New importers coming to China often wear pink-colored glasses. They find nice samples and smiling salespeople on a trade show. Prices are often lower than they expected. And they reassure themselves with remarks such as “if other foreign buyers also work with them, I am not running huge risks.”
The fact is, many importers have lost their shirt in China, even though they don’t tell the world about it. And very few buyers take enough precautions on the first orders.
A good proportion of the comments I got from readers of this blog said “I wish I knew all this when I first started buying in China”, so I thought I should make a list of the most common bad surprises. Here are ten “hard truths” that every importer discovers, sooner or later:
1. Too small to interest a good manufacturer
It might seem simplistic, but most often the following equation is right:
Bigger = more organized = better quality = higher prices = less flexible
Here is the story of a typical Chinese factory. When it starts, it is run by the owner and his family and it gets business thanks to very low prices. As it grows up, the structure does not evolve until it reaches about 500 employees. At this point, professional management has to brought in. Managing more complexity and satisfying more demanding customers increases overhead costs over time.
So you basically have two options:
Go with a large factory. The problem is that if your orders look very small to the manufacturer, you will not get attention from management. It means you will not have priority for production capacity and nobody will care about the quality of your shipment.
Give orders to a small factory. Then you will have to deal with poor organization and low reliability. Keep it in mind…
2. It’s more work than you think
So you come here, you do all the negotiating, you prepare some artwork for the logo and the labeling, you choose a forwarder, you prepare the warehousing space and the deliveries… Guess what? It’s not enough.
China’s real advantage over other countries is no longer about low cost. It’s about convenience. They make it look easy to buy: just select a sample you like and wire the cash!
This is precisely the danger to avoid. If you don’t define specifications, how can you complain later when you are not satisfied with production?
Once you have a decent specifications sheet, get it signed by the supplier and use it as a checklist. By the way, relying on the supplier to check his products’ quality in a professional way is not a good idea. Either you send your own staff (or yourself), or you appoint an independent inspection firm.
3. China has no return policy
Building on the previous point, you need to confirm product quality before the factory brings the goods to the forwarder’s warehouse.
Once the goods have been shipped out, there is virtually nothing you can do if the products are unsellable/unusable. Check out this article from the SRI blog for more details: Returning Products to a Factory in China.
If you discover quality problems in your country, any corrective action will cost you ten times more than it would have cost the manufacturer. And it might damage your company’s image on your market.
4. You know what? They are selling to you!
Importers often have the feeling that they are actively purchasing–taking a plane, going into unfamiliar territory, communicating in a foreign culture.
Most of the time, the reverse actually takes place: the supplier tells a nice story and shows nice samples. The truth is, many exporters are very good at getting orders and a deposit. Difficulties often start after that.
The good purchaser separates story from facts and is not afraid to check everything (visiting a factory, ordering a background check, asking for references, verifying quality, etc.). He also keeps flexibility because he anticipates bad surprises. This means he includes at least two extra weeks in his planning, and he lines up a back-up factory for the most important/risky production runs.
5. It’s all about who holds the power
One of the habits of the successful purchaser is to avoid exposing himself unnecessarily. Some trust is necessary, and you will always rely on exporters up to a certain extent. But don’t give away too much of your power.
For example, if you work with an untested supplier, don’t promise their products to your customers too much in advance. If you are disappointed by what the factory delivers, you can cancel the order or take the time to get it right.
Another important component of power is who owes money to whom. Your supplier will pay more attention to your wishes if he has spent 70% of his selling price for buying materials and he has only received a 30% deposit from you. You should NOT accept to pay the remainder until (1) quality is confirmed and (2) shipment in the right quantity is proven by the bill of lading.
6. Invoking future business has little impact
Chinese suppliers have a very short term view. It is due to reasons that are specific to China. But it is also the result of the behavior of some foreign buyers. Many traders and importers make a thin margin and have to keep “shopping around” for the lowest price. Why would they assume that you are different?
My point is, you will have to walk your talk for some time before they recognize that you are a stable customer. But you should avoid relying only on one supplier for a given product, or that supplier will feel that you have no alternative and might exploit it.
7. Chinese suppliers are quite savvy and experienced
In many product lines, China is the most competitive market in the world. You will be dealing with entrepreneurs and managers who have years of tough business experience.
As mentioned above, they are focused on getting orders and deposits, because that’s what keeps the business going for now. They expect to have a tough conversation with you later, when they announce shipment delays or when you notice that production is not as nice as the samples you approved.
They are very good at making buyers feel comfortable and commit to the relationship, and then at taking advantage of the situation. It can mean price increases midway through production, shipping delays announced at the last moment, substitution of components, unauthorized subcontracting, etc.
They know that switching costs can be quite high in contract manufacturing. Your job is to keep them as low as possible (once again, don’t rely on one supplier for the orders that you can’t afford to cancel).
8. They won’t change their ways for you…
… except maybe if your orders represent 40%+ of their capacity.
One of my European clients had a big surprise when they just started sourcing in China. They were used to buying from small workshops in Northern Africa. All of a sudden, they saw 600-workers factories that had other customers to please and other priorities.
They flew some technicians to follow production, who had to be back home before production actually started because of a three-weeks delay.
If the factory you find needs extensive hand-holding and reorganization to produce at your desired standard, you’d better find another one… Or have a lot of time with you.
9. Keep arm-length relationships
In China, business is personal. It is a low-trust environment where parties feel they need to know each other before approving a deal.
It is also a way for clever suppliers to make you feel comfortable and obliged. They regularly give red-carpet treatment to purchasers. If you become friends, you won’t come down on them too hard because of a shipping delay, and you won’t inspect their products, will you?
Many buyers look for a “partner” factory, but it seldom works out nicely in China. Be realistic, you will likely have to search and manage Chinese suppliers over time.
10. Keep monitoring and giving feedback
In proportion, very few Chinese factories limit their growth, invest in improving their organization, and focus on satisfying their current customers. It means they are very full and routinely turn away profitable business. These are NOT the ones you will find on sourcing fairs or on trade websites. So be prepared for unexpected production issues.
For most Chinese manufacturers, the temptation to cheapen the product and/or to raise prices over time is very strong. Keep monitoring quality and look for alternative suppliers as soon as you see red flags multiplying.