Silk Road International Blog

I have to admit, I’m trading company. And I’m tired of hearing everyone bad mouth trading companies and then quickly hush up when I enter the room. Sure there are bad apples in the barrel but that is a characteristic that is certainly not unique to trading companies (Enron, Anderson, Mattel’s factories being three examples of companies, consultants and factories with the same issues). So why are trading companies always singled out?

I don’t know what your personal experience with trading companies has been but it if the company was doing it’s job it should have been a good experience. Trading companies can and should save you time, money and stress.

So, in (my) defense, here are some of the advantages of working with a trading company vs. going to the foreign factory directly.

1. We work for you—you (and only you) pay us. We are your rep. We don’t get paid from the factories; Ever. If your trading company takes money from a factory they are not a trading company they are a sales office.

2. We take tons of your liability. If the product is bad we are on the hook to both you and the factory. It is in our best interest to get you the quality you want in the timeframes you’ve contracted for. Typically we are paid directly by you and then pay the factory—decreasing your liability (since you are not contracted to the factory for the product).

3. We are on the ground and in the factories multiple times each week over the entire course of production. If you aren’t here yourself you absolutely MUST have someone here for you. We are not day-wage hirelings that will just visit the factory to check the job off their list as many 3PQC are. Nor do we receive any incentive from the factory to lower quality standards. So, who better than someone who has a vested interest in seeing you succeed?!

4. We have management experience with and a better understanding of logistics within Asia. Our job is supply-chain management in Asia. This is where we spend a significant amount of time on every product—finding, negotiating with, inspecting, coordinating and shipping from multiple factories in multiple provinces in China and countries in Asia.

5. We do multiple products and so have resources outside of any individual factory. There is no such thing as an all in one factory for any product—the materials, the labor, the packaging all must come from multiple sources. For example, a bag factory may be great at stitching and finishing. But they will not be great at packaging or printing and certainly don’t make their own hardware or even materials at the same time or in the same location. As a trade company we do products that span multiple industries and know with whom to talk to get better prices and/or more options and/or faster turn around times and/or better quality.

6. We have better communications than factory reps. This is better for you talking to us and for us talking with the factory. We have full time native English speakers who also speak Chinese—you don’t want to talk to someone that is guessing at your meaning. Typically the only time you’ll get factory employees with very good English is at trade shows. And when the show is over they’re gone.

7. We have a better understanding of international standards—having experience with multiple foreign clients in multiple countries for multiple years. We know what you expect and know the difference between what is standard in China and what is standard internationally. We may not be experts in your specific industry, but you are and we work for you. What we do know is how to apply standards to product, how to test, how to do QC, how to communicate in China and how to manage projects. We won’t waste your time with rounds of sub standard samples—nor will you get a “golden” sample that can never be duplicated.

8. We are independent and are not attached to any single factory in any way. The advantages of this position are obvious—there is no conflict of interest when it comes to product standards.

9. We can leverage production quantities for multiple clients into cheaper prices for everyone.

10. We are focused on getting you the best product possible—that’s how we get paid and how we stay in business. A factory is focused on getting a product done for the absolute cheapest price possible.

11. We are totally transparent. We’ll take you to each and every factory and production site that you want to see. You’ll never wonder if something is being subbed out—because if it is, we’ll tell you and we’ll take to the actual production site. We don’t want “face” and don’t make any profit by showing a nice building but then giving you substandard product from a sub-contractor.

12. You already have a job of your own (that you probably work too hard and too long at already), why do you want to do ours? We provide a service not unlike your tax accountant—a difficult job for which many probably think, “If I could just do it myself I’d save tons more money.” Truth is, we often offer a lower price and certainly offer more services than people doing “the China thing” themselves. Do what you do best and we’ll do the same.

13. Finally, you know who we are, where our company registration is, what our relationships to the factories are, where the money goes and where our loyalties lie. There is no guessing, “is this guy really a part of this factory or is he a Hong Kong relative?” There is not need to worry if we are going to run away—we are registered in the US, in Thailand, in Hong Kong and in China—we are conspicuously available and have nothing to hide. Unlike a factory sales rep, who can take the money and run, your deposit is not more money than we’ll ever see and it’s not more important than your long term relationship with us. The truth is, it’s much easier for an individual factory sales rep to take off with your money or sell your product to someone else than it would be for a legitimate trading company with multiple clients.

A trading company works for you, represents you when you can’t be here yourself. It is in our best interest to get you exactly what you expect when you expect it—that’s the only way we get paid!

We are Your Branch Office in Asia.

Tags: Business by david
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Some times Chinese New Year/Spring Festival is hard to understand. I had one client ask me “Why did they schedule CNY right at the same time as the trade show?” Real question. But scheduling the lunar calendar aside, CNY can be pretty difficult to deal with if you’re trying to manufacture on a deadline.

What doesn’t matter is whose house on what day you’re supposed to go to and what gifts you’re supposed to bring for which relative. What does matter is that you’re still trying to meet production deadlines in February and your labor force is all going home for an untold number of days/weeks.

CNY more than just a single holiday—it’s the equivalent of “The Holidays” in the West—Thanksgiving, Christmas, Hanukah, Festivus and New Years all rolled in a 7-14 day period and then multiplied by 1.5 billion. Which for manufacturing adds up to a month of disruption.

Here are some of the reasons why it’s such a confusing wonderful holiday experience:

1. Most of the 1.5 billion Chinese are low wage laborers. They aren’t emotionally connected to their job and have no incentive to stick around (think about when you had a part time job at the supermarket/fast food chain in high school). There are more jobs than workers and this means that people leave early and come back late. Why wouldn’t they? They can have their pick of jobs when they get back.

2. The logistics in China can been good, especially when compared to India or SEA, but they are still not good enough to handle the largest mass migration in the history of the world—EVERY YEAR! Train tickets and buss tickets are sold out the day they go on sale. Ditto for international and domestic airplane tickets nowadays. There just aren’t enough vehicles, plane and simple—so people leave early and stay late because they don’t have any other choice.

3. Everyone, and I mean everyone, is on vacation at the same time and everyone, and again I mean everyone, is “going home.” These means that a few hundred million people are going west the first week of CNY and the same few hundred million are coming back east at the end of the holiday. You may think that I’m exaggerating here. But let me give you some context. Shopping on “black Friday” (Friday after T-Day) in the US is the worst/busiest day of the year, right? My wife, who is Chinese, willing goes to Wal-Mart and other malls on this day in the US—with nary a second though. Why? Because “there are more people than this shopping at Wal-Mart every day in China. What’s the problem?!” See, unless you have “experienced” China for yourself, you just won’t understand. Second, the affects of mass migration. Have you seen “I am Legacy” with Will Smith? Well the streets of Shenzhen look just like those NY streets (sans lions) for about a week. No one is from here and so for CNY no one stays here. Really! If you’ve never seen 500 million people all travel at the same time, you’ve really never lived (ok, so it’s more like a near-death experience).

4. Until this year, the government scheduled everyone’s official vacation at the same three times each year (this year it’s now just two “Golden Weeks” and a couple of long weekends). This means that anyone that can takes as much time as they can get at those three times. It also means that everyone with any vacation flexibility at all does the same thing at the same time! I can’t over state this enough—really, honestly, everyone leaves all at the same time!

5. Dates are relative. Unlike the fixed dates of most Western holidays, the days of actual CNY are based on the lunar calendar so they move each year. But more confusing that this is the fact that businesses and factories will typically not just schedule arbitrary dates months in advance but will break when orders from big clients are also ending. Many times a factory with pending orders will, as late as a few weeks before actual CNY, not yet have decided what days it will be closed. This means that no one factory will have the same vacation as any other factory. Sure most people will get, this year, the 7th through the 10th off, but before or after that—it’s all a crapshoot. We have factories starting their holiday on the 27th of this month. Others on the 5th of Feb.

6. While the type of gift isn’t really important here, what you get may surprise you. Most gifts given on this holiday are of two kinds—money in red envelopes and gifts from one’s hometown (working on a photo). This maybe the 21st century but a factory gift of a smoked duck or leg of cured ham (unpackaged) is still commonplace in big-city Shenzhen. Tasty too!

7. Fourth of July, smorth of July. Here we get fireworks displays just about every night starting a couple of weeks before the actual CNY date and lasting well past the “holiday.” Also, every new business wants to open up at the beginning of the year—it’s an auspicious time. So there are HUGE strings of firecrackers going off every day along the streets for weeks on end. And if you haven’t seen the fireworks display in Hong Kong you haven’t seen fireworks! (OK, I know the Hong Kong show is on Jan 1, but still, it’s a great show.)

If you’re manufacturing in China this year all this means that anytime from the end of January to the end of February you could have any one or all of your suppliers off line for weeks at a time. For example. We do a stitched product that could be finished before CNY but the fabric factory is taking an early vacation (to accommodate a larger client) and so we can’t get fabric delivery until just after CNY. But the stitching factory and the packaging factory are taking, for the same reasons, late vacations. Effectively killing the project for 30 days for a 4-day holiday.

Happy CNY and enjoy the fireworks!

Tags: Business by david
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Back in November (link) I listed out 12 things that are making the price of goods/services in China rise.

This week, the folks from Sourcejuice via China Success Stories (two good sites for people trying to source from China) listed out 4 price-increase issues in more detail with updates for 2008. Check it out here.

My original list included these 12 items:
RMB Appreciation
Inflation in China
Raw Material Price Increases
Increased Labor Costs
Growth in the Chinese Economy
Maturing Industries and Industrial Zones
Pressure to Slow the Chinese Economy
Low Price Competition
Increase QC and Testing Expenses
Poor Sourcing Decisions
Green GDP
The Poor US Economy

The Sourcejuice list includes these 4:
Reduced VAT
RMB Appreciation
Raw Material Price Increases
Increased Labor Costs

An additional couple of factors for the coming year are:

1) The Chinese government is actively trying to slow down their economy and the US is trying to speed up theirs. This means that money will be more available in the US (Yesterday’s huge rate cut being example 1-A) than it is in China. Thus making China relatively even more expensive.

And 2) The inconvertibility of the RMB and it’s appreciation make it a target for foreign investment, thus raising it’s value further; as noted here.

Among other things in this article, the increased price of exports is singled out as a policy measure (the decreased VAT above being a good example) that must happen again/more/further than it already has.

“To solve the problems of declining purchase power, and to burst the domestic asset bubble, according to experts, the Central Government should, first of all, adopt measures to streamline asset prices, elevate people’s income levels, and increase export prices. At the same time, it should strengthen its supervision of the influx of speculated funds overseas.”

Can you say “Good Morning Vietnam?” (SRI will be blogging from Vietnam later this year as part of a couple already-planned investment and sourcing trips.)

Tags: Business by david
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Very interesting piece on Pysorg.com about the effectiveness of international management practices in China.  From the article:

Dr Gamble said: “All the evidence suggests that, whilst it may be necessary to adapt to some extent to local conditions, time-tested management practices actually translate well across cultures.”

Basically the article says that while there must be some adjustments made for the institutional and demographic realities of China, business is business even in China. Who knew!?  So all those MBA classes will actually pay off in China.

This is really interesting to me as I have been looking for the book on how Chinese do business and have either come up with introductions to general Chinese culture or western business theories retold in terms of general Chinese cultural maxims.  I don’t believe, anymore, that there is a “Chinese way” to do business.  But there are characteristics about the Chinese business culture that are unique in their combination and influence.

This should also be interesting to anyone else doing business here for a couple of reasons.  First, if you are successful in your business at home you have a great chance of duplicating that success here in China.  Skills and success can be translated and duplicated.  Second, there is not some “secret” to cracking the Chinese market.  No magic bullet, no golden connection that will give you the country on a silver platter.  If anything China just requires more of the same: more due diligence, more QC, more management on the ground, more training, more time invested into starting up, more patience, more “buy-in,” more cautions and legal protections.

So if you’ve got business “success” down pat in your home country, what are some of the things that (I think) you need to “adapt” to here in China.

1.    Labor/people are more often the answer to problems than a tech or money solution.
2.    Language is key—Learning Mandarin is a great advantage.
3.    Regionalism—From differences in language and trust to manufacturing/industry to intra-province transport tariffs, China is more like a group of loosely federated states.
4.    Scarcity mentality—there is not enough for everyone, there never has been and there are too many people.  Throw in political turmoil and you’ve got the scarcity mentality that most business owners grew up in.
5.    Change and irrationality—Local, Provincial and National government policies can be created, changed and/or (un)enforced for completely political motivations.
6.    Nationalism—it’s very real and very active.
7.    The personal nature of business and the converse lack of trust between strangers doing business.
8.    The incredible numbers that are China.
9.    Business is not M-F, 8-6.  Its all day all night until the sun goes out.

This, of course, is just a quick list of the things that I think are “culturally” important when doing business in China.  The good thing is, all of these “cultural” traits are not only very understandable but manageable as well.

BONUS—Business, politics and PC’s.

Not sure that this article will pass the censors, so I’m just recommending it and not commenting.  Glen Smith of PC Magazine has a fantastic article on the interconnected nature of business and politics across the Taiwan Straight.

Tags: Business by david
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If you are looking to register your own business in China, I would suggest that you read this on the China Success Stories website. It’s a great list of must do’s. I would add a couple of other items to the list that if you’re not prepared for will get you hung up.

Here’s the article from China Success Stories.

Now for the additions.

1. You must have all the correct documentation for the business name, foreign capital (if any), and members/owners/reps/legal person in China done and approved buy the Chinese Embassy in your home country BEFORE you can start this process. This time consuming and almost completely mail-only process can be both frustrating (hard to talk with people in the embassy) and time consuming (yes, I said time consuming twice–and I meant it both times). It also can cost up to $100 per document to have the embassy certify.

2. An additional few days could be spent getting your health certification for foreign employees. This requires an eye test in one government office, a complete physical exam in a (scary) government clinic and at least two visits to your local police department for residence verification.

3. Just because you have been told by one office that you need to get X document from whatever other department does not mean that that next department will have it, or that they will give it to you or that they won’t want some other form from some other department first. This is not just me being crotchety either. In our SZ business registration we traveled back and forth between government offices trying to figure out who really could do what was next on our “list” of required documents. Many times we were told by one clerk that we must have this and then left only to hear something similar from a different clerk in a different department. Try to find a senior official in each place. They will know what really can and can’t be done and even if they don’t take care of your paperwork, you can throw their name out to the window clerks to get things done right.

4. One advantage of hiring someone to do this process for you (see below) is that they will know what papers can be filed first, at the same time and which offices really do process stuff in a single day.

5. Legally, you have to hire employees from the State. But if you have “employees” that you already know/work with/want to hire you can work with an accounting firm on your employee taxes and they can “work out” the conflict of this law. Even according to the lawyers that I’ve talked with, this is a little bit of a gray area. But the contracts for employees and taxes are with the state and they are the ones allowing this end-round process via accounting companies.

6. Once your business is registered, you’ll of course have to find a place to do business and, unlike the US, you can’t have a home business unless your building is specifically registered as “multipurpose” facility. Check out your building’s code/zoning before you start the registration process. You could have your license rejected if you provide an address that is not approved for business.

7. You DO not have to pay anything “extra” to officials in offices nor do you need guanxi to get this process done. But I’ll make one warning and one suggestion about what “really” happens on the ground. First the suggestion.

a. Pay $1000USD and have someone else do all the paper work for you. It will save you tons of frustration. You can be involved as much as you want (follow them to each office for each document) if you don’t trust them. But there are a lot of good accounting/law firms that will help you register, annually update registrations, pay employee and other taxes and take a huge load off your mind for a very reasonable price.

b. Even though you don’t pay fees in the government offices, you most likely will have someone come out to your office. There are a number of government departments that need to come to your office after/while the registration is completed (fire safety, employee verification, zoning confirmation, or foreign employee registration—all of which were needed in Shenzhen). You’ll have to choose whether you are willing to pay these people or not. I’ve found that if you don’t they just won’t show up. And, a little bird told me that just one of these guys can cost you more than all the legal fees and hiring an accountant put together–and that’s if you haggle with him for 2 months and cut the “fee” in half!!

Good luck.

Tags: Business by david
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