture. So the wholesale market was a good fit. In this case, I introduced the Australians to the Shenzhen wholesale market. First they selected the raw materials in bulk. Then delivered the materials to a small cut-n-sew job shop next door to the materials market for processing. At the end of the chain, they came back to inspect the finished goods, make final payment and arrange shipping with a 3rd party logistics company.

This buying trip worked because the buyer was very hands on and structured the payment to protect their interests. It is simply not possible to come in to the wholesale markets, select some product and leave the next day, hoping that what you saw is what will ship. As there are no formal contracts, no stable suppliers and no code of ethics, it is very much a shark infested water where dealing with the Chinese wholesale markets. But as small buyers, it may be worth the effort.

Many of the small buyers I met at the show were interested in fashion items like leather goods, fabric and shoes. For your reference, here is the list of the relevant wholesale markets in Guangzhou. Compliments of Howard Glaser of CBI Consulting. On a side note, the reason Howard knows these markets so well is because he does surveillance of the markets on behalf of foreign brands to keep track of counterfeits! So please don’t try to set up a supply chain at the wholesale level if you have IP to protect.

Leather Goods

The largest leather goods wholesale markets are located in GUI HUA GANG and SAN YUAN LI in BAI YUN DISTRICT. Specific markets include Bai Yun International Leather Goods Wholesale Market, YI SEN Leather Goods Wholesale Market and IN YI Leather Goods Wholesale Market. Any good taxi driver will know the address.

Fabric Apparel

SHA HE APPARAL WHOLESALE MARKET , BAI MA APPARAL WHOLESALE MARKET and SHI SAN HANG APPARAL WHOLESALE MARKET are the big ones. Once again, the taxi driver should know the address.

Shoes

HUANG NAN SHOES CENTER is located at GUANG ZHOU DA DAO NAN.

GLOBAL SHOES CENTER is located at HUAN SHI XI ROAD.

DA DU SHI SHOES CENTER is located at JIE FANG BEI ROAD.

To give you a sense of the scale of these wholesale centers, imagine 20 buildings each 20 stories high with 20 shops on each floor! Yes, there are easily 8000 wholesalers in just one of these markets!

Wishing you successful China sourcing!

About the blogger

Written by Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

Lack of Rules, Lack of Ethics. Up to you to do the QC in China!

Mike Bellamy, with CSIC — Tue, 10 Jul 2012 05:45:55 +0000

If you think MSG was bad for you, try some formaldehyde-tainted Chinese cabbage during your next trip to the Mainland!

Living in China, it is an almost daily occurrence to see some item in the newspaper about QC corners being cut in the drive to make more money. A bridge collapsed yesterday because the contractor pocketed the money allocated for rebar. The day before the headlines were about tainted medicines. I can only imagine what it will be tomorrow. Over the years, I have almost grown immune to the quality scandals, but today’s headline shocked me back into reality. The China Daily reports:

Vegetable dealers in Qingzhou were seen spraying a formaldehyde solution on Chinese cabbage to keep the produce fresh during long rides to faraway markets.

Farmer Zhao says he uses the chemical to keep the cabbage in good condition during a 10-hour journey to Langfang, a small city on the Hebei-Beijing border. “Vegetable dealers in Langfang openly demand formaldehyde-preserved cabbages because they sell more easily.”

He also says the practice is not a new one. “I just did what everyone else was doing for three or four years. Vegetable dealers in other parts of Shandong and Hebei do the same.”

It’s no question that farmers and wholesalers know this stuff is dangerous.

Formaldehyde, used as a disinfectant and embalming fluid, was declared a known human carcinogen. It is also a skin, eye and respiratory irritant.

Then why still use the cancer causing chemical on food?

The answer is two-fold.

1. Lack of ethics when faced with the opportunity for significant savings. Not only does use of the nasty chemical help the farmers and wholesalers avoid the cost of refrigerated trucks, but

a big bottle of the chemical, about 2.5 liters of solution, sells for only 7 yuan and can keep 20 tonnes of vegetables fresh.

2. The laws in China are vague and were not being enforced.

…unclear how the toxin-using dealers should be penalized, as no such conditions exist in relevant laws and regulations, said Liu.

China’s law on farm produce safety stipulates that the use of preservatives should “conform to relevant technical standards of the state,” but fails to define what preservatives, or how much, are acceptable.

The end result is that the buyers are forced to take measures to protect themselves.

One consumer says, “You must do away with the first layer of leaves, cut the root and rinse well,”

As buyers of manufactured goods in China, we also need to take measure to protect ourselves because if you think ethics, rules and enforcement in China are going to ensure acceptable quality of your product for you, you are sadly mistaken.

However, if you have clear standards in place with your suppliers and you are willing to roll up your sleeves to monitor the situation, then there is a higher chance you will get decent product. But let the poisoned cabbage be a lesson to us buyers that our suppliers in China are prone to cut corners. The mice will play, when the cat is away.

Related articles and videos:

Behind the scenes look at the recent QC recalls

QA vs. QC – what importers need to know

How to find a QC partner

Wishing you successful China sourcing!

About the blogger

Written by Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

More Free Resources For Buyers (virtual trade shows)

Mike Bellamy, with CSIC — Tue, 26 Jun 2012 02:10:48 +0000

The China trade season comes twice per year in April and October. If you want to refresh yourself on what you saw during your trip, or if you couldn’t make the trip in the first place, know that Global Sources has created a virtual trade show by taking a picture of every single exhibitor’s booth and posting the images of staff, products and additional information to the Global Sources website. These online sourcing fairs are available at http://www.onlinesourcingfair.com/?source=GSOLHPNav .

But in order to make room for the next round of shows, after 4 months, the online fair comes down and a new one goes up. So you have until August 2012 to check out the April 2012 shows for example.

I’m also happy to report that Global Sources has included the video tape of the Sourcing Seminar Series, hosted by CSIC, on their virtual trade show platform.

Wishing you successful China sourcing!

About the blogger

Summer Blackouts: How you and your factory can get ready

Mike Bellamy, with CSIC — Tue, 19 Jun 2012 05:20:54 +0000

Recent blog post and videos at CSIC have covered the labor shortage at factories along the coast in depth, but today let’s take a look at another shortage causing headaches for buyers- China’s power shortage.

The China Daily article Power-strapped China to see blackouts this summer explains:

Some parts of China will experience severe blackouts this summer as the result of an electricity shortage of 30 to 40 million kW.

Although power consumption is predicted to slow this year, growth momentum has remained steady and supplies are tight, according to a quarterly report released by the China Electricity Council (CEC).

“The shortage will hit about 30 million kW during summer peak days and may expand to 40 million kW if heat waves persist,” the CEC warned.

China’s more developed eastern and southern regions will bear the brunt of the shortages, followed by north and central China, while northeast and northwest China regions are expected to see an electricity surplus, the report said.

China has suffered seasonal power shortages in recent decades due to steadily climbing electricity use, breakneck economic growth and an unwillingness on the part of coal-fired plants to produce more energy amid rising costs and decreased prices.

What does this mean for us buyers?

It is generally the industrial areas that are hit with the brownouts and blackouts rather than the residential areas. This of course can have a big impact on production lead times.

The good news is that the power cuts are usually announced weeks or at least days in advance, and factories can schedule accordingly. For example, at my assembly center in Shenzhen, we have about 5 days each summer where power is cut off for a 12 hour period. But we have never missed a delivery date thanks to some strategic planning. Here are tips we use that you can apply to your suppliers as well.

1. Maintain open communications between factory and landlord/power bureau to ensure the factory gets notified of a power cut well in advance.

2. Build in some buffer time if possible.

3. Consider a diesel generator as back up. In our industrial park, the companies kicked in as a group and purchased one that is shared during the blackouts.

4. Many assembly functions don’t need power. As long as there is plenty of natural light during the day, hand tools can still be used. Get the power hungry tasks done in advance and save the labor intensive production for the days without power.

5. If the power is going to be cut on a Wednesday for example. Switch with Sunday and let Wednesday be the “weekend” when staff take a break.

6. During the summer it can get hot during the day, so it may be more comfortable to work in the evenings and mornings anyway. It is important to make sure staff approve and that your policy complies with local labor regulations, but factories can consider staggering the shifts around the times when power is out.

Let me know what strategies are working for you.

Wishing you successful China sourcing!

About the blogger

Written by Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

Due Diligence and Verification

Mike Bellamy, with CSIC — Tue, 12 Jun 2012 06:52:39 +0000

In my blog and educational videos at CSIC I explain the two types of due diligence professional buyers conduct when evaluating a potential supplier. A factory audit is a review of the suppliers QC systems to confirm they have the ability to make your product. An operational audit is an investigation into the financial stability of a company.

To further explain how these services can be applied, below I share an email from CBI founder Kevyn Kennedy to his potential client.

Hi Kathy,

If you need quality control, we suggest AQF (www.AsiaQualityFocus.com). Prior to contracting another factory, however, we suggest you contact us for due diligence and then AQF for QC. Worth the investment of a few 100 USD for sure.

My firm, CBI, is not quality control in the traditional sense. If you need someone to inspect your products prior to shipment, we suggest you contact Asia Quality Focus as mentioned above.

CBI are investigators. What Asia Quality Focus does overtly, we verify covertly. Lots of fun. We offer a complimentary service to our CSIC partners. For example: -

* If you need a sourcing company, contact Passagemaker (www.PSSchina.com)

* If you want someone to look at the accounting books (vague though they may be), contact Fiducia (Fiducia-China.com)

* If you need a quality control company, contact AQF

* If you need due diligence prior to signing your contract, we suggest CBI. And after the initial due diligence you might be interested in an unbiased view of how the sub-contractor operates when they do not realize they are being monitored, contact CBI.

We do not present name cards when visiting, we may act as an interested buyer. What can that add?

As an interested buyer, we have no right to inspect their accounting books, but we do have the right to inspect their production facilities. If they tell you they can produce 10,000 widgets per day, but have only one production line that is obviously not up to the task, where do they produce? Common problem in China.

As an interested buyer, we might ask for a sample right off the production line. NOT a sample that they have made especially to show you. We would send this sample to you. Is the quality the same as what you were expecting? Are the materials up to speed? If not, you may have a problem. This use of the “Golden Sample” is common in China. The first sample the factory gives you is fine, the large production…not so much.

What would happen if one of my investigators went to the sub-contracted factory begging for a job and joined their team? From the inside, would he hear of worker abuses like the kind detailed in the this video that happened to Disney! Of all companies!

If a normal quality control company cannot uncover such practices, don’t blame the quality control company. The factory was just on the ball that day and trained their staff what to say. Our discreet visits, however, can let you behind the scenes.

I understand that in this case your sub supplier sent you a load of bad quality products. Asia Quality Focus could have helped in that one. But just last week CBI did a case where the supposed shipment had not even been produced! CBI could have learned the situation on the factory floor weeks prior to shipment had we been allowed to covertly interview factory workers coming off their shift.

CSIC operates as a team and I am happy to recommend our partners. Likewise, I am always happy to introduce our services. From what I see, you could use a quality control company for current shipments, and our due diligence (provided by CBI) for future partners.

Other than that, thank you for writing me. It is a pleasure to converse with you, and I look forward to being of service.

Best Regards,

Kevyn Kennedy

CBI CONSULTING LTD. (www.CBI-Consulting.com.cn)

Wishing you successful China sourcing!

Mike Bellamy

About the blogger

Not in my bed room!

Mike Bellamy, with CSIC — Tue, 05 Jun 2012 13:23:23 +0000

In my blog (here, here and here) I often talk about the status of Intellectual Property protection in China and try to offer some solutions to protect ourselves. But today I came across an interesting article about how even the Chinese consumers are starting to get fed up with counterfeit goods.

It could be argued that China’s historic lack of enforcement of intellectual property rights allowed many of its industries to learn production methods and techniques from the West (and by “learn” I mean “copy”) without being saddled with the burden of paying royalties or bearing the cost of development on their own.

However, I am happy to report that things are changing for the better…perhaps not as fast as we would like it, but China is paying more attention to the protection of intellectual property.

The main reason may be that as China production moves up the value chain (think flat screen TVs rather than tube socks), Chinese companies are creating brands, new technologies and registering their own IP. You could say that because they finally have something to protect, they are jumping on the IP protection bandwagon.

But I think another reason is that the middle class and certainly the wealthy are getting sick of being ripped off by counterfeit products. They are willing to pay for the real thing and when they find out they were bamboozled, they raise a fuss. And that brings us back to the article I mentioned at the beginning of this blog post.

Here are the highlights from “Counterfeit Italian goods spark rage in China” as Chinese consumers are up in arms over “Italian” luxury goods that were recently revealed to have been manufactured in China.

“The Beijing office of the Intellectual Property Rights Department of the Italian Trade Commission (ITC) recently submitted a list of 30 brands that are advertised as having Italian origin to China’s State Intellectual Property Office.

The products specified include bags, leather goods and bedding, some of which are sold for higher prices than domestic products or even genuine imported goods. Italian addresses and phone numbers printed on the products’ packaging were found to be falsified.”

What goes around comes around.

I’ll bet you dollars to doughnuts that some of these rich Chinese consumers who can afford a few 100,000 RMB for what they thought was a real Italian bedroom set were the same factory owners in the 1990’s who made fortunes by copying foreign technologies and intellectual property.

That would be nice karma, wouldn’t it!

Wishing you successful China sourcing!

About the blogger

Insider’s look at Alibaba Inspection Services

Mike Bellamy, with CSIC — Tue, 29 May 2012 09:07:35 +0000

Sorry for the long blog post, but I am passionate about helping buyers understand their options in China.

While walking a trade show in China, I was handed a brochure about the inspection services offered by Alibaba.com.

To the un-initiated, the marketing message on the brochure is very appealing, especially to a new-to-China buyer who doesn’t yet have the experience of dealing with China/Alibaba and/or a buyer who is unable to read between the lines of this slick marketing message. Perhaps I have grown too cynical during my 12 years sourcing in China, but here are my comments inserted into their marketing message.

Stressed about the Quality of Your Product?

Be sure with Inspection Service on Alibaba.com!

I’m still pissed off about “Ali-scam” where Alibaba staff were in collusion with Chinese crooks to trick foreign buyers into placing orders with suppliers that didn’t exist in exchange for a piece of the take. See this link to the Wall Street Journal about the Alibaba.com fraud. Here are some blog posts I contributed to which explain What buyers should learn from the recent scandal at Alibaba .

In short, until they get some more reputable companies at the top of their list, Alibaba are the last people I am going to trust to inspect my products!

Why use inspections service on Alibaba.com?

That’s obvious- because I don’t trust suppliers I find online until their trust has been earned. And I trust Alibaba suppliers the least. Sourcing expert Renaud Anjoran does a great job explaining why in his post The real Alibaba fraud: not the one everyone talks about .

Reliable Inspectors

Every inspector is pre-qualified by Alibaba.com

I immediately asked myself, if Alibaba has a hard time qualifying their vendors how are they going to qualify inspectors? Maybe if they have some famous inspection agents I can feel safe. To the contrary, the inspection agents found at http://inspection.alibaba.com/ are far from famous. Not a single major inspection agency is on the first page of this list at the time of writing (5.16.2012). There are some big companies on the list if you dig past the first few pages. But those companies appear not to have any active projects in the Alibaba system. I hope some professional companies join the top of the list because the real scary part is that many of the inspection agents on the current list are not even companies. They are individuals doing freelance work. Unbelievable! If these guys screw up, they are doing to disappear and leave the buyer hanging. Using these freewheeling freelancers goes against my core principles. My blog posts How to find a QC partner and Finding a good employee explain why in great detail.

Secure Escrow Payment

Payment is held released to the inspector only after you confirm receipt of the inspection report.

That does add a level of safety. But in so many words it really means they don’t even trust the inspectors in their system.

Affordable Service

Wide price range from different types of inspectors to satisfy your specific service requirements.

Pardon the profanity, but I read this to mean, cheap-ass services for cheap-ass buyers who don’t really care about quality. The major inspection agencies (SGS, Intertek, BV) and even the mid- sized inspection firms (Asia Inspection, Asia Quality Focus, Pro QC) all charge at least 290 USD per man-day for inspection, inclusive of transport. I don’t know a single professional buyer (meaning the buyers who care about quality AND price) who use the bottom-of-the barrel inspection agents charging below 100 USD like some at Alibaba.com. I honestly believe you get what you pay for.

Maybe this is a new service at Alibaba and I am being too harsh. But I’m afraid in China we need to assume the worst until proven otherwise.

Quality Inspection Guaranteed

Compensation up to 20 times the inspection cost in the case of a false or faulty inspection.

Let’s say you pay your inspector from Alibaba.com 200 USD for the inspection. Let’s say you order a container load of pink underwear and blue underwear shows up. 20X sounded safe at first, but $200 x 20 is only $4000 in maximum liability. Your order could be 100,000 USD or 100 USD and the liability of the inspector is the same. So these services are very much geared to the lower end of buyers. I often joke that Alibaba is the flea market of global sourcing. And don’t get me wrong, flea markets can be fun. But just what you are getting into. Suggest you read the blog post Directories of Chinese suppliers & manufacturers to get another buyer’s view on how the online directories stack up.

Now to be fair, liability limited to a multiple of the day rate is indeed the standard practice across the inspection industry, from the small individual freelance inspectors to the big boys. BUT, if you really want to protect yourself and find a good inspection partner, you should not focus on the amount of liability they offer but rather focus on finding a professional agent from day 1. A legit firm with small liability is much safer than a fake company promising a massive guarantee. Guess what happens when that small company screws up. I’ll tell you what happens- freelancer Joe Wang just closes his website (no company to close) and starts over the next day under a new name and new URL. Big inspection companies can’t do that. Good luck getting any compensation from Mr. Wang (probably a fake name to begin with).

Here are some tips to find legit service providers.

Do a good search under the key words of “China + inspection + audit” and you will find plenty of options. Then ask the following questions:

Are they a legitimate company? If they ask you to pay to a personal account, this is a big red flag.

Do they have a clear track record of performance? If they can’t give you some client references, run away.

Are they focused on a certain set of services (inspection only) or do they try to everything for everybody (inspection and engineering and sourcing)? Yes, even the 3rd party service providers have been known to outsource to others just like some factories outsource production without telling the buyer. If an inspection company is also a trading company- that is a big conflict of interest.

Is their pricing structure and service agreement well defined and transparent?

It is a major pitfall to do business with a 3PQC service provider without a clear contract in place that outlines the service, costs, time frame and other desired attributes of the partnership. If something goes wrong, you want to know in advance how the company is going to stand behind their services.

The golden rule of China sourcing is to inspect the products before you make final payment before the goods leave China. So I highly encourage you to conduct inspection independent of the factory, but find the professional inspection agents or you are just wasting you money.

Why set up a HK buying office?

Mike Bellamy, with CSIC — Tue, 22 May 2012 10:00:49 +0000

I often get asked about the ins and outs of setting up a HK company to manage China purchases. I’m not a US tax expert, but here are some of my personal thoughts on jurisdictions for incorporation if you are doing business in Asia. Consult your tax guys, but for me, I am a big fan of incorporation in Hong Kong and many of my clients set up accounts in HK for the following key reasons:

1. HK is consistently voted in the top 2 most pro-business jurisdictions on a global level, thanks to things like

a) Easy of set up and annual filings
b) Ease of internet banking (I use HSBC)
c) English language based rule of law with proper accounting and respected auditing by local authorities
d) Business transacted outside of HK (buy PRC goods and sell to USA) is TAX FREE!
e) Easy to repatriate funds and corporate dividends are not heavily taxed.
f) Manpower for HK operations can easily be based in PRC to keep costs very low.

2. Unfortunately, Uncle Sam has some tight rules about arm’s length pricing/transfer pricing/ overseas earned income for US passport holders. So as a US citizen you won’t be able to avoid personal income tax legally when funds are eventually repatriated from HK to USA, BUT as I understand it, you can legally defer taxes and this has a big long term advantage when you start to recycle funds.

For example, if on order #1 profits are parked in HK, then used to purchase order #2 and so on and so on, over time, because each transaction is not being taxed, the profits start to build up in HK and only once dividends are declared or funds repatriated to US based owners, does US tax kick in.

I run my business, and recommend you run yours, in full accordance to PRC, HK and USA tax code. I go above and beyond when it comes to compliance as I want no problems w the IRS, but at the same time I am happy to take full advantage of global opportunities to limit my global tax exposure in a legal fashion. So if your project takes off, as I hope it does, you may want to closely consider HK as a place to set up shop.

For professional advice on business formation, accounting and taxation, talk to the experts at Fiducia-China.com. They are the people I go to when I need support and I would be happy to make an introduction for you.

Wishing you successful China Sourcing!

Best Regards,

Mike Bellamy

China Operations Director, PassageMaker Sourcing Solutions (3rd party assembly
& inspection to protect intellectual property and ensure quality.)

Chairman of the Advisory Board, China Sourcing Information Center

Author, The Essential Reference Guide to China Sourcing

LinkedIn Profile:
http://www.linkedin.com/pub/michael-bellamy-author-business-owner-volunteer-advisor/8/52a/389

trade friction: now even the kitchen sink affected

Mike Bellamy, with CSIC — Tue, 15 May 2012 09:41:25 +0000

Summary: As part of CSIC’s efforts to keep buyers informed of WTO (world trade organization) rulings which could affect your sourcing, this post explains about the status of stainless steel sink imports and why China sourcing professions need to care about those products and WTO rulings. Even if you are not in the sink industry, the trade friction could spill over into your industry. Here is the latest on the situation.

First some good news

As China is now a full member of the World Trade Organization (WTO) trade disputes are mediated
by the WTO. This is a large step towards “rule of law” at a global level and helps to reduce not only trade barriers but also prevents trade friction turning into trade wars.

Now the reality

When one nation brings a case to the WTO court, it is not uncommon for the defending party to
raise countersuits on other products. Sometimes the act of raising a countersuit results in the two sides “settling out of court”. In cases that do go to the WTO mediation, it is very common for the losing nation to strike back in other product categories.

For a case study, check out the blog post Chicken and Tires. Tit for Tat at the WTO.

The article “US to continue probes into stainless steel sinks from China” has the following
highlights:

A US federal trade panel determined Friday the US industry was “materially injured” by importing stainless steel sinks. The US International Trade Commission (USITC) voted unanimously in the affirmative in the case, which was petitioned by Elkay Manufacturing Company based in Illinois.

The USITC’s move would allow the US Department of Commerce to continue its investigations on imports of these products. The preliminary countervailing duty (CVD) determination is due around May 25, 2012, while the anti-dumping (AD) one is due around August 6, 2012.

These investigations, started on March 22 by the Commerce, intend to impose anti-dumping duty ranging from 22. 81 percent to 76.53 percent and countervailing duty at above 2 percent.

The United States consumed about 303.9 million dollars of stainless steel sinks in 2011, among which nearly 119.1 million U. S. dollars of products were from China, according to the USITC.

If the US governments moves forward with the penalties, we can expect the Chinese will be calling for counter measures. Let’s hope this politically motivated sabre rattling over stainless steel sinks doesn’t spill over into other industries and ignite a trade war.

We believe a full scale trade war is highly unlikely, but “tit for tat” sanctions are to be expecte

How to stay “in the know”

To help readers keep a pulse on potential and active WTO cases, sign up for this RSS feed as we will blog about any cases that have the potential to impact the China sourcing profession.

Wishing you successful China sourcing!

About the blogger

RMB’s exchange rate more flexible. Your risk just doubled. What to do?

Mike Bellamy, with CSIC — Tue, 08 May 2012 08:42:52 +0000

The China Daily runs the headline “Yuan’s trading reform gains momentum, risk prevention needed.”

Expanding the yuan’s floating band is a significant step of the yuan’s trading reform, but will also increase trading risks for export-oriented firms and banks in the short run, said Lian Ping, chief economist with Bank of Communications.

The exchange rate of the Chinese Yuan or RMB against the USA has been tightly regulated by Beijing to a band of just ½ of a percent. Meaning it could only go up or down so much in a day’s trading. But recently that bandwidth has been doubled to 1%. It doesn’t sound like much, but if you are placing a PO to China in USD, your supplier is factoring their exchange rate risk into the price of the goods sold.

According to our research, suppliers have been building in about 5% of the cost of goods sold for their exchange rate risk. But now that the daily band has doubled, we can expect them to build in about 10% for the exchange rate risk.

What can be done?

Consider paying in RMB. Below are some articles on this topic for your reference.

Are we on the level?

The article states:

Speculative capital inflows are also expected to ease, as the value of the yuan, which has
gained over 30 percent against the U.S. dollar since 2005, is widely believed to have approached an “equilibrium” level.

Since China has a policy of keeping the RMB stable in order to bolster international trade, I am hoping that Beijing’s extension of the daily trading band is an indication that they believe the current
RMB-USD exchange rate will stabilize around the current exchange rate of about 6.3 RMB to 1 USD. This would be good news for us buyers, because not only does stability make it easier to trade, but every time the RMB gets stronger, our cost of doing business goes up.

So let’s keep our fingers crossed that 6.3 is the new 8.26!

8.26 was the pegged rate that was in place for many years before the RMB started to float. Those were the glory days ofChina sourcing.

Pay suppliers in RMB and save big

My appreciation of the RMB depreciation!

Wishing you successful China sourcing!

About the blogger

Sourcing expert gets the smack down from a QC expert

Mike Bellamy, with CSIC — Tue, 01 May 2012 08:10:14 +0000

In his article “Yes, lean production is possible in China” QC expert Renaud Anjoran of the blog www.qualityinspection.org takes Author and China Consultant Rosemary Coates to task over an article she published entitled “Why China Is Not Ready for Lean Projects” in the Supply Chain Management Review.

I don’t know Mary but I do know Renaud. He is a very humble and quiet gentleman who really knows his stuff. See for yourself at this video entitled ‘Arm’s length buying’ which has him answering questions about China sourcing. Rosemary must have touched a nerve, because the very reserved Renaud drops the gloves with his rebuttal by addressing four pieces of “nonsense” (his words) in Mary’s article as follows:

First nonsense: lean manufacturing is a set of techniques

Second nonsense: classroom training should be enough

Third nonsense: lean principles come from the West

Fourth nonsense: lean thinking is incompatible with Chinese culture

Visit his article to get an education on why the concepts above are nonsense. Great stuff!

BTW, if you want to see Renaud’s review of Mary’s book entitled “42 Rules for Sourcing and Manufacturing in China”, you can visit this link. Be warned, it ain’t pretty.

Here are links to other books reviewed by Renaud. He calls it like he sees it. Enjoy!

Review of Change by Design: How Design Thinking
Transforms Organizations and Inspires Innovation

Review of Toyota Production System: Beyond Large-Scale
Production

Review of Where East Eats West: The Street-Smarts Guide
to Business in China

Review of 42 Rules for Sourcing and Manufacturing in
China: A practical handbook for doing business in China, special economic
zones, factory tours and manufacturing quality

Review of Toyota Kata: Managing People for Improvement,
Adaptiveness and Superior Results

Review of Poorly Made in China: An Insider’s Account of
the Tactics Behind China’s Production Game

Review of Mr. China: A Memoir

Review of Managing the Dragon: How I’m Building a
Billion-Dollar Business in China

Review of River Town: Two Years on the Yangtze

Review of The China Price: The True Cost of Chinese
Competitive Advantage

Let me know if Mary responds to Renaud’s points. I’d love to blog about it.

Wishing you successful China sourcing!

About the blogger
Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center (www.ChinaSourcingInfo.org). He is also the author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)

More free resources: business guide to China’s provinces

Mike Bellamy, with CSIC — Tue, 24 Apr 2012 06:16:50 +0000

The team of China experts at Fiducia Management Consultants have put their China business guide on-line. Free for CSIC readers.

Check out the interactive “China Province Report” at http://www.fiducia-china.com/china-insights/china-provinces-map

For each province, the reports introduce the major industries and infrastructure. A quick an easy way to get up to speed if you ...

[Continue Reading]

Exclusive look at data from one of the largest Chinese supplier surveys ever conducted

Mike Bellamy, with CSIC — Tue, 17 Apr 2012 05:51:32 +0000

Dr Neale O’Connor with the School of Business at the University of Hong Kong is interviewing 1000 suppliers in China to understand market trends and challenges. As buyers, it is always good to know what our suppliers are thinking. Dr O’Connor has spent the last 18 months and over $HK300,000 on research, including a team of 14 interviewers, yet it could be months before the full 1000 interviews are complete. Luckily, in an exclusive arrangement with CSIC, our favorite professor is willing to give our readers a sneak peak.

Below are some of the figures from the first 644 interviews with Chinese suppliers.

The pie chart breaks down how China based suppliers answered the question “what is your number one challenge?”

“Cost Control” is the biggest challenge in the eyes of the suppliers. Further questions were asked about how the suppliers plan to implement cost control and below are the results from the first 212 respondents broken down under “no solution” (black), “strategic” (yellow), “managerial” (green) and “human resources” (blue).

After reviewing the data with Dr O’Connor, here is some initial analysis:

Suppliers are responding in different ways to the cost challenges but very few of them are looking to long term solutions like brand building, technology innovation or even moving inland to less expense locations.

Many are seeking short and medium terms solutions.

Short term:

1. collecting more quotations (in other words, trying to twist the arms of their sub suppliers)

2. achieve economies of scales

Medium Term:

1. Automation

2. Improve efficiencies

Interesting that “cost control” challenge is a huge slice but “currency appreciation” challenge is tiny. Perhaps being a bit optimistic, I would take this to mean that suppliers realize that gains in
efficiency can far outweigh losses in currency. This means they are in control of their destiny and I take it as very good news for the future of China sourcing.

The sooner factories realize they can no long depend on the “throw another body at it”
production mentality the better. I am happy to see that according to the research above, more and more suppliers are finally realizing they actually need to learn proper management and efficiency techniques to stay in business. There are some professional factories in China a lot of un-professional factories. I am hoping the increased costs of labor, rents, power, taxes, and currency appreciation will cause a great shake out where only the efficient and well managed
factories survive. As buyers, this will make our lives so much easier, plus there will still be plenty of factories left after the shake out for healthy competition driving down costs.

References:

Here are some blog posts that explain why I feel China has another 5-10 years as the premier sourcing destination:

http://chinasourcinginfo.org/2011/05/10/reports-of-china%e2%80%99s-death-as-a-sourcing-destination-are-highly-exaggerated/

http://chinasourcinginfo.org/2011/08/29/labor-shortage-in-china/

http://chinasourcinginfo.org/2011/08/02/heavy-hitters-weight-in-on-future-of-china-sourcing/

See below for more information about Neale O’Connor and the “Supplier 1000” research.

Neale O’Connor PhD, GDip(Acc), FCPA(Aust)

Associate Professor

School of Business, The University of Hong Kong

Mob +852 93045964

Home page: www.nealeoconnor.com | He can be found on Twitter as @acno1

Director of the China Supplier-1000 Project – www.Chinasupplier1000.com The largest face to face
interview study of Chinese suppliers.

My friend Kevyn, the Magnum PI of China sourcing

Mike Bellamy, with CSIC — Tue, 10 Apr 2012 09:58:20 +0000

In order to keep tabs on suppliers, Social Audits are a good start, but most of the time they are scheduled in advance and staff interviewed by the auditors know that what they say is being watched closely by factory owners. Plus it is not uncommon for management to coach staff on how to answer the questions to be asked by the auditors.

So how do you really know what a factory is like? Hire an investigator! Below is a bit of an email between myself and the representative, Kevyn, of the firm I eventually hired about how they conduct their investigations.

Here is how we can give you an unbiased view of how the sub-contractor operates when they do not realize they are being monitored.

We do not present name cards when visiting, we may act as an interested buyer. What can that add?

As an interested buyer, we have no right to inspect their accounting books, but we do have the right to inspect their production facilities. If they tell you they can produce 10,000 widgets per day, but have only one production line that is obviously not up to the task, where do they produce? Outsourced. Common problem in China.

As an interested buyer, we might ask for a sample right off the production line. NOT a sample that they have made especially to show you. We would send this sample to you. Is the quality the same as what you were expecting? Are the materials up to speed? If not, you may have a problem. This use of the “Golden Sample” is common in China. The first sample the factory gives you is fine, the large production…not so much.

There are many ways we might approach this problem, one of which includes sending one or more consultants into the factory area looking for a job. A job seeker does not have access to management, like an official Social Auditor may, but a job seeker would have ample opportunity to discuss the working conditions, labor relations, management, etc. at the target factory. Quite a non-traditional way to approach this, but usually very effective.

Our job seeker would approach the workers as they enter or leave the factory, invite them to a meal, have a few beers with them. He would do this for two or three days, targeting a different worker or (ideally) group of workers each evening. Our professional fees for this work are US$500 per person per day (perhaps you would consider two consultants–different factory sites, different points of view, etc.) and the client is responsible for disbursements including travel, lodging, and entertainment.

If you have not done a complete media and Internet search, perhaps you would consider having us do that as well. We target all the traditional media in addition to blogs and chats. We can make telephone calls to reporters, competitors, suppliers, etc. for their comments as well. This does not usually take a lot of time and we can usually do this part for professional fees of US$600 per target investigated.

Add investigations to your China project management tool box!

Wishing you successful China sourcing!

Mike Bellamy

About the blogger

Is there hope for IPR in China?

Mike Bellamy, with CSIC — Tue, 03 Apr 2012 09:27:52 +0000

In my blog (here, here and here) I often talk about the lack of Intellectual Property protection in China and try to offer some solutions to protect ourselves. But today I am happy to say there was some positive news about IP reported in the China Daily:

All government departments at, and above, county level will use licensed software by the end of 2013 in the latest move to protect intellectual property rights (IPR).

Industry insiders predicted that the move will create a wave of business opportunities for software providers, especially for foreign brands.

A source from the Ministry of Commerce said all government departments in 600 cities and 2,900 counties will use licensed software by the end of 2013, while the 31 provincial-level governments will promote the use of licensed software by the end of next June.

The move came after 135 central government departments, including all ministries, completed installing licensed software at a cost of more than 140 million yuan ($22 million) in May.

Let’s hope this is not just a symbolic gesture, but actually demonstrates that Beijing is commitment to protecting IP. They have a long way to go!

Wishing you successful China sourcing!

Mike Bellamy

About the blogger

Pay suppliers in RMB and save big

Mike Bellamy, with CSIC — Tue, 27 Mar 2012 08:48:26 +0000

The China Daily ran an interesting article about how more and more UK retailers are paying their Chinese suppliers in RMB (Chinese Yuan or CNY) rather than USD or Euros.

With the yuan having appreciated at least 7 percent against the dollar since June 2010, Chinese suppliers commonly embed a “buffer” into dollar-denominated contracts to guard against further yuan appreciation.

How much can be saved if this buffer is removed by settling in RMB rather than USD?

According to Barclays Capital, the investment banking division of Barclays PLC, more British retailers are paying in yuan to achieve cost savings of up to 8 percent.

What’s the downside for buyers?

Settling in RMB removes the risk for the seller but transfers the risk to the buyer as the buyer is holding RMB in their account. Say for example, your order takes 3 months to produce and you agree to pay in RMB. If the exchange rate changes during this time, the risk is on the buy side. Luckily, the RMB’s exchange rate is tightly controlled by Beijing and we haven’t seen any major short term fluctuations.
The other problem is that you can’t walk into your local main street USA bank and open up a RMB account. At the time of writing, I believe only banks in Hong Kong and recently London are offering businesses the option to open RMB accounts. More cities will come on line in future, but at present, most buyers can’t deal in RMB even if they wanted to. But this is going to change fast, so get ready to deal in RMB and take advantage of the savings.

Wishing you successful China sourcing!

Mike Bellamy

About the blogger

Techniques to access the truth about your supplier

Mike Bellamy, with CSIC — Tue, 20 Mar 2012 02:53:24 +0000

Excerpt from “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book)

Here are some “softball questions” I look to toss out during a factory tour or at the dinner/lunch following the tour, to get the supplier talking. When they are comfortable and at ease, they may go off-script and give you some juicy information.

“What are their plans for the future?” Most factory staff are proud of their business and want to tell you all their hopes and aspirations. If they have their eyes set on becoming China’s #1 toilet brush maker and you are asking them for help with toothbrushes…you may have an issue.

What are their biggest headaches? You may hear about trouble with staff, or rolling black outs, or that their rent keeps going up or that they hate small orders…watch out if any of these issues affect you the buyer! This is a great question to ask because they simply don’t put this stuff in their websites or on their brochures!

It may be uncomfortable to ask for sensitive information like ownership papers, business licenses and client references. Certainly you don’t want to come across as being rude and letting the supplier feel they are guilty until proven innocent, but this is something you have to do to be safe! I have found that playing good-cop, bad-cop is an effective solution to this dilemma; usually by saying something like this: “Mr. Factory Manager, you run a nice shop and I am impressed with you and your team. I want to go home and tell my team about what a great supplier you will be, but my boss is a real stickler for detail and he is making me fill out this check list. I could care less about the following, but under our company’s Standard Operating Procedure (SOP) for conducting a supplier audit, I need to get a copy of the following documents….thanks for your understanding and sorry to trouble you”.

If the supplier still tries to wiggle out of giving you the information, it should be a red flag. Here are some common scenarios:

Supplier doesn’t want you to see their business license for some reason. Perhaps the factory history, ownership, scope of business is very different from the story they have presented you.

Here are the common excuses you will hear:

“Our business license is at another location.”- This is highly unlikely as all businesses in China are required by law to have their business license framed and posted on the wall or other highly visible place in the office.
“Our business license if getting updated and is not available now.”- Highly unlikely as to operate without a pre-approved business license is illegal.
“Here is the license of our parent company (in HK or Taiwan for example)”. This is not a PRC license.

Wishing you successful China sourcing!

Mike Bellamy

About the blogger

my appreciation of the RMB depreciation!

Mike Bellamy, with CSIC — Thu, 15 Mar 2012 06:12:33 +0000

For the first time since I can remember, the RMB (AKA Chinese Yuan or CNY) didn’t appreciate today.

For the past 5 years the trend is pretty obvious. Just look at the chart below. Beijing has kept the maximum daily allowable appreciation amount to a minimum, so there were no big jumps, but day by day, the currency got stronger and stronger.

Let’s take it to the next level…

But things are different now.

Yes, in the past there have been times when it didn’t move much- like when Beijing held the exchange rate in a very tight band during the Global Financial Crisis. But today is the first time in my memory, where the headlines (here and here) are pointing out that the RMB actually depreciated in some markets.

Domestic and external conditions for yuan appreciation have changed dramatically compared with the past 10 years, leaving more room for two-way yuan fluctuation, instead of only appreciation.

What is the central government saying?

The real effective exchange rate of Renminbi may have reached its equilibrious level after rising by 30 percent since China launched the exchange rate reform in 2005, Chinese Premier Wen Jiabao said Wednesday.

Why should I care?

As buyers, a weak RMB is good for us, so let’s keep our fingers crossed that the RMB stays where it is or gets slightly weaker in the short and medium term.

Wishing you successful China sourcing!

About the blogger

References/Related:

Central government to bring down costs of logistics. Good news for sourcing industry.

Heavy hitters weigh in on future of China Sourcing

What lawn mowing methods tell us about the costs of labor in China

Avoiding Middlemen – a look behind the bamboo curtain

Mike Bellamy, with CSIC — Tue, 13 Mar 2012 02:51:30 +0000

Excerpt from “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book)

How bad is it?

To test my theory that the vast majority of vendors encountered by foreign buyers are actually just middlemen or brokers rather than actual manufacturers, I decided to attend a trade show in Mainland China. I brought with me an electronic fuel pump used in the quality intensive US automotive marketplace. This product combines electric and gasoline – one would assume anybody willing to quote on such a dangerous and technically demanding product would have a lot of production experience. I stood in the main hall of the trade show and held up a sample of the fuel pump and said in English “Can anybody here make this item?” In the blink of an eye I had 15 interested parties. All claimed “mei wenti” (“no problem”) and boasted of their factory direct connections and great pricing. If only it was this simple to find a supplier.

This bad!

After interviewing all of them, it became obvious that these were people (both Western and Chinese) with only loose connections and no industry experience. They were essentially just middlemen. One was even a cab driver who carried the brochures of all the factories in the area. He would ask the foreign visitor what product they were looking for then magically pull out a brochure from the truck. He then would invent a cousin that has ownership in the given factory thus making up a story about why he could help broker a deal for the buyer to ensure good price and quality. Some naive foreign buyers actual did business with him only to learn that their price was inflated 15% by the back door deal worked out by the cab driver and the factory. Worse off, the factory was just randomly picked based on the recommendation of the cab driver and it turned out this supplier had no proper QC system and as a result most of the parts delivered had quality problems. Today, the amount of money involved in the China Sourcing game is so large that when visiting China just about anybody (bar tenders, hotel staff, exchange students, tour guides, translators, friend of friends and even cab drivers) will offer to be your source in hopes of making a quick buck. BUYER BEWARE!

Definition of Middleman

There are good and bad middlemen. For the sake of this book the bad type of middleman is an intermediary who provides little value in the supply chain, perhaps only playing match maker but building in a margin. On the surface, in order to have more perceived value, they may claim an intimate relationship with the factory, but if they don’t allow you to communicate directly with the factory, then you are dealing with a middleman.

If the intermediary is providing legitimate value (for example logistics, project management or quality inspection) then perhaps there is a place for them in the supply chain. But if the intermediary is not transparent in where their margin lies, then most likely the actual value for their inspection or project management service has been greatly inflated. Before you sign up with an intermediary simply ask that they separate the costs for their “service” from the “production costs”. If they fight this, then you know their actual value to you is minimal.

Wishing you successful China sourcing!

Mike Bellamy

About the blogger

Michael Jordan forgets to register his IP. Learn how not to make the same mistake.

Mike Bellamy, with CSIC — Wed, 07 Mar 2012 06:05:06 +0000

In the 1988 Eddie Murphy film “Coming to America”, the restaurant owned by Cleo called “McDowell’s” is under investigation from McDonald’s for copying their franchise. Hijinks and hilarity ensue as Cleo tries not to get caught. This makes for good comedy in the movies, but it is not so funny when it is your brand being knocked off in China.

... me and the McDonald's people got this little misunderstanding. See, they're McDonald's... I'm McDowell's. They got the Golden Arches, mine is the Golden Arcs. They got the Big Mac, I got the Big Mick. We both got two all-beef patties, special sauce, lettuce, cheese, pickles and onions, but their buns have sesame seeds. My buns have no seeds."

In past articles I wrote about how Land Rover had their name pirated in China. This week Hermes and Michael Jordan appear to have made the same mistakes.

China Daily writes “a Chinese court has rejected a bid by Hermes, the French fashion icon, to register a translation of its name, because a Chinese company has registered a similar trademark.” Read full article here.

Do these logos look similar?

The Chinese characters read “QiaoDan” which is the phonetic translation of the family name Jordan and most commonly associated with Michael Jordon. Yet (perhaps after watching Coming to America) the knock off artists at QiaoDan shoes had the balls to say:

“We just use a Chinese translation of a common foreign family name and it cannot be identified with Michael Jordan,” said Hou Lidong, manager of the public relations department of Qiaodan Sports.

Then after somebody pointed out that the QiaoDan company even uses Michael Jordan’s red and black colors and the famous #23 in their marketing, they changed their story to the following:

Later, the company issued a statement, saying the brand, Chinese Qiaodan, is legally registered in China and protected by domestic law.

Read the full article here.

Basically they are saying, “yeah, we stole the logo and name Jordan, but we registered first in China, so screw you Michael.”

The case is not closed, but since China is a “first to register” rather than “first to market” IP system, there is a good change MJ could end up like Hermes.

To prevent loss of your IP, I highly suggest that regardless of your product and your destination market, even if you are sourcing from China but not planning to sell your products in China, you should still register your IP before a local firm or foreign competitor registers it first! And register your brand in Chinese language too!

The good news is that if you follow the Chinese system, you may be surprised to learn that, these days; the courts in China are doing a better job of enforcing IPR. BUT, you have to play by the rules and that means registering IN China!

The other good news is that should you go to court, you will find the costs of a legal battle are much less in China than back home, assuming you use local law firms. Luckily English speaking, PRC registered lawyers are easy to find these days. By registering your IP in advance, you will have the law on your side. I don’t provide legal services, but contact me if you would like to be introduced to the IP lawyers who have helped me register my IP in China.

Dear Nike, our buns have no seeds.

References

Follow these links for articles and videos about how to protect your IP in China and avoid getting knocked off:

http://chinasourcinginfo.org/2011/07/06/my-surprisingly-positive-experience-with-the-chinese-courts/

http://chinasourcinginfo.org/2011/11/26/protecting-your-intellectual-property-2/

Wishing you successful China sourcing!

Mike Bellamy

About the blogger

Short Term Mentalities of Some Suppliers

Mike Bellamy, with CSIC — Tue, 06 Mar 2012 02:48:48 +0000

Excerpt from “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book)

Compared to their counterparts in the West, China’s managers and factory owners tend to focus more on generating revenue in the short term rather than thinking long term strategy. This is especially true of the mangers born in 1960 and before who lived thru the tremulous times of the Cultural Revolution and Great Leap Forward. Times were so bad in China during the youth of this group that these days they still live by the creed “one bird in the hand is better than two in the bush”, because back then you may wake up to see that you have been sent to the country side for re-education and you can’t bring your bush OR your bird with you! This generation of factory owners is very focused on making stable profits on each order rather than taking short terms risk or losses in exchange for a future potential payoff.

The young managers and factory bosses (born 1965 and after) also have short term mentalities, but for different reasons. Themes of “economic stability” and “optimism about the future” have only come into play during the past 15 years, but in these present “economic boom years” young managers and factory owners see other young Chinese getting rich all around them and they have a tremendous “me too” drive to earn revenue in order to have a large home, new car and provide for their children in a way that is leaps and bounds better than what the past generation was able to provide. As Deng Xiaoping put it “too be rich is glorious”.

What does this short-term mentality mean for sourcing?

Ideally your business offer will make money for the supplier right away, or you risk them losing interest in your project. Or even worse, they may take your idea and try to sell it to other buyers if they feel there is no pay off in the near future with you. See notes in the Intellectual Property Protection chapter if this is a concern of yours.

I have had suppliers tell me they are “taking a loss” in the short term in order to keep the partnership open in the long term. But after reviewing the details, not once in my 10+ years of China sourcing did it turn out that they were actually taking a loss. So if your supplier kicks and screams about how much money they are losing, most likely it is a negotiation tactic.

Generally speaking, suppliers are less likely to take risks or make a strategic long term investment on items such as new production equipment or lines of business unless they feel there is a quick payoff. However, most suppliers are very willing to take risks when it is done with your money! So don’t let a supplier talk you into giving them a huge deposit or full payment in advance so they can buy equipment or start a new line of business around your order. This is a common tactic used by Chinese suppliers to hedge their bet. If it fails, you are out your deposit and they disappear.

Wishing you successful China sourcing!

Mike Bellamy

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