Q & A about Importing into China

This is a conversation that I had with a friend who is considering getting involved in importing into China.  Since I get some variation of this question a few times each month, here's my response.  (Original email first.)

Hey David,I am really interested in importing some stuff to China, I have a solid contact in South America that can help me to import several items.  I think that it is a good opportunity but so far all of my experience in doing business in China has focused only on exporting from China.From what I have read, importing *** into China is something that is very difficult to do; there is a high import tax, clearing customs is a pain and there can be huge delays, I also heard that the son of the President of ABC, a large American owned importer, was detained for customs violations.That being said, the potential for growth with items in China has to be better than trying to sell anything to Europe or America.  *** seems like an easier bet, and there seem to be quite a few people interested in purchasing imported *** here in China.What kind of advice can you offer about how to get started?Teaming up with an importer seems to be the only way to get started, I think that we would have to sell to them and just avoid doing any distribution at all.  I have several friends that are buyers  but I think that we have to work with an importer, even if I have a supplier and willing buyers.What would my next step be moving forward?  How should I approach an importer?

My thoughts:First, importing opportunities.  I’ve mentioned this a couple of times in the past few years on my blog: I think that this is a very viable option for the future and a great opportunity for any company that is willing to do the initial DD and then stay the course.  China can’t support itself and it doesn’t want to and so there will be fewer and few restrictions on bringing things into the country as the economy expands.  It’s only going to get better for importers.  Right now for importers is like the 90’s were for exporters—a bonanza if you’re hooked up the right way.  More on that in a minute.Why it’s good. Despite the recent downturn, which will not last forever, Chinese have now and will have in the future more and more disposable income.  This is the most obvious reason that people capitalize on when they think of importing into China—and they have been thinking this for 200 years.  There is money, Chinese save 30% or more of their incomes.There are markets for mainstream Western products that are not developed yet in China.  And there is a real lack of extensive distribution of imported goods across the entire country.Not only do Chinese have money (and will spend more as the economy recovers) they want the quality that comes from foreign brands.  Name brands in the US or EU are, in general, popular either because they have better design and/or quality than domestic goods (even if they were manufactured here).  In general, Chinese goods lack both of these characteristics.  Quality is what people with money want—from clothes to furniture to cars to food.  And, they’ll pay more for it.  Long history of successful products/business in the West gives bands instant credibility in China.On the other side of the coin. The milk scandal really brought down the Olympic nationalism a couple notches.  People openly admit now that they trust foreign brands more than domestic ones.  It really hurt Chinese pride and subsequent buying habits (for those with enough money to choose).  And these are the people you most likely want to target.  You couldn’t buy better press for foreign goods than the milk scandal and the fact that the Beijing govt has now let the FDA set up an office in Beijing.For my money, the growing economy and the milk scandal are probably about 6’s when compared to the need for face.  I don’t say this as a a knock on Chinese, but if you read “Elite China” by Pierre Xiao Lu (and I strongly recommend that you do BEFORE you import anything), you’ll see that the numbers agree.  Once Chinese have money, they want to spend it on items that give them visible face (conspicuous consumption).  Yea, and they want quality too...but face is first and quality is often an assumed given with foreign name brands.  If we’re talking about imported items there are a few things that can happen.  One, no one will know what it is, but it’s imported so it has some face value to it just because it’s foreign.  Of course there are significant marketing barriers to overcome with this (the marketing it is a whole other issue).  Or second, it’s a recognized foreign brand and you have a prepared market.Choice is becoming more and more an option for all of China and not just the rich on the east coast cities.  Chinese are more and more internet and marketing savvy and realize more and more that they have choice.  Choice means feature shopping and not just buying whatever is available.  More foreign brands can now compete here precisely because Chinese shoppers are looking for options to meet their specific needs. And since face is such an issue choice doesn’t lower prices as much here (yet) as it would in the US.  Until China produces consistent quality products to rival western goods, imports will be able to stay ahead of the price curve (as least relative to their domestic competitors).Now for the bad news. Why importing is really really scary.First, distribution.  Many foreigners think of China as one big country like the US.  It’s not.  It’s much more like Europe—a federation of different countries (provinces), each with their own standards, boarders (tariffs), laws (taxes), and requirements.  Not to mention that China is HUGE both in terms of population and geography.  Finally they don’t’ have the free flow of goods like the US or the domestic infrastructure to make commerce as cheap/efficient as the US.  Negotiating China is a nightmare, as importers have found for the last two centuries.  Just because you’re successful in SZ doesn’t mean that GZ or SH or BJ or CD will even want the same items even if you can get them there.  North China and South are different countries, culturally.   Eastern and Western China are different countries economically.  The first and second tier cities are years ahead of the rest of the country in levels of education.Distribution to regional chain stores and/or ones own retail outlets then is vastly more complex than getting goods from a couple of factories out of China and into a DC in the US.  DO NOT UNDERESTIMATE THE NEED FOR A (VERY EXPENSIVE) PARTNER IN DOMESTIC DISTRIBUTION.  These guys know their value, they know the law and they quite frequently take advantage of foreign partners.  Danona Wahaha is example #1.One of the horror stories that I hear from folks at some of the larger chains that have regional and national distribution is that a lack of good quality trucking across provinces kills margins, destroys product and adds significant costs to even the simplest products.  Stuff shows up damaged, rotten (perishable goods) or regularly missing a significant percentage. Insurance is impossible to collect and losses are then just part of the equation.Add into this the high fees and salaries (bribes and pay offs) that many importers are paying not only to domestic partners but to customs and provincial boarder officials and the price of going from Shanghai to Ningbo can double.  We have issues like this regularly as we ship components from one part of the country to another for fulfillment.  I personally know people who have been jailed for driving specific goods across provincial lines—not even dangerous/illegal stuff either.Finally, if you do manage to get things in and you do start making money the very next issues you’ll have to deal with are first, paying protection money to either the police or local gangs to keep your retail front “safe.”  And second, if there is money to be made, you’ll be knocked off.  Congratulations!Recommendations.•    Read Xiao Lu’s book—no matter what you’re importing.  (My review)•    Find a trust-worthy partner.  Take the time (months) to do DD on this one.  This one person, more than anything else you do, could sink/steal/make your business.•    Pick one region or one domestic distributor to start out with.  China’s big, don’t get greedy.•    Build some serious guanxi with the port and regional officials that you’re going to be using.•    Plan on staying in the market for at leat two CNY holidays to see if you can really make it—remember, 40% of all annual luxury sales happen over this vacation.Good luck! Let me know what you think and what happens.