Smart Steps for Effective Sourcing in Tough Economic Times

15 May 09 UPDATE: This is now been written out as an article and can be found here (SRI) and here (China Success Stories).---------------------------------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 market1.    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 China1.    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 China1.    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 China1.    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 China1.    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 China1.    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).