Silk Road International Blog

15 May 09 UPDATE: This is now been written out as an article and can be found here (SRI) and here (China Success Stories).

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This is the outline of a presentation that I give at each Global Sources China Sourcing Show entitled: Smart Steps for Effective Sourcing in Tough Economic Times.  It’s both an introduction to the current factory situation in China and a review of the list of options for financing in China today.

Know your market
1.    Exports have dropped up to 60% in many industries.
2.    Imports have dropped even more.  There are a lot of reports saying that buying is up this year—but it’s not consistent across all industries (asset heavy) nor all regions.
3.    Chinese factories have been stiffed for payments and canceled orders by foreign companies—don’t go into China with the attitude that “hey, they should trust me, I’m from the developed country, I’m the one that doesn’t trust you.”  The roles have been reversed.  Dramatically.
4.    China says it will hit 8%, no one else believes it.  No one.  Think more like 5.5% to 6%.
5.    Chinese banks and governments are offering incentives and loans.  The question is whether or not you(r supplier) can get any of it.
6.    Bad economy in China has lead to consolidation, which is not a bad thing.  Lots of smaller, borderline quality factories have gone out of business.  Big factories have more resources.

Difficulties in China
1.    Banks are not really solvent, but they are flush with cash (from the central government) right now.  Banks have given out more loans in 1Q09 than in all of 2008.
2.    Money from the banks is mostly pushed through local governments and their connections.  The money is targeted to specific industries/areas (e.g. Western China and green and higher tech products).
3.    Chinese consumers do not consume, they save.  Spending is up, yes but no one knows yet if it’s just Chinese New Year hang over or if people will spend money after the immediate stimulus money is all gone.
4.    There is over capacity, under employment and over production in many industries.
5.    Trust for foreign companies is low, but hope in the domestic economy is not mature yet either.

Opportunities in China
1.    Well-established factories want orders!!  Everyone wants them, but factories that are still in business have employees and need to pay for them so they will be aggressively looking for new orders.
2.    Well-connected factories have access to cash.
3.    Factories and equipment are for sale/rent at rock bottom prices.
4.    There lots of opportunities for JV’s and other partnerships.
5.    Product from cancelled orders is available everywhere!

Options for Financing from outside of China
1.    Typical TT’s and LC’s are still the standard.
2.    Factoring is an option—it’ helps cash flow in the short term, but will suck out most (or all) of your profit.
3.    Loan standards (in the US) have dropped dramatically in the last 6 months.
4.    3rd party financing.

Options for financing from inside of China
1.    Factories are willing to do projects with creative terms—so long as they have some financial guarantees.  Cash flow and actual money/orders are the keys now.  No one is being picky, just cautious.  More than one former suppler has called to tell us they will offer us terms (60 days) if we pay higher deposits.
2.    Lower MOQ’s are available.  We’re having a ton of former suppliers call us back about previous inquiries and tell us that small orders are just fine now.
3.    Additional labor is available to get projects done more quickly.  Lots of day labor and fixed time laborers are waiting around for projects.
4.    If you’re in the right industry, you may have cash options via your supplier/local govt.  Industries receiving money from the government include: technology, education, logistics, green technology, health care, infrastructure, transportation.
5.    Middlemen or trading companies have larger volumes and better connections may be able to offer you some financing.

Other steps to take to secure your investment in China
1.    Do all your due diligence (buy company/entity reports) BEFORE you place orders.
2.    Be on site as much as possible.
3.    Buy from sub-suppliers directly to save your supplier money and to negotiation the prices and quality yourself.
4.    Pay for factory audits BEFORE you place orders.
5.    Break out large orders to different suppliers if you’re concerned about factories going out of business.
6.    Get your lawyers involved early (just to be safe).

Tags: Business, China by David Dayton
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It’s telling, the amount of hassle that you get buying a visa or going through various international customs, about the nature of the country that you’re about to deal with.  I really don’t understand the attitudes that I get LEAVING China from various boarder points in Guangdong.

Once across the boarder, Hong Kong is a piece of cake.  No visa, one short form, no questions that you have to look up the answer for, short (or at least quick) lines.  Lots of windows/desks.

Thailand, is easy but slow.  No visa necessary but long lines that never end.  Not enough windows/desks, poor design in the new airport, crappy traffic control.  But at least they are nice and they smile.

Vietnam is pretty good too.  Fast, no lines, easy form and cheap visas—even for express service.  They seem actually excited that you’re coming to visit them.

Taiwan seems like it was really great about 20 years ago but hasn’t been improved since.  It’s moldy and cold (even in the newer terminal).  Customs is a pain, visas are both difficult and expensive.

Cambodia and Lao are, well…not sure how to catagorize them—My experience with these two customs is just pay for whatever you want and move on through.  Really, I’ve paid for at-the-boarder service in both places.    The Thai embassy in Lao also asked me what  I needed (and how long I wanted to stay in Thailand and Lao before I went back to Thailand) and then gave me just what I asked for. (Obviously helped that I spoke Thai.)

For my wife (Chinese) going through the US alone it’s a huge insulting hassle.  When she is with me, no problems.  But when she’s alone, she comes out almost in tears every time.  This pisses me off, big time.  Why should it make any difference if we’re together or not.  I’ve had her take down agents names and talked to superiors before.

But China is just a mess.  I’ve detailed before the randomness of their checks and limitations.  I’ve crossed the boarder about 14 times in the last two weeks (speaking at the show fills up my passport quickly).  And only last night, coming back INTO China at 11pm was the process at all pleasant.

Customs must have a new rule to have all agents to really look at all faces very carefully.  What else would explain why they are holding up groups of young foreign students, European businessmen and a group of tourists?  Standing in line I saw agents requesting people take out their earbuds and asking women to pull back their hair.  They asked me when the last time I shaved was (in my passport pic I have a gotee, but don’t now).  These are all non-Chinese people that are LEAVING China!  What’s the problem?  Why are they so strict?  I could understand if security was an honest concern, but these are the same boarders that are NOT using their x-ray machines and allowing just about everyone to just walk through (except for Middle-eastern or African looking men with boxes–I feel really sorry for these folks, there is just no chance that they’re getting a fair shake in life any more.  Really sad to see the extreme racism all over the world toward these people.).

15 years ago, I went to Israel and the middle East for a semester in college.  The boarders there were INSANE.  Crossing back and forth from Egypt to Israel or Jordan took forever and required EVERY item to be x-rayed and the vehicle to be inspected.  All of this was done under armed guard.  But I’m convinced that getting a bus load of college kids with luggage across the Israel/Jordan boarder was faster than getting 50 foreigners out of China during tradeshow month.  And we didn’t have to wait at a second boarder check point to get into another part of the “same” country either!

Ok, I’m finished complaining.

One other issue that you could be of value to you working in China: Shenzhen Notary Public. I’ve used them before, but forgot about the process until I had to get a POA stamped this week.  The good news is, if you need to get any documents notarized you can do that in SZ (or just about any other big city).  The bad news is, Notary Publics in China are all government agencies.  Its not like the US where you can go to a post office or a law firm or your accountant’s office and get a stamp for $15 or less.  Here you have to pay about $25, have 3-4 copies of every page of the document, sign every page of every copy of every document and fill out an application.  You must provide both the original and a copy of your ID.  And, here’s the kicker—you have to have EVERY PAGE OF THE DOCUMENT TRANSLATED before they’ll stamp it.  If you use the Notary’s translation services the current back up is 7-10 days!!!!  If you pay for an approved 3rd party to translate it for you it’ll cost you at least another $50 and you have to wait for them to do it too.

So for even a simple one page POA in English you’re paying $75 and waiting at least 24 hours.  They can’t just see your ID and notarize that you indeed signed the document in their presence (which is the point in the first place, right?!).  They have to know what all the documents say—why is it any of their business?!  No notary in the US asks to read documents if you ask for just the notarization of a signature.

OK, now I’m really finished complaining.  Honest.

SHOW PRESENTATION NOTES:

3P’ of Quality from SGS:

1.    Product Control—asses the risk.  Voluntary standards, specific requirements and other safety requirements/standards.
2.    Process Control—managing the supply chain.
3.    People Control—ethical issues, training human involvement.

Quality and Cost seem to be the most important drivers for sourcing strategies. (Not sure why I noted that little gem, but there you go!)

Schenker on Shipping:

Shipping costs from China to the US look to be about 50% of the price of what they were this time last year.  Airfreight too.  To the EU is not such a steep discount.

I looks like shipping and foreign buying in China is moving up a bit. But the fear in the market is that it’s not a recovery so much as its just retailers refilling their inventories that they let lag as long as possible.

SHOW Q&A NOTES:

Some of the Q&A today was, I though enlightening as to the current state of affairs of the global economy.

First, The shows are empty.  We have had more people at my individual presentation last week than we did at the group presentation every day except Wednesday.  Attendence is said to be down about 25% off of last fall (which was off about 30% from the spring before!).

Second, the majority of people that I talked with are doing enough volume that they can (and should) cut out their domestic distributor.  But what they don’t know when they do this is that all the warranty, customer service on the sales end and all the QC and logistics on the sourcing end are now their responsibility.  There is a reason why everyone doesn’t just go to a show in Asia, buy off the rack sell with huge margins without any problems.  The reason is that it just doesn’t happen (successfully) that often.  You don’t cut out layers of middlemen with no (positive and negative) repercussions.  But the point here really is that small to medium retailers are tired of domestic distributors and are more and more going direct as the economy forces them to make choices.

Third, there is still trillions of dollars of business going on—sure the US alone lost a trillion dollars worth of value, but there are still 300 million consumers that have to live.  Unemployment is still lower than 10% too (most countries would kill for single digit unemployment numbers).

Fourth, many small businesses that were selling to other mom-and-pop retailers and were not working on credit are still in business.  They were not killed by the credit crisis nor were they affected by the box stores huge lead times.  Smart small businesses were running on cash, still have cash and are still in business.  Many of there are coming to shows here in Southern China this week.

Fifth, in case you didn’t know (and apparently many don’t know this) there are multiple shows going on this month, not just one show for one specific industry as some of the buyers we talked to thought.  Starting about 10 days there are show almost every day of the week from Hong Kong to Shenzhen to Guangzhou (and in BKK and other places too).   Smart buyers are hitting multiple shows, getting options from both mainland and Hong Kong venders and realizing that they have both choices and power (since they have money and factories are dying for orders).

Sixth, anybody hearing about a black list of foreign buyers being put together by the Chinese government?  There are a TON of factories that are stuck with orders that were cancelled in various stages of completion.  I’ve not heard about this directly, but someone told me that a list is being collected.  That could be really scary.  Let know if you’ve heard anything specific.

Finally, simple pleasures make life better.  The French Toast at the Harbor Kitchen in the downtown Hong Kong expo center is fantastic!!!  Just like I used to get at JB’s (Bob’s Big Boy) when I was growing up.  Haven’t had toast this thick, battered-up and deep-fried for 25 years.  I loved it!!

Tags: Business, China by David Dayton
1 Comment »

Best piece of advice that I heard at the show this week was from Ben Dolgin-Gardner of Shenzhen CE and IT Limted.  In his presentation at the Global Sources seminar “Buying from China: What New Buyers Need to Know” Ben said, “There is a difference between price and cost.”

That one simple sentence revels a level of understanding about buying from China that most new buyers miss.  What he means that is this: Just because the price is better going direct to factories in China, that doesn’t mean that your final landed cost back home will be cheaper than buying from domestic vendors.  There is often a very good reason for domestic prices and factory direct prices being so different.  Reasons include: Quality control, international shipping, taxes, duties, a return policy, customer service.

Other good advice from Ben:

• A network of professionals on this side of the ocean who give you personal attention is very important.  Don’t reinvent the wheel if you don’t have to.

• Get a sample of EVERYTHING at EVERY stage and for EVERY component/packaging/etc.

By the way, show attendence seemed to be rather low (I don’t have any official numbers).  I’ve been to three different shows and didn’t see much at any of them.  Even the Canton Fair is allowing domestic Chinese buyers into the show this year (they were not allowed unless they were employees of foreign companies before).

Thailand has to be the only country in the world where there can be violent, deadly protests one day and then everyone takes two days of vacation before coming back and continuing the protests!  Blood in the streets on Wednesday and then water Wednesday through Sunday (Thai New Year festival) for a nice long weekend.  Unbelievable.

Problem is, international trust and perception didn’t take a vacation.  The bad economy is now DEAD.  The remaining dribble of FDI still coming into Thailand is now bone dry.  When you look at China and say:  “more stable, more safe, better political environment” you know that your country (a supposed democracy, no less!) has hit the skids.  Tourism is even down now.  When back-packers and pedophiles are changing their vacation plans to avoid your country you know you have serious issues.

Vietnam has really cheap labor but quality and education is lacking.  Really?  No kidding!?

Notes on the Chinese economy.

1.    Chinese consumers, don’t. China is looking for a new stimulus package just to get consumers to spend a bit more.  All the first round of government loans went to well-connected factory owners who then invested it in the Shanghai stock exchange in stead of producing more or buying raw materials or even paying off debt.

2.    If Chinese factories are not getting paid or not getting orders, who’s paying their bills?  Answer?  No one. The future is not so bright.

3.    But when the Chinese consumers do buy, they buy smart. Oil, cars, houses and the Chinese stock market (ok, the stock market isn’t smart, but if you time it right you can make zillions!).  Is this a recovery or some digging in (and quick profit taking in the market)?  Except for the stock market, it’s smart digging in for a longer recession than expected.  So many people made so much money in the stock market in ‘07 that people hope it can happen again.  Chinese people buy assets for security and save money so they can take care of themselves–why are Americans not doing the same thing?

4.    China may not reach the govt’s goal of 8% growth this year. Really?  No!  Let’s see…what non-Chinese commentators have been saying this for the last 6 months?  ALL OF THEM!

5.    And…if that’s not enough.  Chinese Banks are handing out govt mandated money hand over fist to just about anyone with a Chinese ID card and a pulse (and to any foreigners with property).  Sound familiar?!  (Think the US sub-prime mortgage bill in the US in the ‘90’s.)  Add this new loan binge to the fact that Chinese banks are mostly insolvent already and you have the makings for another future economic disaster.

6.    Steel is also up one of the items that’s up (along with oil, autos, cars and housing prices, as mentioned above).  Steel?!  Really?  Why?  There is over capacity in industrial, commercial and residential building.  Shipping has so much over capacity they will not be using it all up for years to come.  Auto sales in China are up—but they had over capacity as recently as December in China (and no one other China has had an increase in sales).  Where are they using this steel?!  Could it be that no one bought steel for the last 6 months, waiting as long as possible before buying new supplies (seeing prices continue to drop in the meantime) and now finally they have to buy to keep (the low levels of) production going at all?!

I hope that the Chinese economy is going to turn things around and can help the rest of the word by buying more imports.  But if buying trends continue the Chinese will be buying assest, not imports.  And that’s not going to stimulate anyone elses bottom line.

Tags: Business, China by David Dayton
2 Comments »

Theres are my notes from day one of the presentations at the Global Sources Electronic and Components Show seminar “Buying from China: What New Buyers Need to Know.” Participating Companies in the Global Sources seminar today included:

Silk Road International, Sourcing and Project Management
SGS, Third Party Inspections and Testing
Passagemaker, 3rd Party Secure Procurement, Manufacturing and Assembly
Schenker, International Logistics

100-300 people usually attend each session of the conference.  The seminar is free and there will be more held today and tomorrow.  My presentation topic today is “Smart steps for effective sourcing in Tough Economic Times.  Other presentations include Protection of IP, Eco-design and Negotiations.

1. Make sure that you’re more worried about specific business issues than you are about general cultural issues.  Don’t worry about screwing up the cultural things; the Chinese are great hosts and rather forgiving toward “stupid” foreigners.  Having said that now, I do believe that cultural miscommunications will derail your production faster than business miscommunications will.  I’m talking about offending people, not handing your business cards over the wrong way.  Not giving appropriate face to a manager, not refusing to eat the duck tongue.  So be careful.

2. Specify the details for the packaging for both air and sea shipments as they should be different.  People are often very concerned about the product and less concerned about the (outer) packaging.  But if the packaging is great for a container load but not sturdy enough for air-freight, all your great product will be worthless by the time it’s delivered to your door.

3. If you do not start to prepare to protect you IP BEFORE you come to China you will be to late to protect it fully after you’re here.  With the lower levels of orders in the last year, there are more and more people that are willing to break the rules to make a Yuan.  Either protect yourself or lose your advantage (and your IP—and maybe your whole brand).

4. According to the folks as SGS (whom I agree with) most of the QC problems can be boiled down to YOU helping your supplier clearly understand their rolls responsibilities, your standards and, above all, clear communications about every change and detail.  YOU’VE got to train your suppliers to meet the standards that you’re looking to achieve.  YOU then have to follow up to make sure that they both understand their responsibility in achieving that and the process needed to achieve it.  Sure, they have to do their part, but you have to both details the standards, enforce the standards consistently and then confirm that the standards are met.  This is a harsh reality, you need to act like it’s all your responsibility and take steps that that end.  Regardless of which party does or doesn’t do fulfill their part of the contract, it’s your fault, not theirs, if substandard but approved products shows up in your home country.

Here are the minimum points where you need to be checking on your factory’s quality.
•    Raw materials QC and testing,
•    Sample QC and testing,
•    warehouse/materials storage QC,
•    in-line QC and testing,
•    finishing/packaging QC and testing,
•    final QC and container loading.

5. Don’t leave doing the shipping research for last.  If you like your profit margins and have done all other due diligence the product could still be a financial dud if you’ve not done all your shipping/customs research. Logistics equates to about 20-30% of the cost of goods sold from China (as opposed to 10% of so for US and the EU).  At 30+ days onto that and you have a significant additional expense to consider.  Also, taxes, duties and fees can be very expensive.  Free (yea!) and 3-6% are certainly tolerable and typical.  But duties of 17% to 200% (which we’ve seen kill projects before) are also common and you must prepare for them very early on.

6. Finally, remember, payment terms and INCO terms are not the same.  When you pay (Payment terms) and who is responsible for what portion of the shipping invoice (INCO terms) are completely different.

Tags: Business, China by David Dayton
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