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Whitwell C. Kelly, Global Sales Director of PassageMaker Sourcing Solutions, talks about not getting cheap on the design of your product.

Written by Mike Bellamy, the founder of Shenzhen-based sourcing agency PassageMaker, and support by CISC researchers, this whitepaper is a behind the scenes look at how SD cards and USB flash drives are sold to international buyers. Is designed to give the reader the tools needed to avoid ...

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Written by Mike Bellamy, the founder of Shenzhen-based sourcing agency PassageMaker, and support by CISC researchers, this whitepaper is a behind the scenes look at how SD cards and USB flash drives are sold to international buyers. Is designed to give the reader the tools needed to avoid typical traps.

Target Audience

Buyers sourcing or interested in sourcing SD cards and USB flash drives from China

About the Publisher

Founded in 2010, the China Sourcing Information Center (CSIC) is a not-for-profit organization that exists to educate, develop, and advance the China sourcing profession. Support from corporate sponsors and donations from individuals help keep the following services available to the public free of charge:

• Monthly China Sourcing email update
• China Sourcing Conferences/Seminars
• Ask the Experts Service
• Video Tutorials
• Sourcing Blogs
• White Papers

Table of Contents

Summary

Introduction

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?

Conclusion

References

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Whitwell C. Kelly, Global Sales Director of PassageMaker Sourcing Solutions, talks about keeping your current supply chain.

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Whitwell C. Kelly, Global Sales Director of PassageMaker Sourcing Solutions, talks about knowing the Chinese production calendar.

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Whitwell C. Kelly, Global Sales Director of PassageMaker Sourcing Solutions, talks about being a good customer

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Whitwell C. Kelly, Global Sales Director of PassageMaker Sourcing Solutions, talks about understanding the importance of guanxi.

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 ...

[Continue Reading]]]> 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

Related Video Tutorials

Video 1: Finding Suppliers
Video 2: Evaluating Suppliers
Video 3: Negotiations
Video 4: Project Management and Quality Control
Video 5: Protecting Your Intellectual Property
Video 6: Leveraging Global Sources
Video 7: How to Find and Manage Partners for Logistics
Video 8: Avoiding Scams
Video 9: Returning Defective Products
Video 10: Resolving a Dispute

About the author:

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

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Whitwell C. Kelly, Global Sales Director of PassageMaker Sourcing Solutions, talks about not confusing motion with progress.

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Whitwell C. Kelly, Global Sales Director of PassageMaker Sourcing Solutions, talks about Kelly’s law.

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Whitwell C. Kelly, Global Sales Director of PassageMaker Sourcing Solutions, talks about Muse’s Law.

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 ...

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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.

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 ...

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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!

Related Content:

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

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).

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Whitwell C. Kelly, Global Sales Director of PassageMaker Sourcing Solutions, talks about steps small businesses must know on importing from China.

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CSIC representatives answer tough questions from an audience of international buyers. Taped at the October 2012 Sourcing Seminar in Hong Kong.

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CSIC representatives answer tough questions from an audience of international buyers. Taped at the October 2012 Sourcing Seminar in Hong Kong.

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 ...

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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.

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CSIC founder and Buyer Representative Mike Bellamy helps viewers understand the advantage of setting up a sourcing office in China. Pros and Cons of China vs HK. Taped at the October 2012 Sourcing Seminar in Hong Kong.

Sourcing Veteran Charles Kirmuss offers his take on what can go wrong if you don’t understand the process for registering Intellectual Property. Taped at the October 2012 Sourcing Seminar in Hong Kong.

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Sourcing Veteran Charles Kirmuss offers his take on what can go wrong during the supplier selection and mangement process. Taped at the October 2012 Sourcing Seminar in Hong Kong.

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.

...

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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)

If you are having trouble viewing this video click here.

CSIC founder and Buyer Representative Mike Bellamy walks viewers through the process of preparing a budget for initial orders with new suppliers. Taped at the October 2012 Sourcing Seminar in Hong Kong.

With reports of textiles industry moving to cheaper South East Asia and third world countries and out of China, China continues to dwarf the other top five textile exporting nations (Thailand, Cambodia, Indonesia, Vietnam and Honduras) to the U.S. in terms of exports. ...

[Continue Reading]]]> Report on Dongguan’s Textile Industry By Neale O’Connor

With reports of textiles industry moving to cheaper South East Asia and third world countries and out of China, China continues to dwarf the other top five textile exporting nations (Thailand, Cambodia, Indonesia, Vietnam and Honduras) to the U.S. in terms of exports. As much of the reason for China’s staying power can be put down to scale and the logistics of packaging and transport, we need to understand how and why textile factories are continuing to survive in China, especially those in the expensive coastal regions.

Visit to two mid-range factories in Dongguan

The first textiles firm we visited produced sweaters using wool, cotton, rayon, etc.  We went there to get a quote on some product designs which would sell for about US$44 which means about US$11 (FOB) price per unit goes to the manufacturer. One factory (120 employees) is solely focused on finishing (knitting is done at other factories inland).

The other factory (60 employees at the site we visited) outsources and also does its own knitting. It has four locally built computer knitting machines that cost about 100K Yuan each. The investment plan is for the machine cost to be spread over 5 years – Each machine runs for 22 hours per day and can do a side panel of a garment every hour – ie about 10 garments per day. Although this varies depending on the pattern. On average the machine needs to produce 300 Yuan per day in profits to break even after accounting for the labor costs and maintenance costs of running the machine.

Big Challenge for small factories

1. Getting new Orders and short Lead times – Most manufacturers are suffering from shorter and shorter lead time but the customers want delivery yesterday.

2. Powerful trim suppliers –

Case in point a renowned zipper manufacturer usually has 75 day lead time. In contrast, a local brand manufacturer has a lead time of only days to weeks.  The renowned zipper manufacturer has sales staff to contact their customers to ensure that they insist on using the renowned brand as part of the contract for new orders. In addition, the zipper manufacturer requires a minimum order amount (e.g., 100 pieces) per colour, per size so unless the order is large, there is little chance for small manufacturers to fulfill customers’ order requirement.

3. Costs Squeeze and outsourcing

How the textiles manufacturers are coping? Now the squeeze comes from buying prices (materials and trimming costs) and labor costs. As a result, much of the knitting is being done inland and sent to factories in Guangzhou in secret unbeknownst to the customer. It is secret because of certification limits. That is, most buyers enforce a rule to ”scrutinize” factories before entering business.  In most cases, they even require enforcing production under one roof in addition to relative terms & conditions.  If the result is to their satisfaction, they will give their seal of approval in a form of a certificate to the factory in question.  In this connection, factories need to be super careful with the unique knitwear manufacturing practice.

4. Getting Paid – Problem of letters of credit – the new middle man

Getting paid before/when goods are delivered or getting any form of guaranteed payment terms before shipment does not happen.

Factories cannot get letters of credit (LC) financing from local financiers and financing from underground banks is expensive (20%). In Hong Kong, by contrast, vendors can get 60-70% financing.

At the same time, customers are having difficulties in getting trade financing from home – due to lower margins, less cash flow from their own markets.  Indeed, most buyers prefer not to open LC as they do not have sufficient collateral to put down.  Thus, customers push the supplier(s) to consider payment terms: possibly up to 100% of invoice value 30 days by T/T upon receipt of goods, terms which the factory cannot accept?

In the face of a shortage of financing options for both vendors and factories the upshot is that large middlemen – third party logistics providers (3PLs) can provide value added service in bring a financial bridge to both parties. 3PLs can bring security of financing to both parties. So the middlemen who up to 5 years ago were in risk of becoming extinct, are now viewed as a key player in the supply chain. The international buyer will not kill the middle man while the buyer is coming from the struggling developed nations.

The family textile enterprise is still alive

The family textile factory enterprise continues to stay a sustainable form of enterprise for several reasons

1.     Small is beautiful! – They are under the radar of official labour laws and so can survive at lower costs including cash basis of trade. For example, Pay is in the form of a minimum allowance (smaller than usual) and piece work. Pay is employed to tackle reducing revenue. The use of piece rate which gives the factory flexibility in surviving low order periods. For example, business not as good as 12 months ago – The critical part will be after CNY – Employees decide whether to come back, and new orders come in from overseas customers. They can lay off workers very easily unofficially but officially it’s complicated.

2.     Government and family business go hand in hand! – In 2008 the provincial gov’t was forced to quietly hand out subsidies to the factories to keep them alive as they have employed so many people. Thus, factories are able to survive and continue to operate. As much as the Guangdong government wants to modernize, the established eco systems of Chinese family owned firms will not move to another province. They will always survive as the family is the basis of the Chinese culture.

3.     Complex business supported by extended network! – There are hundreds of knitwear factories in Dongguan doing the final and not the full assembly – ie more of the knitting is done in lower cost areas – Everyone knows but customer doesn’t need to know the arrangements. In other words, knitwear manufacturing is a complex undertaking.  It involves more departments than other textile items.  Each department demands a kind of expert knowledge & skill.  It is difficult for a mid-range factory to afford to house all departments. Outside experts often render better services in terms of quality & cost-effectiveness.  Buyers may not like to know this!  They would like to have the cake & eat it!

Neale O’Connor, Director of The China Lab, Silk Road Associates and The China Supplier 1000 Project www.chinasupplier1000.com

That depends on the brand names you are after.  If you ...

[Continue Reading]]]> We are planning to attend the electronic fair in Hong Kong as well as the Canton fair in April. We are interested in consumer electronics by brand names and are wondering if these shows are worthwhile attending for these purposes.

That depends on the brand names you are after.  If you are looking for Chinese brands, yes, you will find them at the trade shows for sure. If you hope to get a western/ Japanese brand direct from China manufacturer of that brand…well that is very hard to do.  Here is why: http://chinasourcinginfo.org/2011/08/22/genuine-products-from-china/

We are indeed interested in brand name cameras like Nikon, Panasonic, Samsung etc. I have spoken to employees of local wholesalers in the US who know for a fact that some of their merchandise, legitimate brand name cameras and tablets are shipped from Hong Kong.  It seems like there is a worldwide trade of these goods and, of course one has to do his or her due diligence to make sure they are buying from a reliable source.  I understand that there is a large center for electronics in Shenzhen called Huaqiangbei Commercial Street.  You probably know this place.  We appreciate your help and guidance and will keep in touch.

If you have any information regarding this subject please keep us informed.

No question that these famous brand products are made in Asia and ship to wholesalers, retailers and even consumers in US direct from China. The problem is that exclusivity of the brand is tightly controlled. For example, a single unit of iPad ships from China factory direct to Apple customer. But you and I can’t knock on the factory door in China and ask to buy direct from factory in bulk, or any size for that matter.  Details here.

BUT, you are right about HK being a hot spot for these products.  The reason is the sales tax.  HK wants to be a shopping destination, so not as much tax is applied as product moves from factory to wholesale to retail.

BUT, sales tax is pretty low in USA too.  Even before you add in the shipping, the cost of the same famous brand camera in USA is about the same as in HK.  When you get to HK, you will see Americans and Europeans buying 1 or 2 items for personal use.  But the Mainland Chinese, Africans, Indians and Mideast people are buying dozens of units at a pop. The reason is that their sales taxes back home are higher than USA, so it makes sense to buy in HK.  Walk by any Indian airline at the HK airport and you will see “commercial mules” each with a large flat screen TV and pockets full of electronics. But you don’t see that on the flights to USA.

I write this not to rain on your idea about coming to China, but I want you to have realistic expectations.  As you mention, Huaqiangbei is a great place to get electronics in Shenzhen … if you are buying local brands.  But Shenzhen people go to HK to buy international brands if they want a deal.  A Japanese camera at Huaqiangbei is more or less same price as any big box retailer back home in USA.  The opportunity, in my opinion, is to buy high quality Chinese brands and re-package them under your own brand at a markup.  We have plenty of clients doing that, but no clients buying major US/Japan brands at factory/wholesale/ retail level in China/HK for export (expect the few Africans and Mideast clients we help out).

Let me know how things work out for you. Hope my notes help.

Question answered by Mike Bellamy, host of “Ask the Experts” at the China Sourcing Information Center.

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 )

Written by Mike Bellamy, the founder of Shenzhen-based sourcing agency PassageMaker, this whitepaper is a behind the scenes look at common tactics used in China to deceive buyers.  Is designed to give the reader the tools needed to avoid typical traps.

Target Audience

Buyers sourcing or interested in sourcing from China.

About the ...

[Continue Reading]]]> Summary

Written by Mike Bellamy, the founder of Shenzhen-based sourcing agency PassageMaker, this whitepaper is a behind the scenes look at common tactics used in China to deceive buyers.  Is designed to give the reader the tools needed to avoid typical traps.

Target Audience

Buyers sourcing or interested in sourcing from China.

About the Publisher

Founded in 2010, the China Sourcing Information Center (CSIC) is a not-for-profit organization that exists to educate, develop, and advance the China sourcing profession. Support from corporate sponsors and donations from individuals help keep the following services available to the public free of charge:

• China Sourcing eMagazine
• China Sourcing Conferences/Seminars
• Ask the Experts Service
• Video Tutorials
• Sourcing Blogs

Table of Contents

• Summary
• Introduction
• Definition of Middlemen
• Why go factory direct?
• How to spot a middleman
• The Good News
• Recommended Viewing
• Recommended Reading

Download White Paper | PDF
“Avoiding Middlemen”

One: having read some of the content at CSIC, I am happy to ...

[Continue Reading]]]> 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

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 )

Small Order Strategies Part 1 of 5

How can you ...

[Continue Reading]]]>

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 )

Small Order Strategies Part 1 of 5

How can you go China direct if you can’t necessarily go China Factory direct?

Topics covered in this video:

-Challenges and Solutions for Small Buyer.

-“Off the Shelf” vs. “Highly Customized” vs “Tweaks”

-Costs of going China direct.

Small Order Strategies Part 2 of 5

Topics covered in this video:

- Is China ready for you? (BOM, production technologies, etc…)

-Are you ready for China? (budget and skill set)

-Multiple China trips

-Product safety testing

-International shipping

- The Harsh Reality

Small Order Strategies Part 3 of 5

Topics covered in this video:

-How to protect yourself before the goods arrive.

-Price, Quality, Lead time, Intellectual Property

Small Order Strategies Part 4 of 5

Topics covered in this video:

-Small “off the shelf” Projects. What to focus on.

Small Order Strategies Part 5 of 5

Topics covered in this video:

-Strategies for “New or Highly Customized” projects

-Manage expectations

-Make sure you have the right partners in place (suppliers and service providers)

-Link Performance to Payment

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Transcript below:

How does Fiducia’s SCM platform help its clients manage suppliers and customers to achieve better ROI?

Our platform called the OTC, Order To Cash, aim’s to facilitate the efficient handling of all processes from the moment an order is placed until ...

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Transcript below:

How does Fiducia’s SCM platform help its clients manage suppliers and customers to achieve better ROI?

Our platform called the OTC, Order To Cash, aim’s to facilitate the efficient handling of all processes from the moment an order is placed until payment is received.

For our clients with a certain trade volume (say a few hundred orders) and a high level of complexity in supply chain, OTC connects all trade partners in order to share information, document and workflow so that everyone has the same clarify, same single truth, about the orders and shipments and the same work is not performed by multi parties.

Our own experience with such a platform is that we were able to increase efficiency by over 50% by cutting the average time of processing one order from 8 hours to under 4 hours.

In addition to efficiency gain, the platform enables, or rather, enforces proactive communication of problems so that shipment delays and production/quality issues can be managed timely to avoid air freight, penalties and other costs.

When the administrative costs are kept low, our clients can achieve a better return on their orders.

If you’d like to know more about this topic, please visit our website.www.fiducia-china.com

Bryan Wong, Trade Services Manager, BSc, MBA

Bryan leads Fiducia’s Trade Service Department in Hong Kong, Shenzhen and Shanghai. He comes from a diverse background of operations management, business process optimisation and project management. Since joining Fiducia in 2006, Bryan has been advising clients on cost-effective supply chain solutions by leveraging the latest technologies and modern management practices. Having worked in manufacturing and buying companies, Bryan understands both demand and supply sides of the trade industry.

Bryan completed both his MBA and BSc in Travel Industry Management from the University of Hawaii. He is also a PMP (Project Management Professional), which is one of the most recognised project management certification programs worldwide.

Bryan speaks fluent English, Chinese (Cantonese & Mandarin) and is conversational in Japanese.

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Transcript below:                                             

What are the Benefits of using a HK company to control sourcing operations in China?

HK has been ...

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Transcript below:                                             

What are the Benefits of using a HK company to control sourcing operations in China?

HK has been and remains a very popular choice for international companies to set up their sourcing operations, due to its ease of doing business and its, strategic location for sourcing from China and rest of Asia.

If you supply major sourcing companies with offices in HK, you have the advantage of working closely with your buyers. You will also benefit from the large number of companies in HK offering support services such as testing, certification, and quality assurance.

From our experience supporting clients in setting up in HK and China and it’s just much easier and faster … A HK co. offers much greater flexibility as you fine tune your strategies along the way.

You are more likely to find the right talent for managing and supporting your sourcing operation in HK due to HK’s long-established sourcing industries and the intl biz environment.

If the orders are channeled through the HK co., you can enjoy lower tax, issue contracts in HK, and go through arbitration / litigation in HK in case of disputes.

If you’d like to know more about this topic, please visit our website.www.fiducia-china.com

Bryan Wong, Trade Services Manager, BSc, MBA

Bryan leads Fiducia’s Trade Service Department in Hong Kong, Shenzhen and Shanghai. He comes from a diverse background of operations management, business process optimisation and project management. Since joining Fiducia in 2006, Bryan has been advising clients on cost-effective supply chain solutions by leveraging the latest technologies and modern management practices. Having worked in manufacturing and buying companies, Bryan understands both demand and supply sides of the trade industry.

Bryan completed both his MBA and BSc in Travel Industry Management from the University of Hawaii. He is also a PMP (Project Management Professional), which is one of the most recognised project management certification programs worldwide.

Bryan speaks fluent English, Chinese (Cantonese & Mandarin) and is conversational in Japanese.

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 ...

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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:

1. 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.
2. Registered Capital for Manufacturing WFOE in Guangdong is 140,000 USD in most cases.
3. 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.

1. Trading WFOE vs. Manufacturing WFOE. Which one is best for your needs?
2. 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.
3. Additional Licensing (domestic sales? Import/export? VAT?)
4. Are there location or industry incentives offered by China government to the WFOE?
5. 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.
6. 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.
7. 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.
8. 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.

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What are the recent changes to VAT for service firms in Shanghai and Guangdong all about? How will this affect international buyers?

Previously many service firms where subject to business tax of 5%. In 2012 China started a very comprehensive VAT ...

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Transcript below:

What are the recent changes to VAT for service firms in Shanghai and Guangdong all about? How will this affect international buyers?

Previously many service firms where subject to business tax of 5%. In 2012 China started a very comprehensive VAT and Business Tax Reform and BT has been abolished now.

Most service providers in Shanghai and Guangdong now have to apply a 6 % VAT.

The overall effect for international buyers depends on each individual business transaction, so if you are buying a service from a supplier in China mainland, there can be the possibility of tax exemption; this would give your service provider room to lower their prices.

I would recommend every buyer to observe the market carefully and pay special attention to the offers they receive from their service providers.  Ask yourself questions like:

Are there any changes in pricing?

Is VAT explicitly mentioned?

And also, why not ask your suppliers how the changes affect them?

Important to know for any foreign buyer, a trading transaction where goods are exported is not touched by this reform directly, so for this part it is business as usual.

If you’d like to find out more about this topic, please visit our website.www.fiducia-china.com

Thaddaeus Mueller, Associate Director of Business Development/Personnel Management.

Thaddaeus’ area of expertise is to find innovative solutions for clients seeking to establish their presence in Hong Kong or China. He evaluates situations and strategies to identify the right tools and services and is experienced in advising both SMEs and large companies from many different parts of the world. He also manages Fiducia’s executive search in finding and placing high-level professionals for various industry leaders.

Thaddaeus is a frequent speaker at China-focused events in Hong Kong and Germany on topics ranging from setting up viable sourcing strategies for SMEs in Hong Kong and China to identifying suitable acquisition targets in China. His articles are printed regularly in various publications, such as China Contact, Asia Bridge and in Fiducia’s China Focus newsletter. Thaddaeus is Chairman of the board for AGN Asia Pacific, advisory board member of the China Sourcing Information Center and a member of the Europe Committee of the Hong Kong General Chamber of Commerce (HKGCC).

Thaddaeus joined Fiducia in January 2005, prior to which he worked in the automotive industry and for the fabrics and fibres division of W.L. Gore, a large US technology company. Thaddaeus holds a Master’s degree in Economics and Business Administration from the Catholic University of Eichstaett, Germany. During his studies he has completed research on the automotive industry in South Africa and studied at Stellenbosch Business School, South Africa. Thaddaeus is a native German speaker and speaks English fluently.

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Explain the ease of accounting in China vs Hong Kong.

Transcript below:

When you consider setting up a company in either HK or in China, one thing you should look at is how the Corporate functions of the company need to be ...

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Explain the ease of accounting in China vs Hong Kong.

Transcript below:

When you consider setting up a company in either HK or in China, one thing you should look at is how the Corporate functions of the company need to be arranged and what reporting requirements you have to follow.

Here Hong Kong and China are very different:

In China, Bookkeeping has to be done once per month and companies also have to report their financial statements once per month to the local Tax authorities in China. In addition, every company requires an annual Audit, an annual inspection and a Foreign Exchange Clearance.

In Hong Kong, the rules are different. Not only for taxation but also for financial reporting. With a Hong Kong Limited company you are basically required to only conduct annual bookkeeping and to report once a year to the Inland Revenue Department. Every Hong Kong Limited company requires an Audit.

If you’d like to know more about this topic, please visit our website.www.fiducia-china.com

Thaddaeus Mueller, Associate Director of Business Development/Personnel Management.

Thaddaeus’ area of expertise is to find innovative solutions for clients seeking to establish their presence in Hong Kong or China. He evaluates situations and strategies to identify the right tools and services and is experienced in advising both SMEs and large companies from many different parts of the world. He also manages Fiducia’s executive search in finding and placing high-level professionals for various industry leaders.

Thaddaeus is a frequent speaker at China-focused events in Hong Kong and Germany on topics ranging from setting up viable sourcing strategies for SMEs in Hong Kong and China to identifying suitable acquisition targets in China. His articles are printed regularly in various publications, such as China Contact, Asia Bridge and in Fiducia’s China Focus newsletter. Thaddaeus is Chairman of the board for AGN Asia Pacific, advisory board member of the China Sourcing Information Center and a member of the Europe Committee of the Hong Kong General Chamber of Commerce (HKGCC).

Thaddaeus joined Fiducia in January 2005, prior to which he worked in the automotive industry and for the fabrics and fibres division of W.L. Gore, a large US technology company. Thaddaeus holds a Master’s degree in Economics and Business Administration from the Catholic University of Eichstaett, Germany. During his studies he has completed research on the automotive industry in South Africa and studied at Stellenbosch Business School, South Africa. Thaddaeus is a native German speaker and speaks English fluently.

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 ...

[Continue Reading]]]> “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

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).

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Transcript below:

Are rep offices in China redundant?

Most likely, the answer is NO, since redundant is too strong a word.

But the Government made rules stricter and stepped up the enforcement of the rules because many ROs were used outside their business scope;

As ...

[Continue Reading]]]>

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Transcript below:

Are rep offices in China redundant?

Most likely, the answer is NO, since redundant is too strong a word.

But the Government made rules stricter and stepped up the enforcement of the rules because many ROs were used outside their business scope;

As an example, RO have to be reregistered once a year and have tighter restrictions in terms of employment.

So if you really only need a representation in China for marketing and market research an RO can still be the right choice

Bear in mind, that an RO leaves you no flexibility for the development of your business and for other activites.

Plus, an RO has no tax advantage towards a WFOE anymore, on the contrary, most likely it will have a higher overall tax burden.

If you’d like to find out more information about this topic, please visit our website.  www.fiducia-china.com

Thaddaeus Mueller, Associate Director of Business Development/Personnel Management.

Thaddaeus’ area of expertise is to find innovative solutions for clients seeking to establish their presence in Hong Kong or China. He evaluates situations and strategies to identify the right tools and services and is experienced in advising both SMEs and large companies from many different parts of the world. He also manages Fiducia’s executive search in finding and placing high-level professionals for various industry leaders.

Thaddaeus is a frequent speaker at China-focused events in Hong Kong and Germany on topics ranging from setting up viable sourcing strategies for SMEs in Hong Kong and China to identifying suitable acquisition targets in China. His articles are printed regularly in various publications, such as China Contact, Asia Bridge and in Fiducia’s China Focus newsletter. Thaddaeus is Chairman of the board for AGN Asia Pacific, advisory board member of the China Sourcing Information Center and a member of the Europe Committee of the Hong Kong General Chamber of Commerce (HKGCC).

Thaddaeus joined Fiducia in January 2005, prior to which he worked in the automotive industry and for the fabrics and fibres division of W.L. Gore, a large US technology company. Thaddaeus holds a Master’s degree in Economics and Business Administration from the Catholic University of Eichstaett, Germany. During his studies he has completed research on the automotive industry in South Africa and studied at Stellenbosch Business School, South Africa. Thaddaeus is a native German speaker and speaks English fluently.

Before embarking on a China career, my brother and I started a health and beauty supply store in New York City. In memory of our father, the store was called Yaba Bath & Body (“Yaba” being the slang term for “father” in Arabic).

As an entrepreneur ...

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Before embarking on a China career, my brother and I started a health and beauty supply store in New York City. In memory of our father, the store was called Yaba Bath & Body (“Yaba” being the slang term for “father” in Arabic).

As an entrepreneur at heart, I moved to China in 2011 to learn about International Trade and the Chinese market with the goal of sourcing quality products for people in Middle Eastern countries. I joined CSIC as a content manager in 2012 to fully immerse myself in China and international trade. I’m also working on some very interesting projects with PassageMaker as an Account Manager.  I speak Arabic and am based in Shenzhen.

Earlier this year, I attended an event called Shenzhen Startup Weekend.  Startup Weekend is a global grassroots movement of active and empowered entrepreneurs who are learning the basics of founding startups and launching successful ventures. Some of which go on to form their own company.

One of the many services that PassageMaker provides is to help companies who want to expand their business into China. A dental supply company from Brazil is currently in Shenzhen working on building a factory in China. PassageMaker is in the process of helping them with this delicate process and recommended that they open a Hong Kong Company through Fiducia Management Consultants.  Fiducia is a multidisciplinary firm with over 80 experienced and dedicated specialists and four offices strategically located in Beijing, Hong Kong, Shanghai and Shenzhen.

During my last visit to Hong Kong, I visited the office of Fiducia, which is located in the O.T.B Building at 160 Gloucester Road.  In the lobby, there is a large touch screen panel to help visitors locate offices within the building. When the doors of the elevator opened on the 15^th floor, there was a massive poster celebrating the 30+ years Fiducia has been in business. To my right was the entrance to the office where the secretary politely greeted me. While there, I conducted interviews with Associate Director Thaddeaus Mueller and Trade Services Manger Bryon Wong.

Building Entrance                                Lobby                              Celebrating 30 Years           Office Entrance on 15th floor

This 5 part series will be posted over the next few weeks. The information can be useful for entrepreneurs just starting out or well established companies who want to improve and expand their business. Please check back with CSIC to see what the experts have to say to these very interesting questions:

1- Are representative offices in China redundant?

2- Explain the difference of accounting in China vs. HK.

3- What are the recent changes to VAT for service firms in Shanghai and Guangdong all about?  How will this effect international buyers?

4- What are the Benefits of using a HK company to control sourcing operations in China?

5- How does Fiducia’s SCM platform help its clients manage suppliers and customers to achieve better ROI?

Shaher Husein is originally from New York City and has been in China since 2011.  He has a Bachelors in Business, Management and Finance from Brooklyn College and is based in Shenzhen.

If you are having trouble viewing this video click here.

How can you go China direct if you can’t necessarily go China Factory direct?

Topics covered in this video:

-Strategies for “New or Highly Customized” projects

-Manage expectations

-Make sure you have the right partners in place (suppliers and service providers)

-Link Performance to Payment

Mike Bellamy ...

[Continue Reading]]]>

If you are having trouble viewing this video click here.

How can you go China direct if you can’t necessarily go China Factory direct?

Topics covered in this video:

-Strategies for “New or Highly Customized” projects

-Manage expectations

-Make sure you have the right partners in place (suppliers and service providers)

-Link Performance to Payment

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 )

If you are having trouble viewing this video click here.

How can you go China direct if you can’t necessarily go China Factory direct?

Topics covered in this video:

-Small “off the shelf” Projects. What to focus on.

Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center ...

[Continue Reading]]]>

If you are having trouble viewing this video click here.

How can you go China direct if you can’t necessarily go China Factory direct?

Topics covered in this video:

-Small “off the shelf” Projects. What to focus on.

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 )

If you are having trouble viewing this video click here.

How can you go China direct if you can’t necessarily go China Factory direct?

Topics covered in this video:

-How to protect yourself before the goods arrive.

-Price, Quality, Lead time, Intellectual Property

Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit ...

[Continue Reading]]]>

If you are having trouble viewing this video click here.

How can you go China direct if you can’t necessarily go China Factory direct?

Topics covered in this video:

-How to protect yourself before the goods arrive.

-Price, Quality, Lead time, Intellectual Property

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 )

If you are having trouble viewing this video click here.

How can you go China direct if you can’t necessarily go China Factory direct?

Topics covered in this video:

- Is China ready for you? (BOM, production technologies, etc…)

-Are you ready for China? (budget and skill set)

-Multiple China trips

-Product safety testing

-International shipping

- The ...

[Continue Reading]]]>

If you are having trouble viewing this video click here.

How can you go China direct if you can’t necessarily go China Factory direct?

Topics covered in this video:

- Is China ready for you? (BOM, production technologies, etc…)

-Are you ready for China? (budget and skill set)

-Multiple China trips

-Product safety testing

-International shipping

- The Harsh Reality

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)

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 ...

[Continue Reading]]]>

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

If you are having trouble viewing this video click here.

How can you go China direct if you can’t necessarily go China Factory direct?

Topics covered in this video:

-Challenges and Solutions for Small Buyer.

-“Off the Shelf” vs. “Highly Customized” vs “Tweaks”

-Costs of going China direct.

Mike Bellamy is an Advisory Board Member & Featured ...

[Continue Reading]]]>

If you are having trouble viewing this video click here.

How can you go China direct if you can’t necessarily go China Factory direct?

Topics covered in this video:

-Challenges and Solutions for Small Buyer.

-“Off the Shelf” vs. “Highly Customized” vs “Tweaks”

-Costs of going China direct.

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)

“How can we protect our IPR effectively in China?”

The following was my answer:

1. First of all, register your IPR in China, ASAP.  All IP laws & regulations in China are based on the protection for legitimate ...

[Continue Reading]]]> One of my clients asked me a question, which I believe is a common concern:

“How can we protect our IPR effectively in China?”

The following was my answer:

1. First of all, register your IPR in China, ASAP.  All IP laws & regulations in China are based on the protection for legitimate registered IPR.  Furthermore, for IP registration, China operates a “first-to-file” system, which means, whoever first applies for IPR will be granted ownership.  That means if you want to protect your IP in China, you should register it in China.

2. Sign an NDA or similar contract with your partner.   Whether you want to sell, buy, or manufacture in China, make sure you sign a Non-Disclosure Agreement (NDA) or a contract with NDA clauses with your partners, who are probably your distributors, suppliers or local staff.  In the NDA, you may specify that a penalty will be payable once either party breaches it, no matter if any actual damage has be made.  Word of advice, it is vital to find a good partner, worst NDA +best partner is better than best NDA + worst NDA.  Due diligence or IP audit is necessary when you choose your partner.

3.  Register your IP with China customs.  Though an NDA may work with a partner, you can’t stop any third party by signing an NDA with them.  However, according to Regulations of the People’s Republic of China on the Customs Protection of Intellectual Property Rights, you may register your IP with customs to stop the infringed upon goods being shipped out of China.

4. Finally, but not less importantly, you may resort to the following procedure to stop infringement: civil litigation, criminal prosecution and administrative action.  Different procedure has different effect; you had better consult your local lawyer before you do any of them.

Sophie Mao is Sr. Partner at Chibridge, a Guangzhou based law firm offering Intellectual Property Protection, Bilingual Contracts, Mediation and Litigation. Sophie is based in Guangzhou.

Before you place your order, you should do the following:

a)     Ask for references

b)     Conduct an audit to make sure the factory has ...

[Continue Reading]]]> How do I know that the goods I am requesting are not inferior to those produced in US, since Chinese products in my country are regarded as sub standard.

Before you place your order, you should do the following:

a)     Ask for references

b)     Conduct an audit to make sure the factory has the ability to produce what you want

c)     Focus on suppliers in the GlobalSources.com network who show experience in your specific products and market standards. Stay away from the suppliers who say they “can do” something, and focus on the ones who “have done” something.

After you place your order, even if no red flags found in above steps, you still need to do the following to be safe:

1.     Have clear standards under contract with the seller. If you don’t tell them exactly what you want, you will get something you didn’t ask for.

2.     Conduct a product inspection before the goods ship and before final payment is made.

3.     Same goes for lab testing!

If you want some more tips, I highly suggest you check out the short videos at:

Video 1: Finding Suppliers
Video 2: Evaluating Suppliers
Video 3: Negotiations
Video 4: Project Management and Quality Control
Video 5: Protecting Your Intellectual Property
Video 6: Leveraging Global Sources
Video 7: How to Find and Manage Partners for Logistics
Video 8: Avoiding Scams
Video 9: Returning Defective Products
Video 10: Resolving a Dispute

Let me know how things work out for you.

Question answered by Mike Bellamy, host of “Ask the Experts” at the China Sourcing Information Center.

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 )

Good ...

[Continue Reading]]]> Our company is considering importing a container of goods via sea through a freight forwarder. When the goods arrive at the port what is the best practice to transfer the goods from the port to our warehouse? Please note we are located in the middle of the country. Thank you

Good question to ask. Too many new importers focus on getting the product out of China and they forget to do the homework regarding importation (duties, shipping methods, costs, lead times…).  Without knowing your exact port and warehouse address it is hard to answer this question in detail, but your best bet is to find a good customs broker/freight forwarder who has experience in the port of arrival. It’s their job to walk you through the options.

For your reference, here are some tips from the China Sourcing Information Center regarding how to find a logistics partner:

Just like picking suppliers in China, the problem isn’t finding a 3PL, as there are so many to choose from, the problem is how to find the right one for you. Assuming you keep it easy and purchase “FOB China Port” from your supplier, then the role of your 3PL will be to orchestrate the movement of your goods from the China port to your destination point. In most cases this means organizing ocean freight or express air for the international leg of the journey then customs clearance in your national plus local trucking for domestic delivery. As such, you should be looking for 3PL that have experience importing product from China into the specific domestic port you have in mind back home.

1.     Pick up the phone book or do an internet search with key words such as “3PL” or “Freight Forwarder” + “name of port”. This will most likely generate a significant list.

2.     The next step is to contact them and learn if they will be a good fit for you. I like 3PL’s that have at least 5 years of experience importing product from China into the given port.

3.     And as I have mentioned a few times before, it is worth saying again, if a service provider can’t give you a list of client references they probably aren’t worth doing business with.

4.     Once you narrow it down to a hand full of option based on initial talks and references, ask for an estimate on freight. What separates the great companies from the good ones will be the format and timing of their quote. If they more than a few days to get back to you, it probably means that they don’t have well developed shipping channels and are trying to set something up just for this order. Try to avoid having your order serve as some 3PL’s first attempt at doing business with China. Pay special attention to the formal of their quote. It should be an actual form based on a template, not just a few sentences or pricing sent via email. If they don’t have a set format for estimates or quotes, that is a real bad sign about the level of their professionalism. The quote should be easy to understand and if you are unclear about a particular line item on the quote, then the 3PL should be able to explain to your satisfaction. Don’t be afraid to ask questions! Better to ask in advance before getting hit with surprise charges later.

5.     Shipping rates change on a day to day basis, and unless you are ready to ship immediately after receipt of the quote, most likely the quote will be an estimate. So we like 3PLs that will hold their quote valid for a certain time or at least offer to re-quote closer to the actual ship date so that the buyer knows the exact costs in advance.

6.     On countless occasions I have had shippers send me invoices after delivery which were much higher than the agreed estimate. So as you are confirming price, ask the powerful question “Does this price include everything to get the product from X to Y, even taxes, duties?”, “Is there anything that is not included?” and “Will you put in writing that the amount to be invoiced will not exceed the agreed estimate?”.

7.     It also helps to negotiate your terms with the shipper so that the goods are paid upon delivery, as opposed to paying them upfront. But actually, you don’t have a lot of leverage because the shipper has physical control of your goods and could choose not to immediately release them if there are any confrontations about pricing at the last minute. So it is very important to find a professional company upfront and negotiate the terms and pricing well in advance.

Let me know how things work out for you.

Question answered by Mike Bellamy, host of “Ask the Experts” at the China Sourcing Information Center.

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 )

That is a good question and it gets asked a lot. So I am happy to give you some blog posts ...

[Continue Reading]]]> How can a first timer begin buying directly from a Chinese factory, with no less than us$15000? What does it take to travel directly there to do your buying ?

That is a good question and it gets asked a lot. So I am happy to give you some blog posts and short videos which cover this topic in detail:A small buyer placing orders with Chinese Suppliers: contracts, travel, and other issues

Should a small startup, dealing with electronics, go factory direct?

How to place an order with a supplier in China while living somewhere else

Chinese Purchase Order (PO) formats/templates for large and small orders

Video 1: Finding Suppliers
Video 2: Evaluating Suppliers
Video 3: Negotiations
Video 4: Project Management and Quality Control
Video 5: Protecting Your Intellectual Property
Video 6: Leveraging Global Sources
Video 7: How to Find and Manage Partners for Logistics
Video 8: Avoiding Scams
Video 9: Returning Defective Products
Video 10: Resolving a Dispute

Also, I recently gave a seminar on strategies for small volume buyers. The presentation was taped and it should be posted in about 30 days at www.ChinaSourcingInfo.org.   I’ll let you know when it is made public.

Hope the above information helps you.  Let me know how things work out.

Question answered by Mike Bellamy, host of “Ask the Experts” at the China Sourcing Information Center.

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 )