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Rebecca Chow(not a XING member)Group newsletter: Simple Rules for Outsourcing to China
Initial Planning and Communication
After compiling a list of potential manufacturers, contact the companies. English-language instruction has become widespread in China, and many companies will have someone in their international sales office who can communicate in English. However, not all companies have staff who can speak fluent English, so it is ideal to have someone on your staff who can speak Chinese in an appropriate dialect.
E-mails and phone calls are necessary to establish trust and credibility, and their importance should not be overlooked. However, it can take as many as 10 e-mails and calls just to make contact, and it may take many more to establish trust.
The time difference is often an unaccounted-for hurdle. It is difficult to contact a Chinese business when its hours of operation fall between 9 p.m. and 5 a.m. EST. Be sure to factor in the time difference and allow both companies several months to build trust. It is unrealistic to expect finalized results after the initial calls and e-mails.
When contacting Chinese companies, one of the first and most obvious questions to ask is whether they can manufacture the product to your exact specifications. Some Chinese companies realize that their products will not meet U.S. standards, and they often say so directly to avoid wasting time. However, it is critical to understand that some may claim to be manufacturing the product while making plans to purchase it from someone else, mark up the value, and then sell it. It can be extremely difficult to determine a Chinese company’s intentions from phone and e-mail communication, so a certain amount of skepticism is healthy. Although open distrust will not lead to a productive relationship, keep in mind that further investigation is necessary for every business to protect its reputation and the bottom line.
Once you have developed a relationship with the manufacturer selected, the next course of action is getting a price quote. The manufacturer needs detailed product specifications and quantities of each item to prepare an accurate price quote. Be aware that a common problem with price quotes is that they often compare apples with oranges; that is, they often provide prices for products other than the ones you need. If the product is standard, this may not be an issue. But if it has many possible variations, ask for an itemized price quote. Investing time early to ensure that the manufacturer understands what is expected helps companies avoid basing financial projections on erroneous information.
Chinese manufacturers are most familiar with metric units. They may be confused by specifications presented in inches, pounds, or yards. Attention to small but important details, such as units of measure, saves time and energy in getting an accurate price quote.
Ask the manufacturer the price quote’s expiration date. After several years of deflation or very low inflation, China has recently seen rising inflation and rising oil prices. Because of this, Chinese manufacturers are often unwilling to guarantee price quotes for very long.
The price quote is not the only cost consideration needed to arrive at a fully priced estimate. While the manufacturer’s unit price may seem very low at first, this cost can balloon once international freight forwarding, customs duties, and domestic shipping issues are factored in. Additional costs can also arise from unexpected sources, such as expenses related to travel, cultural differences, language barriers, and time differences. These costs are difficult to outline, but a general estimate should be calculated into the price.
Know the Difference: Factories versus Trading Companies
Relaxations on import and export regulations have led to an increase in direct exporting from Chinese manufacturers. Trading companies, however, are still common in China. Trading companies that act as go-betweens for manufacturers and buyers usually have experience with Chinese exporting. There are certain advantages to using trading companies rather than going directly to the factories.
Trading companies offer a wider range of products. If a company needs multiple product lines, it may not be possible to purchase them all from the same factory. And sourcing products from different factories requires much effort to locate and evaluate each factory and can create logistical difficulties. The use of a trading company may simplify this process.
Trading companies also have the capital to purchase in large volume. Through established relationships with the factories, trading companies can get more-competitive prices than foreign companies that go directly to factories for relatively small orders. Even after trading companies add a markup, the prices they offer may be lower than the prices offered by the factories themselves.
A major advantage of trading companies is their experience in dealing with foreign companies. Trading companies are generally easier to communicate with because they tend to hire more English speakers. Because they have better-trained staff in their international sales departments, trading companies can help avoid common pitfalls of doing business in China.
Still, trading companies are not for everyone. Finding the right outsourcer also depends on your long-term objectives. If you are interested in maximizing short-term profits and having a relatively easy introduction to working with Chinese businesses, trading companies may be the best solution. But if you prefer to establish long-term relationships with Chinese manufacturers, you may opt for factories that export directly. Building relationships with Chinese factories offers more opportunities to develop company brands. It also allows companies to be directly involved in the quality control process.
Companies with an in-house sourcing group may decide to work directly with a manufacturer. Quality control issues for a factory require frequent communication, and an in-house sourcing team can handle this responsibility. Without such a team or significant resources from an outside firm, however, it may be difficult to monitor issues as they arise. In this case, a trading company may be preferable.
Choosing between a trading company and a manufacturing company is a function of long-term objectives. The key is your company’s ability to monitor quality.
Due Diligence before the Site Visit
Before investing a lot of resources to visit factories, it is important to conduct further investigations for the companies being considered for outsourcing. Most may not have any major problems. However, some have problems that may not surface through long-distance communication and initial background research.
For example, a company that speaks enthusiastically about future deals may do so because it is on the verge of bankruptcy and is desperate to attract business to avoid shutting down. Another may be running a glorified sweatshop—a fact that, for obvious reasons, is not advertised on the company’s Web site. A company may claim to be a manufacturer with several hundred employees, but in reality consists of five people in one downtown office acting as intermediaries. Others may boast of reliability and quick delivery times, but have recently experienced multiple weeklong power outages due to electricity shortages. Such problems are difficult to discover without visiting China.
Hiring a local Chinese person to perform due diligence is a good way to get complete information. A number of firms in China perform inspections, and several U.S.-based companies with experience in China can provide assistance in conducting due diligence.
If you would like to learn more about Chinese business culture or way of life, please check out our sites:
For Chinese Translation:
http://transchinaservices.weebly.com/
For China Business Travel Management Services:http://chinabiztrip.weebly.com/
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This newsletter has been written by moderator Rebecca Chow of the group "American Business Network".
Visit the group here:
http://www.xing.com/net/abc/
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- 18 Jan 2010, 11:40 am
