Tuesday, November 24, 2015

Two-Wheel Electric Scooter Shortage on Horizon

Since couple of days ago, China customs has been cracking down on the export of the two-wheel electric scooters.  None of the products to be exported through most of the China’s major ports will be allowed to go out.

This is due to a patent infringement law suit filed by some idiot in China.  Idiot because Chinese law allow for design patent that is based on infringing the mechanical patent owned by Segway.

We are lucky to have our products shipped already, so it does not affect us.  However, a lot of the other sellers who still don’t have their products exported will NOT get their products.  If the freight forwarders they’ve engaged have very strong “connections,” they might still get a pass.  But the palm-greasing fee will definitely add into the cost of their products.  This will be a very minority since there just aren’t that many people who has such good connections.

I expect this dog-and-pony show will be there for a few weeks.  And then, perhaps, the Chinese customs may choose to release the products already made, waiting at port.  Or maybe not.  One can never be sure about China and its policies.

This blockade is most certainly going to affect the supply of the product.  I expect a supply shortage, temporary or not, will be on the horizon very soon.  Selling prices will undoubtedly go up due to the limited supplies.

Nonetheless, this supply shortage will only affect U.S. sellers.  For China sellers, they are sending the orders one-by-one and the Chinese customs may not want to bother with holding them up.  Again, this is not for certain.  In any case, this shortage will benefit China sellers.

When and if Chinese customs again allow this product to be exported, there will be a flood of supply that appear on the market at roughly the same time.  Sellers will be very eager to dump the product.  I expect by then, the selling price will dip well below $200.  Sellers will be forced to liquidate the inventory at a loss just to cover some of the costs already spent on the products that has been sitting and waiting for weeks.

If this product is going to stay permanently on the Chinese customs blacklist, then I expect it will become a turning point in the popularity of the product.  Since only China sellers can offer this product, most American consumers will tend to stay away.

This blockade affects generic and branded products alike.  Even expensive brands such as Airwheel, Ninebot, and American brands such as IO Hawk will be not be exempted.

Thursday, August 28, 2014

Air Shipping... Add up all the hidden charges before you book that flight.

Following is an excerpt of my communication with a customer regarding the cost of shipping by air.  Customer claimed that our quoted price is about 80% higher than what he received from a air cargo company; however, after he added up all the hidden charges, our price turned out to be 5% lower!

Let me share with you about our pricing for shipping…

We make a very meek percentage on printing; that’s our core strength.  Shipping is always done as a “service” to our customers.  Many times, we’d be okay if customer wants to handle their own shipping just because it is so much hassle with virtually no profit.  We mark-up our shipping cost, not to make money, but to cover for “eventualities.”  And there seems to be quite a bit of these in the logistics world.  One day, pricing might be this, but when you are ready to book, price went up again.  Sure there are times when prices stay the same or went down a little.  But as I’m sure you know, most of the times, prices always go up.  So the little mark-up we do is always used to cover for the cost increase when customer’s job is ready to go.  For instance, when we sign an order with a customer, it’ll take a month or so to get the shipment ready to go.  But when we quoted the job, sometimes it is a month before the order is actually signed.  So, from quote to ready to ship may be two months or so.  During that time, shipping costs change, and they have a tendency to go upward.  Also bear in mind that all shipping companies in China takes only USD, so there’s also the exchange rate that’ll make the cost go up as well.  So, two months after the quote we found ourselves facing a higher shipping cost, there’s no way our customers are going to pay for the difference.  The only way to pay for that is from the little mark-up that we had built in.  In other words, our mark up is almost based on a running average of the differences that we had to pay over a decade of handling customer’s freight.  So, please do not feel that we are trying to make a killing on shipping.

In this instance…  There may be some additional fees that you may not have been quoted, or offered. 

-        If you are going to handle your own freight, there would be truck delivery charge from us.  From factory to the customs warehouse.  I believe Elyn had quoted this separately.  Our “air” price does include this, and I’m 100% certain your quote does not include this.
-        Make sure that your quote includes customs clearance fee on both ends as our price covers both.
-        Our price is DDU, we’ll deliver this to your facility.  I know your price does not include this.
-        I’m not sure if your freight quote is based from Shandong…?  Sometimes, people mistake this for Shanghai.  There’s no direct flight from Shandong to D.R.  There is also no direct flight from Shanghai to D.R.  Everything must be routed through the U.S.  However, there’s one more hop from Shandong to D.R. as the flight must stop over in Shanghai to pick up more load.  If your quote is from Shanghai to D.R., it is naturally less costly.  But this will not work…
-        Does your freight cost includes insurance?  Even if you provided a value to your freight company, it doesn’t mean they’ve put insurance on this.  Better check on this as our price does include insurance.

If after everything is added up, our price is still that much more, then I must urge you to do what’s right for you – save money.  Why pay more to get the same thing.  However, if our price is marginally higher, and that you do see the value in having us handling the shipping so you can save the hassle, I’d really appreciate the opportunity to be of service.

Friday, April 18, 2014

State of e-Cig Supply Chain in China

Just to share a little bit of my thoughts regarding the state of e-cig supply chain in China; this is after a couple of months of research and experience.  As you are very aware, most of the e-cig factories are stationed in the Shenzhen area.  This is a very typical “Chinese” pattern.  For some reason, Chinese factories (and sellers) like to be around friendly competitors and reside in a conclave.  This is a cultural thing.  You’ll find many different industries with the very same behavior.  There is a huge benefit of this type of social behavior: your competitors (counterparts) can readily become your partners when there’s a big order.  And most of them will need this type of symbiosis in order to get big orders.  While this works out great for these suppliers/sellers, it doesn’t bode too well for the buyer.  It means whatever trade secrets you have will be wide open; everybody in that tight-knit community will know about you.  What you buy, how much you buy, how picky you are, and type of turn-around you need; basically, everything there is to know.  The worst down-side is that when they see your volume steadily increase, some part of the community will start to make knock-offs.  And as you know, they are not going to use the top quality components that you use.  In the end, you lose market-share to the knock offs, and they decrease your profit margin once they start to surface.  Worst of all, the inferior components used in the knock-offs will damage your brand trust and identity.  Such event is very difficult to circumvent as your designated supplier does not have control over this.  Since he may be buying components from all the different members in the community, everybody in the community knows how much you are buying.

And this is what’s going to set us apart as well.  As we’re familiar with this unique Chinese ways of doing things, we have already established a very different type of supply chain from the get-go about a decade ago.  Our supply chain management is more western and much less community-based.  Whatever we are doing, our suppliers will only know a very restricted portion – enough for him to do his job.  And we never buy from a community.  When we find a supplier may possibly belong to a community, we usually dump that supplier.  This way, our buyer’s trade secret remains safer.

Personally speaking, I think the e-cig supplier market in China is headed to an implosion.  Something big will happen soon where a lot of the suppliers will disappear and then a new crop of suppliers will emerge.  The disappearing and re-appearing may mean a lot of buyers will be affected.  Some will lose money since they can’t locate their original suppliers while some will have disruption of product and many need to start brand new with new suppliers.  The root of this problem may just be the very close-knit community they have built.  And…  I think both China and U.S. will start to regulate this e-cig sooner rather than later.  That will have a major impact on the supply-side of things.  Right now, the international express thing is dominant.  Once the loop-hole is closed up, then this trade will be much more normalized and stablized.  This is my personal feeling, we’ll just have to wait and see what happens.

Saturday, March 1, 2014

Buying Directly from China

I wrote this post about six years ago.  Since then, majority of U.S. buyers have become much more discriminate shoppers.  However, recent encounters with a couple of new customers have me thinking about this exact same topic...

• Overview.
Overseas printing is very unlike printing domestically in the U.S.; overseas printing is half printing and half transportation. With the inherent nature of printing each single job is highly customized and very different from another, difference in perceived values in quality, language, and lack of market-recognized standards overseas, choosing your next overseas printing factory may not turn out to be as easy as buying that Nintendo Wii on the Internet. Buying anything overseas carry its own benefits and risks. With overseas printing, the process is many times more complex than most people recognize. The decision to buy overseas printing directly from China should not be based on the lowest price alone or the myth that "because you can, you should." There should be multiple and well-thought through considerations before this action is undertaken. Just exactly what are the risks and benefits?

• The Benefit of Buying Direct.
To most people, at least on the surface, it may sound like a wonderful idea. Cut out the middle-man and get better pricing. While this can be true in certain other products, in the highly customized business such as printing, there might be more than meets the eyes. This benefit stands out singularly as the number one and most common reason for U.S. buyers wanting to buy direct. The Internet, and its many search engines, has made finding potential factories much easier, but the Internet cannot shield you from the many risks that are involved in buying direct.

Nonetheless, the single and most attractive benefit of buying direct is a perceived lower pricing.

Is this true? While on the surface, it is hard to argue against it. But add in other factors such as possible lower quality, additional customs and transportation fees, and personal time and resources spent, the final costs may not always point to buying direct as the lowest price winner.

• The Risks of Buying Direct.
Before the advent of Internet (and e-commerce), buying something out-of-state is strictly in the realm of mail-order catalogs. The power and versatility of Internet have helped to narrow the distance between, say a store in California and a seller in New York. With globalization, buying direct seemingly feels like buying from an out-of-state vendor except with even lower prices! While this is not entirely false, many consumers neglect to remember that although the Internet and globalization have bridged the gap of a domestic buyer with overseas vendor, buying direct from an overseas vendor is governed under different sets of rules and transacted in different ways.

Overseas printing is international trading, not interstate commerce. In the case of interstate commerce, both the buyer and seller are protected under the same laws. Common shippers such as UPS or FedEx is used to deliver the goods to the customers. In interstate commerce, industry customs and quality expectations are commonly shared by seller and buyer, there is less room for the unexpected. Furthermore, in the interstate commerce scenario, both buyer and seller speak the same language, so there is a lesser likelihood of miscommunication and misunderstanding.

While international trading isn’t exactly "Indiana Jones," nor do you want it turned into an "adventure," in international trading, a whole lot more is involved most of the rules are more complicated and very different.

[-] RISK. Common Seller Tactics: Low Ball Pricing.
To get the attention of U.S. buyers, many overseas factories will offer a "low-ball" pricing first. Once they have eliminated most of the competitors, they will gradually increase the overall quote. Not very different from how it’s done in the car selling business here in the U.S.

Since overseas printing is not just simply printing, and the standards are very different between the U.S. and overseas, there are many wiggle rooms for these overseas factories to play with when it comes time to increase prices. Unlike shopping for a car, when the buyer knows exactly how much to pay for the model and equipment desired since everything is manufactured by the same car maker with exactly the same quality, there can be many different variation in the end product from one overseas factory to the next. And it is exactly the nature of printing, highly customized and imprecise, that lends itself to such different variation in quality.

As most people may have some past negative experience being caught in the low-ball pricing strategy of unscrupulous car dealers, the same downward-spiraling and self-perpetuating force will just as easily entangle unsuspecting U.S. print buyers into a ditch that only money can fill. Money in additional cost to get the job delivered in-place and on-time, or worse, money to redo the job elsewhere or domestically.

[-] RISK. Common Seller Tactics: Bait and Switch.
To lower costs, many overseas factories will put in leftover or inferior paper into the job. While the term "leftover" is not a reasonable one as anything can be considered as "leftovers" once the seal on the paper is broken especially when it pertains to "house stock." In this instance, it is used to describe the practice of using actual leftovers from a previous job where the cost of paper had already been paid for despite the fact the paper (weight or grade) may be different from what the current job calls for. Needless to say, this will save the factory quite a bit of cost since such "fillers" have already been paid by the previous job.

Or worse, an inferior paper will be ordered to fulfill the job. A few hundred copies will be printed using the paper specified in the quote, and those will be either sent to the buyer in advance of the ocean shipment or on the top of each carton. Most U.S. buyers will look at such an unethical practice with disbelief, intentionally or not, they are being practiced in China.

Unlike most developed countries, such as U.S., where the paper industry is populated by paper mills with a more homogeneous demographics in size and capability, the paper industry in China is still very polarized. On one end, there are the gigantic foreign and state owned paper mills that produce most of the paper used in China. On the other end, there are tons of small companies, even home-based businesses in small villages, that produce very cheap paper. On the average, paper is about 40% to 60% of the overall printing price, so the source and quality of paper can very easily affect the overall cost of the job.

[-] RISK. Common Seller Tactics: Freight Excluded.
Many overseas factories will quote a price based on "will-call" or just ship to the port of export. Buyer is left on his/her own to take care of ocean freight, customs, and everything else that comes with importing. While this sounds outlandish, many U.S. buyers have "compare and shop" print orders based on lack of understanding in international trading.

    The term "EXW" means the goods will be in the factory for buyer to pick-up; this is similar to the "will-call" in U.S. Many factories like to play this game. They first offer a rock-bottom price. Once the job is finished, the buyer will be very likely to pay the added costs for transportation. By doing this, the factory, in effect, lowers the overall price to lure in the buyer. By having paid some form of deposit, the buyer is stuck with this factory and will usually resort to paying the added cost for all freight charges. On smaller printing jobs, the cost of freight might be a big chunk of the overall price.

    The term "FOB" means the goods will be shipped to the port of export, and the buyer will have to arrange for all the subsequent transportation. This is usually favored by buyers who have frequent and high volume orders; otherwise, the headache and cost of arranging for everything else that comes afterwards will easily make a grown-man cry.

    The term "CIF" means the job will be shipped to the named port of entry. While this may sound like a relief compared to the above two, there are still many other costs associated in getting the shipment out of the port and into the buyer’s hands. While it is not complete, this should be the very minimum that an overseas factory should based its prices on. Unfortunately, to calculate CIF price involves knowing the total weight, volume, pallets, etc. of the job in question and finding out the different freight charges to the named port of entry, many overseas factories just don’t have the resource, time, and patience to go through with this for buyers who are just shopping around.

    The term "DDU" means the job will be shipped to buyer’s door with the buyer responsible for duty. The term "DDP" includes shipping to door with duty paid by the shipper (factory or trading company). Needless to say, DDP is the best and most secured way to go for U.S. buyers. Although usually not offered on small to medium jobs, buyers with large jobs should always demand this.

Keep in mind that even with an agreement signed by both party with the shipping term clearly specified (i.e. DDP), there are many instances where the factories will back out of the deal and change the shipment to CIF, or worse FOB, because they later found out that the cost of shipping to the buyer’s door is much higher than their original estimation. Unfortunately, this news is usually not revealed to the buyer prior to receiving the deposit to start the job.

What can a buyer do if the overseas factory changes its original term of shipment? The sad truth is that there is not much anybody can do. While international court is always a possibility, or even trying to sue the factory in China may be considered, the factories who make this kind of practice for a living have already calculated that such possibilities are very slim as the cost, time, and complexity involved in such actions are well beyond the cost of the job in question. This is especially true for small to medium sized jobs.

[-] RISK. Buyer Expectations: Paper Quality.
Since the paper specs used in U.S. and Asia are very different, many overseas factories will use lesser grade/weight paper to quote a job without fully explain to the U.S. buyer the difference in paper weight and quality.

Compared to the U.S., paper selection in China is very limited. The main reason is the domestic Chinese market has not yet risen to a level where demand for subtle difference in paper quality and style is desirable. Since paper is about half of the overall printing cost, using the right paper for the job will make a big difference in the overall pricing.

U.S. buyers must be aware of the difference in paper they are buying into. The only way to fully appreciate and then accept the difference in paper is to get the exact paper sample the quote is based on. However, unfortunately, since "bait and switch" is a common practice with some overseas factories, one can never be really sure if the paper sample received will be the paper used on the actual job.

[-] RISK. Buyer Expectations: Shipping and Logistics.
Many U.S. buyers erroneous believe that shipping from overseas is like getting stuff shipped via UPS Ground from a different state. The export and import process is complicated beyond belief. Not something to be taken lightly for a once-a-year purchase.

In addition to the complex shipping terms described previously (i.e. FOB, CIF, etc.), each shipping term will bring forth a different set of documentation to prepare, fees to pay, and people to push the shipment to the next stage. While it is beyond the scope of this writing to fully detail all the intricacies involved in the logistics side of overseas printing, it is worth noting that when a shipment is not guaranteed for delivery to door, an inexperienced buyer can expect to be entangled in the import quagmire that, unfortunately, even the professionals may sometimes find difficult to handle.

[-] RISK. Buyer Expectations: Communication.
With the factories advertising themselves on the various Internet search engines, most U.S. buyers are lead to believe that the same factories will be able to communicate with them and attend to their needs in a professional manner. The matter of fact is that communication barrier is usually the root cause of most of the issues relating to unsatisfactory results at the end of the job. Just because these factories can translate what they do into the English language, it does not necessarily mean that they can interact with the U.S. buyers in a professional and real job setting.

Most overseas factories do not have qualified printing professionals with competent English proficiency. Printing is considered as a "traditional" industry in China, younger generation with the English skills usually choose a relatively more "modern" profession; this fact alone causes a lack of qualified printing professionals with adequate English skills. To make up for this deficiency, most factories who hire new graduates with basic English skills who cannot get jobs elsewhere. In turn, these workers are really translators than real printing professionals. Due to the fact that the printing industry is usually not their first-choice of profession, the turn-over rate is very high as soon as they can find a more "likable" position in another industry, they bolt. This turn-over makes it very difficult for them to learn on the job and eventually become a qualified printing professional; furthermore, it makes it difficult for overseas buyers to develop a working relationship since the point of contact changes all the time.

While these young workers help the overseas factories "translate" U.S. buyers’ communications, the translation is always imperfect. Due to the lack of knowledge in printing and U.S. market, there will be many miscommunication of buyers’ wishes and specifications. Domestically in the U.S., as any experienced print buyers will attest, even with the best intentions, there are always miscommunication that will make the job turn-out in an unsatisfactory manner. This miscommunication problem takes place between real print professionals and buyers here in the U.S., speaking the same English language with the same understanding of the market demands and technical requirements. The same problem will certain takes place between an U.S. buyer and its overseas factory working under even more difficult conditions difference in perceived values, traditions, quality, etc& Add in the overseas point of contact’s inadequacy in English and understanding of U.S. market, it is quite a wonder, if not miracle, that any job would get produced as the U.S. buyer had originally envisioned it.

[-] RISK. Buyer Expectations: Quality of Printing.
Most overseas factories print based on quality standard for their domestic market, which is really, really, really different from what the buyers in U.S. are used to get from their local printers. This is not an unreasonable phenomenon as different markets and culture share different values on the abstract idea of "quality."

Despite of its recent economic booms, China is still a developing country. Although millionaires are on the raise, especially in big metropolitan areas, the vast majority of the population still have a relatively lower standard of living. For most of citizens in China, a colorful catalog that has nice looking pictures will help the merchant move stuff off the shelves. There is very little demand for quality printing that really brings out the details and the quality of the products being sold. As long as it’s in color, everything is fine. This value is definitely not shared among the U.S. population.

To go further in appreciating the difference in perception of quality, one must accept the premise that a printing factory’s majority business comes from local customers. This is true in the U.S., and it is also very true in China. With this accepted fact in mind, a buyer can then better understand the fact that most of these overseas factories produce jobs to cater to local market demands rather than their rare overseas orders. No printing factory in China can live on overseas orders alone. Furthermore, it should also be common sense to understand the fact that "quality" is not a switch that can be turned-on for overseas order and turned-off for local jobs. It is a philosophy shared by individual employees who are mentally aligned to the same goal to physically turn this abstract concept into tangible products that they produce.

So, the simple conclusion is that factories who do not have the proper quality training and understanding of the U.S. market will not be able to produce jobs that are acceptable here in the U.S. The only way to rectify the situation is for the buyers to lower their expectation of quality. Sad but true.

[-] RISK. Facts: Packing up the Shipment.
This is the most commonly overlooked item in the entire overseas printing process. Many jobs arrive in the U.S. damaged or becomes liable for additional freight and customs costs due to lack of knowledge and experience of the factory in question. Details from the material of the cartons and pallets to how and how many are packed per packaging unit will determine the final quality and cost of the shipment.

For inexperienced and insincere overseas factories, this is also one of the many ways to cut back on their own cost since they do not suffer the consequences of their fallacies. The U.S. buyer will end-up with inferior products at added costs that the factories will never be legally bound to remedy.

[-] RISK. Facts: Exporting from China.
For exports in China, the printer must have the necessary government granted license to publish books and export print collateral. Without these, the job must be handled through a third-party trading company that knows nothing about printing.

The down-side of this is that the party who is doing the manufacturing is not handling the exporting, and the party who’s handling the exporting wishes to know nothing about what the job is. If something should go wrong, and they often do, there will be a lot of finger-pointing in a language and custom that no U.S. buyer will understand. Furthermore, financial transaction is made more complicated, risky, and takes longer in this situation. Buyers should expect a longer turn-around time for all parties involved to clear the payment before job begins and/or ships.

Unfortunately, the majority of factories in China fall into this category. Licenses to legally print books, magazines, and catalogs are awarded to bigger factories only. Export licenses of the same print collateral are even harder to get. The only way that so many factories can get overseas orders are to print the job illegally and then export the job through a third-party trading company.

While this is a common practice, and the government officials usually turn a blind-eye to this, there are many instances where the same officials, both city inspectors and customs officers will extort the factories for money under the table in order for them to keep conducting their businesses illegally. This is at least an annual event. The problem with that is if your job should get caught during these "special events," delays are very likely as everybody has to negotiate to an agreeable fee.

Even with the "protection money" paid, higher-up government local officials might sometimes jump into the foray and demand "proper documentation" be presented and certified on export items in order to conform to the demands and guidelines of the central government. The term used to describe such an activity is "anti-piracy." When an anti-piracy event takes place, the U.S. buyer will be required to furnish many different types of documentation to prove that the factory contracted to produce the job, and the job in question, is indeed legitimate. While most people think this may not be a huge problem, it will definitely take up weeks of valuable time as the demand for the proper documentation will needed to be prepared, translated, submitted, inspected, and certified. More often than not, the entire job will needed to be translated into Chinese by a government agency that handles translation to ensure that there is no "conflict of interest." When this happens, the entire process may be measured in months instead of weeks. This is usually a result of smaller factories not experienced with exporting print collateral. It may sound far-fetched, but when it happens to your precious and time-sensitive job, it’ll feel like you are in the movie "Midnight Express."

[-] RISK. Facts. Importing into U.S.
Not because everybody is doing it, so why shouldn’t you? And not everybody is doing it.

Importing in the U.S. is one of the best and easiest in the world. There is no corruption in the system unlike other countries. Although some of the fees associated with importation is unreasonably high, and some are just plainly "unreasonable," such fees are collected routinely and legally by the various agencies and companies that are linked to the shipment in question. Despite the facts, the term "best" an "easiest" are very relative. Importation still involves quite a bit of work and money.

For instance, even the most experienced customs broker will erroneous classified the shipment in the inappropriate customs category, and, in turn, a higher fee is assessed. This has a lot to do with the experience and willingness of the customs broker to go to bat for the buyer; how the exporter (factory or trading company) prepares the official documentation also have a great deal to do with this.

When importing goods into the U.S., the buyer is usually the "consignee" of the shipment. For an experienced importer, this should not be a major issue. For others, the label "consignee" carries tons of both responsibility and liability. Needless to say, there is always money to be paid to someone in order to get the shipment delivered this is true even if the overseas factory specifies the quoted price is "to door." There are certain fees pertaining to getting the shipment into U.S. and to your door that the overseas factory just cannot handle even under the best of intentions when the buyer is the "consignee" of the goods.

[-] RISK. Key Issue: Legal Liability.
Not a concern for overseas factories. Buyers are on their own.

While there may be some forms of legal recourse should the U.S. buyers seriously wishes to navigate through the complex and often futile course of international and/or Chinese laws, this usually is not classified as a "last resort." If something should go wrong, it is usually resolved based on the integrity of the overseas factory in question. In other words, it is entirely up to the overseas factory if it wants to resolve any issues with the U.S. buyers. This is the greatest risk of all. When an U.S. buyer ventures overseas, not just to China, but anywhere in the world, the risk of not getting what was paid for is always there. Different countries have varying degree of such a risk. While the focus is on China right now, it can just as easily happen in India.

Overseas printing is international trading. It has all the risks involved with international trading and more. The fact that every job is highly customized and being produced in a country that has all the different standards and values as the U.S. makes buying overseas printing directly that much more risky.        

Tuesday, February 11, 2014

The Chinese Holidays

In answering a client's question about holiday schedule in China...

There are actually three big holidays in China every year.  The biggest and longest one is the Chinese New Year.  The other two are: Labor Day in May and National Day in October.  Officially, the latter two is a three-day holiday.  But unofficially, it is a bit longer. 

The worst part is the disruption and discontinuity.  Not so much the actual holidays themselves, but the fact that the Chinese government move weekends around to string a two or three day holiday into a week-long super break for its citizens.  While this is fine for domestic businesses, since everybody will be on-and-off at the same time, it is very disruptive for international trading. 

For example, if the three-day holiday starts on Tuesday and goes through Thursday, the government would have people work on the previous Saturdays and Sundays so that they can take Monday and Friday off.  This would mean the citizens get a seven-day holiday schedule instead of three.  Make sense?  This is what the Chinese government called: China-styled Socialism.

In any event, the two minor holidays starts around the first of the month in May and October, and officially, the holiday is a three-day break.  But do expect a possible one or two days shift before or after the designated three-day holidays.  Every year is different, and the schedule is not announced until a week or two before the actual holidays.  So stay tuned, we’ll keep you updated as we get closer.

Thursday, January 23, 2014

Exporting out of China during Chinese New Year

Exporting out of Shenzhen during Chinese New Year?  For the decade plus we've been exporting from China, Shenzhen Customs is always the first to leave for the holidays, that's despite the official holiday schedule as posted by the Chinese central government.  This "leave-early" ritual has become a regional way of life in Shenzhen.

For the very same reason, all shipments going through Shenzhen customs will needed to be "greased" more than usual.  That's also early "red envelopes" for these customs officials.  We've had shipments not able to squeeze into export warehouse and had to pay-off customs officials.  And then we've also had to pay the same officials for shipments already sitting in export warehouse waiting to be loaded onto ships.  No matter where your shipment is, just be prepared to pay through your nose to get them out.  No...  Not just before the Chinese New Year, but thanks to these people leaving their posts earlier, they've artificially created a rush to ship environment where it kind of justify greasing their palms.

The new leadership in China had promised to cracked down on corruption and seems to be doing just that.  But that's right at the top of the food chain.  The underlings see this crack-down as their count-down timer to the extra earnings that might eventually disappear.  This may account for why they are so much more aggressive now than ever.

In our situation, as of this writing, it is already too late to ship anything out of Shenzhen.  We had to spend our own money to truck the shipment from Shenzhen to be exported through Shanghai.  And yes... Shanghai customs officials are still working, right up to the designated government sanctioned holidays.  The problem now is all the traffic on the highway may not make trucking shipments around very efficient...

Oh... Chinese New Year...  Worst time of the year for exporters.

Sunday, July 21, 2013

Eaten Alive by Parasites in China

Congratulations!  You've finally set-up a company (office, or presence) inside China.  It took a lot of planning, hard work, and money to finally get this launch.  Now you are a bonafied multi-national company.

With your brand spanking new China company, you've offloaded the mundane, if not painful, tasks of communicating with your overseas factories from your internal operations here in the U.S.  The prospect of saving even more costs is also worth celebrating.

But not so quick.  You might want to pay extra attention to your Chinese operations before you ride off into the sunset...

I've been doing business in China for over a decade.  Like you, I also have a company set-up in China that does all sourcing-related work.  However, it took me years of trial and error to get all the issues worked out.  These issues have costed me a log of money and grief.  I am going to share some of these with you here today.

First and foremost, I am a Chinese-American, a naturalized U.S. citizen.  So I speak fluent Chinese.  I even have relatives in the greater China region.  So when we started doing business inside China, it felt like a natural extension.  With the ability to become one of the natives, it was going to be pieces of puzzle coming together.  Naturally, if you do not have any Chinese heritage, or your contacts to China is really a friend of a friend, you'll probably want to raise your internal alarm level a few notches higher...

From when we started to outsource to China in 2001 till just as recent as a few months ago, there is one scam that seemed to have repeated itself many times.  It is a favorite amongst Chinese people dealing with foreign buyers.  And yes, even having a presence, office, or company inside China does not make you immune to this.  

Today, we have a company partner permanently stationed in China overseeing the management, and a very, very strict certification process for all of our supply chain that had been continuously evolved and improved over the decade, but even under these circumstances, we still experience this common "scam" being applied to us.  Of course, nowadays, we have the benefit of an early detection system that steers us clear from this potential threat.  However, I am seeing many new comers to this game falling prey to this unethical and ruthless scam.

Like cancer, in the early stages, you will never feel anything is going wrong.  As a matter of fact, you may live with this your entire life and not skip a beat.  However, should something of a higher magnitude that goes awry, such as a product quality issue, the interconnections that built the scam may easily break and you'll end up to be the last one holding the bag.  Of course, the scammers have all the incentives to keep the scheme going as long as possible as they profit from it. Although some unforeseen event may cause a domino effect to unveil the gruesome truth, the biggest and most common revelation of the scam is not due to unexpected surprises such as quality issues or delays in shipment.  The biggest motivation for the scammers to end the scheme often times is when a big order that's coming in.

How "big" is big enough?  There is no set rules.  It depends on the experience and appetite of the scammer in question.  Some inexperienced scammers will settle for petty amount as they are still building up their skills.  But if you are among the less fortunate ones, the more experienced scammers will truly wreck havoc and have dire financial consequences.

OK.  What is this common scam that should be feared like a plaque?  It is simply a form of embezzlement.  Due to the unfamiliar and very complicated Chinese legal structure, and most of all, the overall environment where most people only care about making money and not ethics, this scam is allowed to flourish unchecked.  These scammers usually get away with respects from their peers because of their ability to lie and deceive, and most of all, to suck money from their foreign hosts.  Their actions are often not prosecuted and never being looked down because foreigners are deemed as overtly rich and have to obligation to feed the Chinese population when you set up shop here.  In short, there is a lot of cultural and popular support for this type of scam, and that is exactly why it won't go out of style any time soon.  

There are two types of players running the same scam, each has a different role in your corporate hierarchy.  One is an external threat, the other is internal.  Unfortunately, it is entirely possible that they can co-exist at the same time.  Although they are two distinct forces, the end-game is the same -- embezzle your hard-earned money.

Here's the definition of "embezzle" according to dictionary.com:


to appropriate fraudulently to one's own use, as money or property entrusted to one's care.

1). The External Parasites. You are buying directly from a Chinese factory (from U.S. or within your China operations), and due to some export or other B.S. so-called new Chinese laws, you are directed to pay a third-party export company as the factory may have its own export license temporarily suspended or revoked.  While this is not technical wrong, as many factories may not have the necessary export license and go through trading companies that does nothing but export, the key to watch out for is the sudden change of payee.  You might receive tons of assurances from your factory rep about the need to start going through a trading company due to whatever reason, but in the end, it's just part of the scheme.

Premise: As with any corporate entity, a factory is not a person.  Most buyers end up dealing with a factory rep; this rep can either be a sales person or customer service.  The person in question of parasitic actions is the very same factory rep.

Symptom: Sudden change of payee.  If you have been paying directly to the factory and were suddenly redirected to pay a third-party company, no matter how legitimate the reason may seem to be, you must be on guard for possible fraudulent activity.

Structure: The factory rep may have set-up a company on his own on the side.  This company is usually the new payee.  Instead of you paying directly to the factory, now you are literally paying a broker to handle your orders.

Problem: While going through a broker is not really a huge issue, being deceive and defrauded is.  The factory rep who redirects your payment for personal gains set you up for two possible problems:

          #1: He may just take the money and run.  When the order is big enough, with the huge deposit that you've wired, it may just be enough for him to quit his job and disappear.  When this happens, your money is just wiped out.  Since the factory did not receive your deposit, and the rep is nowhere to be found, there is no way the factory is going to be responsible for this.

          #2: Assuming the payment went through, the factory rep and his own company turns around and pay the factory to get the order going (while keeping his own cut), there is still another potential danger brewing.  As with everything made in China, quality consistency is always an issue.  If something should go wrong, and you demand the factory rep to remake the product, it just may not work out.  You are technically NOT the buyer.  Factory is receiving funds from his own rep's company, so that company is technically the buyer.  Factory is not obligated to you to fulfill your demands.  On the other hand, the company set-up by your factory rep is too small to make any demands.  You will be left powerless to do anything.  You either accept things as they are, or see your factory rep disappear as there is no way he can shoulder the cost of a redo.

Sustainability: The above scam isn't going away anytime soon.  While the foreign buyer always ends up losers, many factories actually welcome, if not encourage, this type of transactions.  For the factories, since all these reps are just employees, and all employees come and go all the time, there is no permanent attachment to them and their well-being.  Factory is motivated by the fact that these scams run by its own employees actually set-up a shield between you, the buyer, and the factory.  The factory now does not have to deal with you, and if anything should go wrong, it'll be the responsibility of the factory rep and his fake company.  Factory can just focus on manufacturing and collect money.  

Furthermore, this type of scam is so common in China, these so-called factory reps move from one factory to the next on a regular basis, no factory will actively discourage, or prohibit, this type of action in fear of damaging its own reputation.  If there should be a case where things really blow up, factory can just as easily put all the blames and responsibilities on the factory rep and his scam.

2). The Internal Parasites. The second scenario is less obvious and much more probable.  Your China operations has taken over the sourcing tasks that were previously performed by your U.S. staff.  Everything seems honky-dory and everybody is happy.  Small and odd issues will start to creep up.  Initially, you'll just write it off as part of doing business in China.  But then things will take a dive for the worse.  You'll start seeing a pattern developing behind different issues that were thought not to be connected.  When finally, the shell cracks open, and then you finally realized that you've been duped by your very own China employees.

Premise: You have your own China operations with native Chinese employees.  They are eager to prove themselves to you.  You may have already set-up some sourcing and/or procurement channels to avoid having unproven employees going astray.

Symptom: Your employees will start presenting cases where they need to source products through established channel for various reasons.  Or worse, if the China operation is set-up specifically to do sourcing, your employees might not need to identify who they source to.

Structure: Your employee will benefit from one of two ways, depending on his past experience and expertise:

          #1: Kick-Backs.  This is the most common form of internal embezzlement in China, from government officials down to the common peasants.  This has a very long and deep-rooted history that is now embedded in the Chinese DNA.  Your own employees is in essence getting a commission from your vendors.  This is not just limited to new vendors that your employees may have set-up, if experienced enough, your employees might still be able to manage to get a cut from your established vendors.

          #2: Your Employee is your Vendor.  Your employee might very well set-up a company and become your vendor.  Or he might get his relatives or friends to do the same.  In any event, you'll pay this vendor, and he'll keep his cut and then buy from the real vendor.

Problem: With kick-backs, you will experience less of a problem when a quality issue arises.  You are still working directly with the factory.  If there is any discrepancy in quality, or even payments, the employee in question will simply not be able to receive the kick-backs from the factory.  However, when your employee becomes your vendor, you will run into exactly the same problem as mentioned previously: 1). He may just take the money and run on big orders, or 2). When a quality issue becomes big enough, your employee may keep the money and run since he has no real negotiating power with the real factory.

Sustainability: As far as kick-back goes, it is difficult to prevent it.  The overall culture views this as a legitimate part of a person's income; everybody is doing it.  Although we have been able to minimize this to about as unlikely as possible through many different management check points and education, we are still not 100% certain that we have totally eliminated this in our own company.  By the same token, while it may be technically more feasible to detect when your employee decides to become your vendor, this form of embezzlement is still very common in China. It is viewed with less of an ethical violation than kick-backs since all transactions are supposedly legal buying and selling between businesses, except, of course, the apparent conflict of interest.

Domestic Chinese businesses who are also prone to have their blood sucked out by these parasites have more leisure perspective: "if you can't beat them, join them."  This type of reaction usually stem from the exact same motive for profit as the scammers themselves.  Many factories in China, once they find out their own sales people have been diverting customers' order and payment to a third party company, will usually turn around and work with the sales staff as a team.  Instead of losing the business, the factory will unofficial recognize the sales staff as a third-party company concurrently.  By doing this, the factory will be able to keep the order at the same volume and profit, and best of all, builds a firewall between the customer and itself in case a quality issue arises.  As a matter of fact, factory will receive the greatest benefit among the three parties involved.  Instead of prohibiting this type of activities, the factory becomes a more-than-willing collaborator in the scheme.  And this is exactly why that this type of behavior will not cease to exist.  As long as the factories directly or indirectly encourage their sales force to scam the foreign buyers, we will never see an end to this.

Don't look to the Chinese law to protect you from all different types of embezzlement - unless the amount is so high it's newsworthy, you are just at the mercy of such parasitic actions.  Recently, with the new political leadership, the government seems to be cracking down on state-level corruptions.  While this has tamed government officials, it has relatively little impact on businesses.  To your average factory rep and employees, this has even less influence on what they may decide to do to you.

There is no complete solution to guard against these parasitic actions.  They are not exclusive to China either; any developing country will exhibit similar behaviors.  It is not that China does not have the laws to regulate against such criminal activity, it's just that they are never enforced.  This has more to do with the overall culture rather than lack of legislation.  When personal morals and professional ethics are usually trumpeted by profit motive alone, there is not much that the buyers can do.  The result of all these fraudulent activities is that your costs will continue to rise, and accountability continues to diminish.  You'll eventually hit a point where sourcing in China, or operating in China, becomes too expensive or problematic.  When you arrive at this point, you've pretty much taken yourself out of the competitive global market.  And don't even think about moving to India or Vietnam.  If you can't work within the China system, you won't have a chance with even less developed countries.

For our part, we have developed a system where all of the above activities can be greatly minimized.  If you do not own a China operation, we are also able to help you to ensure that things are on the up-and-up here in China.