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:

embezzle

 
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.

Saturday, July 20, 2013

Alibaba Offline - Yiwu International Trade City (义乌国际商贸城)

Many of you have seem me criticize Alibaba - while a good source for starters, definitely not a dependable or long term channel for serious sourcing strategies.  Today, I'd like to introduce a variant of Alibaba.com.  Unlike its cyber counterpart, this is a real place.  A destination in China that you can physically visit.  A city inside China that any serious sourcing strategist would surely have to know about.

Yiwu is a small city located in the central region of the Zhejian province.  It's about 342 KM (213 miles) south of Shanghai; a two plus hour ride via high-speed train.  The city was founded 222 B.C.  It had traditionally been a city for merchants since ancient times.

There are no historical remanents in Yiwu; there are no sky scrappers there either.  In its current form, it is a vast expanse of typical Chinese buildings.  Despite of its rural appearance, it is one of the richest cities in China.  Average household income and concentration of luxury cars both ranked the highest in China.  Yiwu is one of those unofficial special economic zones within China that makes tax evation a household activity.  For some odd reason, the central government is turning a blind eye to this well-know activity in Yiwu.

Native Chinese merchants have a very high regard for Yiwu; this is "the" destination for small Chinese merchants to buy their goods from.  It's notoriety is bigger than just within China - it is certified by both UN and World Bank as the biggest wholesale marketplace of gifts and crafts in the world.    

So, if you haven't heard of Yiwu, China, consider yourself schooled.  But don't feel too bad, being a Chinese-American, I have not heard of Yiwu until my second year doing business in China.

Yiwu has also become a popular destination for foreign buyers.  Unfortunately, for all the wrong reasons.

Most foreign buyers, when they land in China, are told that Yiwu is like an off-line version of alibaba.com.  For a handful of products, yes, it might be.  But it is really not made for foreign buyers.  Yiwu is a B2B wholesale market while most foreign buyers are looking for factories.  90% of the merchants occupying the Yiwu International Trade City megaplex are wholesalers and trading companies.  The 10% who are actual manufacturers are very small-scaled, garage type operations.  Of the 90% wholesalers, more than half are freelancers.  This means that these freelancers are not really wholesalers.  They just have enough merchandise to decorate their storefronts; they don't actually own any inventory. 


My trip to Yiwu took place in 2006.  Arriving at the main attraction of Yiwu International Trade City megaplex before most of the sellers started their day.  If you ever go there, the sight of the megaplex itself may just be worth the trip.  It is huge; it is made up of five four-story buildings.  Traveling from building 1 to 5, on a single floor, walking on a very fast pace, took me a good two plus hours.  That is, without stopping to see all the different merchandise on display.  By noon, hundreds of buses start to fill the even-bigger parking lot.  The buses are not carrying your average tourists but small merchants from all over China with cash ready to buy.  They are making their annual or semi-annual pilgrimage to Yiwu to replenish their stock. In essence, in some ways, it is like a glorified B2B flea market.

Wholesalers in Yiwu International Trade City megaplex are also one of a kind.  They are not there to exhibit, they don't have samples to give, no price list, they are there to sell.  So, if you are not coming with cash and orders, consider yourself not welcomed.  At least, this is how I was forewarned and then physically experienced.  At the end, it is a cash-and-carry wholesale market.

Storefronts in this megaplex are mostly tiny; many no bigger than a 10x10 tradeshow booth; tens of thousands of such storefronts are packed into the megaplex.  In some ways, the collective resembles a beehive.  Many storefronts will carry the same products, with almost all of them claim to be the real and original manufacturer of the product but none is telling the truth.  Don't forget, most of these sellers don't have real inventory, they will get the products from one of their real suppliers when they have an order in hand.  These stores are there to wheel-and-deal.  If you have an order ready to place and cash ready to pay, you'd be fought over like a seal in a shark tank.  Otherwise, you'd be lucky if anybody would spare you a second look.

We have had a previous experience contracting "the" biggest plastic manufacturer in Yiwu to produce an order.  While the pricing was competitive, not the lowest, the quality is extremely lacking.  First of all, factories in the Yiwu area are home and garage based operations.  These factories are not set up to innovate with new manufacturing techniques, rather, they are there to produce the cheapest goods possible with the cheapest methods.  Since their main customer - domestic Chinese retailers, do not care about quality, Yiwu factories are trained to cut corners in order to bring the costs down.  For export orders, this type of manufacturing culture is just not compatible.  And then, there is the overwhelming majority that are not real factories but trading companies.  It is next to impossible for any foreign buyer to tell them apart.  Even if one is taken for a factory tour, they may still not be who they say they are.

In the end, Yiwu is a fiesta for Chinese domestic wholesalers and retailers.  The needs of foreign buyers will not be served properly.  While sites like Alibaba.com is populated with scammers, at least, they specialize in scamming foreign buyers.  Every once in a while, someone will get lucky and gets hooked up with a real factory with quality work and service.  




Thursday, June 6, 2013

Brief Intro of Our Services within China

Following is an exchange of emails between me a potential partner in crime.

I thought about our earlier communication in regard to the Volvo Fulfillment & Mailing you quoted for Zetweka last year.  You said that Beaconstar is able to do a lot of different products through partner companies in China and Indonesia.  Can you please let me have some information regarding the possibilities? 

My reply:

As you know, we’ve been working in China for about 10 years.  I have set-up a native Chinese company there; this is what differentiate us from everybody else.  With a local company set-up, we are capable of doing a whole lot more than trying to remote control everything from outside of China.

During with the years we spent helping our U.S. buyers source in China, we’ve established a strong network of logistics inside of China.  As you can imagine, lots of components to be shipped around the country for assembly or delivery.

About four years ago, we were approached by two existing customers to help them do distribution of supplies and mass direct mailing within China.  This is on behalf of their end clients who have business within China.  The distribution is for an international hotel chain, and the direct mail campaign is for an international cosmetic company.  Unfortunately, I can’t disclose the actual brands or who these customers are due to the NDA we’d signed.

From that point on, and referral after referral, domestic China distribution become one of our on-going businesses.  We would source and/or manufacture the items needed within China, and then take care of all the logistics.  As a matter of fact, I believe this is exactly how you and I hooked up.

We are no good for Indonesia; that’s about as foreign to me as it is to you.  However, our core competency is within the greater China region.  We have three regional offices throughout China and have been routinely servicing international and U.S. customers to fulfill the needs of the growing domestic Chinese market.

In late 2012, due to emerging demands, we’ve started another aspect of our service – consulting.  We are now not only helping foreign companies to do business in China, we actually and physically help them to:

-          Set-up legal entity (whichever format they desire) in China.
-          Human resource recruitment and management.
-          Accounting management.
-          Sourcing and manufacturing.
-          Marketing and advertising.
-          Production distribution, warehousing, logistics.
-          General management.
-          Sales training and supervision.
-          Government relations (important).
-          I.T. support and management.

Depending on the customer’s needs, we can help in whole or in part, or even just let go and not get involved unless asked.

By the end of this year, we’ll be launching another service for our international customers that will help them to bring their products into China mainstream retail channels (i.e. supermarkets, convenience stores, shopping malls, etc) with or without having a presence in China.

I hope this gives you a glimpse of what other services we offer our customers.  In addition to just plain sourcing, thanks to our established connections and networks, we are capable of doing a whole lot more.

What exactly do you have in mind?

Wednesday, June 5, 2013

Overseas Sourcing & International Shipping

A customer recently asked why we are marking up on shipping related charges.  This is at least the second episode with the same customer that resisted on sending the order in due to shipping.  The previous epsidoe can be found here.


In the field of printing, especially when it pertains to flexible packaging, it took me many years to acquire the necessary knowledge and pay for the mistakes to gain the experience.  To date, I've been in the printing industry for over 20 years.  I've started doing overseas sourcing in China since about year 2000, and like printing, I have to take the time and money to learn about international trading and shipping.  That's now about 13 years under my belt.

I never make an effort to hide that we are technically a brokerage company.  Although we are not an average broker who's really just a middle man.  I have companies set up in the greater China region to do sourcing, quality control, warehousing, and export.  So, I'd like to think we are more of a management company.  No matter how it's called, at the end of the day, I do not personally and physically engage in manufacturing of anything tangible.  The only thing that make money for me is my service.  In other words, my knowledge, experience, and connections that make an order competitively priced while always moving forward for my buyers.  That's it, nothing more.  You buy me, and everything that makes who I am.

I do not understand how you are willing to pay for the cost of management of manufacturing your products while you do not want to pay for me to manage the logistics.  International trading isn't exactly like shipping UPS Ground in the U.S.  There is a wide variety of things that can go wrong, especially to more exotic destinations all over the world.  And within China, there are so many games, tricks, and hoops that you have to go through in order to meet the projected delivery date.  One little thing that goes wrong may mean delay of days or weeks.  I am sad to say that I've experienced delays of two months due to improper logistics selection.  That experience costed me my best customer back then.  It would never happen again as I do not have that many customer to lose.  But the point is that even with such a high degree of confidence and experience in handling international logistics, we still get screwed every now and then.

Moreover, the physical activities involved in logistics is comparable to the resources we spend on managing the manufacturing.  A lot of customers think that shipping internationally is something that can be done online, like UPS.  But the truth of the matter is far from it.  As stated previously, there are many more components involved in logistics than manufacturing.  One single incident will just compound our work more and more.  So, please don't mistaken it for a push-button transaction.  There are more people to call, more documents to send around, in international logistics.  Managing manufacturing is relatively easier compared to this. 

The common misperception about international logistics is caused by the number of freight forwarders.  To be a forwarder, all one needs is a computer and phone; it is a very low-cost operation.  Hence, the high number of people who may be offering their services.  However, based on my experience, 90% of them are not worth your time.  Most of them basically piggy-back on bigger forwarders that much bigger volume.  Problem with these smaller forwarders is simple - when something happens, they become invisible.  Invisible meaning that they have no way to rectify the situation, and more often than not, they do not have the necessary information for you in a reasonable amount of time.  Believe it or not, in the past 12 months, we've dumped two of the top 10 ranked freight forwarders in the western region of U.S.  These two companies are huge; they do billions of dollars in business annually.  However, their ability to get shipment through promptly and correctly eventually caused them to lose our business.  We have very high criterion and expectation on the freight forwarders that we work with.

And as I tell all of my customers: Overseas Sourcing is half manufacturing and half international trading.  This is not a difficult concept to grasp.  However, many of my ex-customers and/or prospects may have elected to buy directly from China.  With that, they'll just gain the manufacturing half as most Chinese factories knows nothing (or not enough) about international trading.  I've heard many horror stories about manufacturing in China; I've also heard the equal amount of horror stories about not handling the shipping correctly.  In the end, I actually have had many U.S. competitors who came to me for an order because they can't overcome certain logistics-related difficulties on their own.

Lastly, unlike manufacturing, international shipping is a very tricky game when it comes to cost.  Whatever is quoted now doesn't really equal to what we'll end-up paying when the order is ready to ship, or when the order is finally delivered.  Nowadays, things are relatively calm.  But a couple of years ago, the price of fuel were so unstable we lost a lot of money on handling shipping for our customers.  Shipping prices is not only connected with cost of fuel exclusively.  The actual oceanliners also have a lot of politics that they play.  Every now and then, they'd play games like cutting down on the availability of ships (reduce supply) so they can increase the cost of shipping to make more money.  Real costs in international shipping are neither predictable nor stable.

So, I hope you can see why I am charging for my service on international shipping as I am doing the same on the manufacturing.  With manufacturing, you get something tangible, but with shipping, it's all just intangibles.  But the reality is that one cannot live without the other.  We are spoiled here in the U.S. because shipping is so easy and common that we take it for granted.  I can assure you, once your shipment arrives on U.S. soil and clears customs, the shipment will also be able to enjoy the same accommodations.  However, it does take work to get things from China to wherever you want them to be.

To win you over, I am willing to lower my pricing down to the bare minimum.  However, I must be honest with you that at that level, I still have some mark-up.  That margin of mark-up is not going to make me rich.  Far from it.  I need it to pay for people's time and salary.  I wouldn't even call it a profit, more like to cover cost other than the direct shipping related bills.

I want to establish our working relationship more like partners instead of vendors.  But to get to that level, it'll take both of us a lot of time to get to know each others.  It is not in my personality to try to spike a job because I see opportunity to make lots of money.  I tend to take the more consistent route - I always keep a very low mark-up and hope that the business will continue over time.  I'd much make a whole lot less but have things to work on every month.  There will be jobs that I'm not competitive on.  If I have to lose money, I can't do the job.  You'd do the same. 

I know you feel there may have been some mistakes made on the present order.  If so, I am truly sorry.  While I cannot guarantee a 100% error-free workflow going forth, you know I'll work very hard to have that as my goal.  There will be times when mistakes or issues will still come up, but I'll always be there to take care of our mistakes.


I'd love to win you over by writing long love stories like this.  At least, this is how my wife fell for me.  But at some point in time, I guess only real actions can prove if we can become good partners.  As I've always tell my other customers:  "If I can't save you money and hassle, I don't deserve your business."  I think this will be very applicable to our situation as well.  If my pricing is solid and competitive on the current quote, I think I, we, deserve the continuous opportunity to work together.  The more interactions, the more opportunity to learn about you.  And the better chances of a more fruitful and smoother working relationship.

Sunday, June 2, 2013

Overseas Sourcing Psychosis

A sales staff recently asked doing a repeat order on a big presentation book that we have done last year.  Customer needs another one for his upcoming book release.  While this is not something out of ordinary, this big presentation book did cause quite a bit of stir last year when we did it.

The book is huge, 140 pages at a finished size of 40 x 30 inches.  It is meant to be sitting on a pedestal for display during some type of press release event.  It also has to be a functional book as it should allow people to flip through the pages and read the contents.

Open size: 80 x 30 inches, 140 inside pages.  This is the "Big Book."

Needless to say, this big book cannot be manufactured through traditional offset.  An inkjet printer was used to produce this book and tediously hand-bound.  Prior to the actual manufacturing, which was relatively expensive, we'd produced a few white dummy books for the customer to test and approve.

Being a one-of-a-kind product, there were certain issues that had to be resolved resulting in duplicate prototypes been made.  Shipping something this big through international express delivery didn't help either.  Minor damages resulted from shipping had also made the road to completion very difficult.

A year later, customer came back for a reorder.  However, this time, he wants us to "guarantee" everything - from shipping to manufacturing.  While this is not totally unreasonable, and quite understandable, having the previously experience, this is not something I was willing to commit to.  The sales staff in charge, as any overly-zealous and eager sales person, was a staunch supporter to meet customer demand of a blanket guarantee.  On the other hand, I personally feel the sales staff did not do his job in educating the customer and setting the right expectation.  My decision was that I'd rather walk away from a potentially good job.

This brings up the main topic: Overseas Sourcing Psychosis.  How is the topic related to the "Big Book?"  It's simple, really.  It's so simple that I hate to point this out...

The primary objective of a buyer souring overseas is one and only: price.  There is no other reason that can come close to justifying overseas sourcing.  With that in mind, one has also to assume that all overseas buyers have already done their homework.  That is, they already know how much it'll cost them domestically, and because there is a big enough cost difference, the buyers elect to go overseas to source the item.

In the case of the "Big Book," customer must have already known how much it'll cost to produce this book domestically and have chosen to go through us to go overseas because of the price saving.  However, being a smart buyer, he now wants us to unconditionally guarantee both the product and shipping.  The shipping part is that if any damage was caused by shipping, we'd pay to reproduce the book and express it without having to get carrier's compensation.

The sales staff is being very naive in this case.  If this product is being produced domestically, the seller would not be able to guarantee the shipping.  That will fall upon the shipping carrier.  Once the shipping carrier clears the case and makes compensation, the seller would be able to make reproductions.  In order to bring the job in, the sales staff is going to all length to try to meet customer demand.  Looks like some basic re-training is needed.

My condition on shipping begins with a requirement for wooden crate.  Without this being agreed to, I would not consider guaranteeing anything.  While the wooden crate will surely protect the Big Book, it'll add weight and volume to the shipping cost, not to mention the cost of making a quality wooden crate.  Naturally, customer decline to pay this and insist on paying the lowest possible price on shipping.

If the product itself was manufactured domestically and something goes wrong, the seller can easily print out the damaged pages and drive over to fix the book.  When it's done overseas, something just as simple cannot be easily done.  The Chinese factory will not be able to drive over and fix the book.  More than likely, the book either has to replaced or flown back to get repaired (this option is not viable as it'll cost more to do so).  This means that the product has to be done in 100% perfect condition that'll stand up to normal wear and tear without having any issue.

To do a book this big once a year and asking for 100% perfection that'll last through time is unreasonable.  That is, unless the manufacturer is specialized in doing books this book and have tons of experience.  In this case, one can safely assume that the cost will be high as the buyer will also be paying for the expertise and experience that will yield a better product.  Having bypass the notion of paying more to get more, an overseas buyer will not see the value of this whether the book is manufactured domestically or overseas.  In his mind, he is so locked into the lowest price possible, nothing else matters.  That is, until something goes wrong...

And with overseas sourcing, something most likely always go wrong...

I should not venture to say that Americans are "spoiled."  We are not.  We pay for the better quality of life with our hard-earned money.  Everything is better in the U.S.  There is really no comparison, but we do really pay dearly for this.  We are so used to enjoying high level quality of life that the concept of "quality" eventually disappears; we take it for granted.  When overseas sourcing comes into the picture, we often forget about the normal standard of quality that we are used to and kind of assume that we'll get something similar in return.  At a much lower price, of course!

I call this symptom: Overseas Sourcing Psychosis.

From Wikipedia: 
Psychosis refers to an abnormal condition of the mind, and is a generic psychiatric term for a mental state often described as involving a "loss of contact with reality". People suffering from psychosis are described as psychotic.  The term "psychosis" is very broad and can mean anything from relatively normal aberrant experiences through to the complex and catatonic expressions of schizophrenia and bipolar type 1 disorder.

The world is a big place, but the law of nature is the same anywhere you go.  There is still gravity and pollution in China as well.  The concept of "getting what you pay for" works just the same on both sides of the Pacific.

China is still a developing country.  It has been famous, or infamous, for being the world's factory for over a decade.  Due to its low wealth and high concentration of people, China started out substituting a lot of how we make things by machines with rural farmers.  Yet the tradition continues till this day.  However, over the course of its growth, China has slowly being modernizing.  Yes, more and more automation, more and more machines.  This is due to rising labor cost and the pursue of better quality.  With manual labor, the quality will always be inconsistent.  One worker's handiwork will be different from the next worker.  With machines, you take out the inconsistency issue.  And over the long haul, with rising labor costs, machines and automation will easily become a cheaper option.  Yes, Chinese businesses are learning just that and is currently going through a shortened industrial revolution.

Most people think China's quality sits at the bottom of the pool.  While that may not be totally wrong, it may be becoming out of touch with reality.  Over the last decade, cost of manufacturing in China has risen so much, it finds itself not competitive with other developing countries such as India, Vietnam, or Thailand.  On the flip side, the quality of products have improved as China modernizes, both in its manufacturing facility and management.  Nowadays, you'll easily find products made in the aforementioned other countries having the same inferior quality as what we remembered China used to make 10 years ago.

For example, it is now nearly impossible to find a pair of Nike shoes made in China.  I look for those.  As those that are still made in China costs more but lasts longer.  Shoes that are made in other developing countries are the lower-end and lower-cost items that tend to last much shorter and would break in very unexpected ways.

So, back to the point about quality.  While China has grown leaps and bounds on quality compared to what it used to do, it still has a long way to catch up to what we are used to here.  As overseas buyers, on certain products, we cannot expect to receive the same quality but paying 40% less.  You'll be lucky to get "similar" qualities.  Having done overseas sourcing for over a decade, I know.

I qualify if something is a good fit for overseas by two methods:

   1). Timeline.  Is there enough time to make the product and ship it?
   2). Quality.  Does the product require a high degree of consistent quality?

For mission-critical products, I always advise my own customers to stay state-side.  Meaning that if customer is extremely picky about a product, and there is a definitely timeline that the product has to fit, it is not a good fit for overseas sourcing.  Under such circumstances, I would not stick my neck out so I can disappoint my customers.  On the other hand, if the product is meant to be more or less disposable and not something you'd put on a pedestal, and of course, if time allows, overseas sourcing is definitely going to save you money.

Just because a buyer sees the potential in cost-saving by going overseas does not necessarily and automatically equate the project to yield the same expected quality.  As buyers, we tend to forget the quality of item we need in the face of lower costs.

I have a feeling I'll lose the Big Book business.  But in fact, I'd rather lose the business than lose money on the job.  There is no way I can guarantee both the product and shipping.  We always take care of our customers.  Meaning that if something goes wrong, we always go to great length to make amends.  And yes, that even means if we have to dig into our own pockets and pay for issues that weren't caused by us.  But knowing walking into a situation where a written unconditional guarantee on everything is just not a wise business decision.  This buyer may get the assurance he wants from overseas factories, but he won't be able to get this from us.  Anything promised by these factories are worthless; there is no legal recourse available if they don't meet whatever contract you can throw at them.  I know this because I have many cases pending to take these factories to the Chinese courts.  Please keep in mind that I'm doing this with my native China company; it'll be next to impossible to do this as a foreign company.  But then, this is another blog for another time.

If you are one of those overseas buyers who may be suffering from this type of psychosis, take comfort in knowing the fact that there is no chronic state for this mental fallacy.  Over the course of your overseas sourcing experience, you will eventually learn to accept that quality often has to take a back seat.  You will learn to accept.  And you will learn how to justify and re-quantify why certain products that you source overseas can have a bit less quality than what you used to enjoy.  This disease is self-curing.  You are all set.

I, personally, cannot become the fool who'll promise you big savings and the best quality under the sun.  We are an American company that abides under the same law as our buyers; unlike Chinese factories who are out of reach, reputation, honor, and law suits are all very important to us.

Friday, May 10, 2013

Alibaba and the Forty Thieves - 11 Recommendations about Buying Directly from China

This popular childhood fable is no longer imaginary.

The mention of "alibaba.com" makes most Americans think it's the primary gateway factory portal.  To buy anything direct, alibaba.com is the one destination.

But if you work in China, alibaba.com is probably the last destination you'll ever visit.  Sure, there are still good information on the site, but at the end of the day, alibaba.com is made for foreigners.  There are more English search results than alibaba.com Chinese version.  That's got to tell you something.

The truth about alibaba.com is less than pretty.  Having great insights into how the company works from a Chinese perspective, I personally have to give it kudos for coming up with such a great name.  And the funny thing is, despite the metaphor, buyers line-up to buy from the site...  What's more funny is that the real Ali Baba is not even a Chinese...

There are scandals after scandals, scams after scams, reported in the domestic Chinese media about unscrupulous companies doing business on alibaba.com.  You can get some reports on this in U.S. media; however, this is one of those well-kept secrets that the Chinese are hiding from the West.

For example, alibaba.com has started to "certify" the factories on its site a couple of years ago.  But the truth of the matter is that whatever certification or Gold Supplier status can all be obtained if you pay the right amount.  Heck, my own China company had been approached by alibaba.com to buy these supposedly elevated standings.  So, next time when you see these on alibaba.com or similar sites, don't take too much stock in it - they are really meaningless.

The entire alibaba.com system has been developed to make it easy for foreign buyers to get stuff from China; it is supposed to be a neutral platform.  However, if the sellers are not successful in selling, they would not stay with the site.  So, there is a natural inclination for alibaba.com to see that the sellers succeed in whatever they do.  Unfortunately, this leaves the buyers out in the cold.  You'd think consumer (buyer) is the king, but when enough suppliers do the wrong deeds, all these wrongness suddenly becomes the norm.  The buyers are re-trained not to be too picky since all the suppliers (on alibaba.com) essentially act the same way.

By the same token, there are just as many brokers on alibaba.com masquerading as factories.  While we have developed a few operating procedures to filter out these brokers and trading companies, the average foreign buyers can't tell the difference.  So, next time when you shop direct from China, you may not really be shopping direct...

I have many customers often compare my prices with alibaba.com.  This makes things difficult for me...  Not that I'm afraid of a little competition, it's just that I can't play bait-and-switch like most Chinese factories.  After all, they can hide behind the vast Pacific Ocean when something goes wrong, and I'm here in the States exposing myself to all kinds of law suits.  So, I can't low-ball my customers with the promise of an unheard of price just to play games with them down the road.  Or, can I deliver something that is not to customer's spec and just walk away.

Here is a lively example...  Customer is looking for 16GB USB disks.  Simple enough.  If you go to alibaba.com, you'll see the terrific pricing of $1.50 per piece with a minimum of 100 pcs.  Some are more decent than others by stating $1.50 to $19,95, etc.  But what does $1.50 buy you anyway?  You get the bottom-of-the-line, cheapest "shell" of a USB disk; the actual memory chip is not included in this price...  To me, this is pure laughable...  Who'd buy a 16GB USB disk without the memory chip?  But tons of American buyers are falling for this...  My customer even use this to try to get me yield to the advertised price on alibaba.com.  Stories like this are a dime a dozen.

There are even more horror stories from other customers who have bought from alibaba.com and gotten burned.  Countless.  And this is not just limited to alibaba.com alone, there are many other similar factory portal sites offering similar services as alibaba.com with even worse records.

If you are thinking about venturing into the wild Chinese factory realm by the alibaba.com remote control, here are some tips for you:

1). alibaba.com is not Amazon or eBay.  Don't think that what you are used to here in the States is automatically transferred to alibaba.com.

2). Be very careful with anything that has to be shipped by ocean (higher volume or weight) unless you are a seasoned importer.  Most of the prices quoted are FOB China.  You are responsible to get your own freight forwarder and import the products.  Getting a freight forwarder is not exactly like calling UPS for a pick-up.

3). If something looks too good to be true, it probably is.  This good old adage works in the U.S., and works just as well in China.  Another adage is: You get what you pay for.  That one is also true.  Just keep these in mind.

4). Don't buy what you can't afford to lose.  While I have customers have great success buying directly from China through alibaba.com, I have more customers did not experience the same luck.  It's always one thing or another.  The rule of the thumb is if you are putting up your house to get the money to pay for the product, it's probably not a good idea to do so.  After all, we really don't need you to add into our homeless population.  In other words, don't bet the farm on it.

5). If your sourcing volume justifies for you to do a visit in China, by all means, go.  You'll be surprised to find that many of your alibaba.com contacts would suddenly stop responding once you tell them you'll be visiting them.  This is naturally because they are brokers and really don't have a factory for you to visit.  But do plan ahead, otherwise, the only thing for you to see during your visit will be the Great Wall of China.

6). Keep in mind that alibaba.com is just a platform; it is not a seller of things.  This means that whoever you choose to buy from has nothing to do with alibaba.com itself.  Despite the fact that alibaba.com is a huge company and makes billions of dollar every year, it is not liable to anybody if some of its registered suppliers engage in less-than-favorable acts.  You'll literally be on your own.

7). Don't shop exclusively on alibaba.com alone.  Although the site is set-up so that it makes it easy for you to shop amongst all alibaba.com suppliers, don't get caught in the scheme.  Get price quotes from a wide variety of sources.  Compare prices, yes, but also compare what you'll get in return.  Intangibles such as service, quality, value, etc, is an integral part of our lives here in America, don't let it evaporate once you landed on alibaba.com's home page.

8). The term "factory direct" has a totally different meaning when you engage in international trading, such as buying from suppliers on alibaba.com.  In the States, "factory direct" still involves quality, service, and the reputation of the manufacture.  You are supposed to be getting a lower price on the exact same item than retail.  But when you buy overseas, provided that whoever you are talking to is indeed a real factory, the exact same term takes on a totally different meaning.  The only thing you'll get is the lower price.  You won't get the quality, service, reputation, or the same item.

9). This one not only applies to alibaba.com but to anybody who you want to buy directly from in China.  Always ask for samples.  Not just any samples, but samples of the actual item you are looking for.  Nine out of 10 times, they'll tell you it's not available.  And prepared to pay for the international shipping for those who actually have something to show.  With a sample in hand, it'll be easier for you determine if what you are looking for is what they are selling.  However, please still be mindful that a satisfactory sample still does not mean your final product will be of the same quality.  I've had too many experiences where samples looks good, but the end product isn't.  Or, one step forward, a real deal prototype.  I still have experiences where the prototype can be signed off while the end products still come out different.  While there are some bad apples out there who had decided to scam you from day one, most Chinese have a very different fundamental concept of signing off on a contract proof than Americans.  So, if your sourcing need is something that is customized, please be extra careful.

10). Do your best to weed out trading companies and brokers.  The real Chinese factories themselves already have issues with lack of integrity, when you end up dealing with trading companies, your risks go up many folds.  This is easier said than done.  Without having a real Chinese company of your own, it's difficult to find out who's real and who's not.  The best you can do is be vigilant and mindful.  When something smells fishy, work with someone else.  Surely there must be a hundred other suppliers in the same search results...

11). Gambler's mentality.  When you cross the line and decide to engage directly with Chinese factories on your own, like it or not, you are a bonafied gambler.  Since that's been established, you need to take this gambler's mentality to the next level.  Once you paid down a deposit and gets a prototype or proof in return, if you don't see what you like, and the factory just can't seem to meet your specifications, walk away.  Yep, be the real gambler who's got the grits to walk away from a bad round.  If somehow you end up with one of those less-than-reputable factories, the tactic is to get you to accept a less quality item (at less cost to them) since they already have your money (deposit).  Most people would just yield to the factory and accept something less.  Once you give in at this stage, be prepared for a string of other misfortunes ready to happen down the road.  Review #4 above.

Finally, if we should have opportunity to talk business, please don't use alibaba's pricing to bargain with me.  I've been in China long enough to know what's up with alibaba.com.  If all you want to pay for the quality you want is confined to alibaba's world, please go with alibaba.com and take your chances.  If things turn out great, awesome, you win.


Thursday, May 9, 2013

Export Delays in China in May, 2013. Anybody?

For the decade plus years I've been exporting out of China, mind you, I also have my own Chinese company managing the export (with the export license), I've been experiencing a consistent chain of delays on almost all shipments for the early month of May, 2013.

This is annoying...  Not to mention furious customers who has been waiting on the shipment for weeks; now more delay.

At first, I was not happy with our own operations and had criticized my Chinese staff.  The cause of the delay was not due to anything logistics-related.  Month of May is not a peak season.  So, what has been causing all these delays...?  If it's an isolated incident, or heck, even a coincidence, I guess I can live with it.  People make mistakes, oversights.  But things are not so simple...

The explanation from my Chinese staff was that the Chinese government had just implemented a new regulation as of May 1, 2013.  This new law dictates that in order to qualify for export subsidy, proper documentation must be presented to the Customs before the shipment is exported.  Prior to May 1st, such documentation can be sent to the government for claims after export.

One of the most important documentation is the VAT invoice from the manufacturer.  And, for many factories, this is one documentation that they most reluctant to supply on-time.

Side Note: China is in a VAT (Value Added Tax) system, this is something very unfamiliar with Americans.  We have our sales tax, very straight forward.  But like the metrics system, VAT is used by most of the countries in the world.  This system is a bit more complicated than what we are used to.  In essence, by providing these VAT invoices (Chinese: Fa-piao), factories have to pay up to 17% of taxes on them.  This amount is, of course, transferred to us as buyers.  But with the commercial invoice, we can then claim up to 13% in the form of a tax rebate, depending on the type of product being exported.  Every product is different.

Another Side Note:  A lot of my U.S. buyers think we pocket the tax rebate.  This is far from the truth.  Whenever we quote out an order, the price is already discounted for the tax rebate.  In reality, the rebate takes up to six months to be sent to us, that is, if there is no administrative quibbling from the Chinese government. So, the U.S. buyers are really enjoying the benefit of not having to pay ahead and wait six months for the rebate portion.  We are actually acting as a bank here...

Back to the topic at hand.  Most of China's factories are not used to provide VAT invoices on the spot.  Usually, they drag their feet for as long as possible.  They would even sometimes try to substitute the VAT invoices under the name of another company (or companies) they'd registered.  That was before; it had never been a pleasant experience.  Now, the new law requires the VAT invoices be presented before an export is allowed, this creates all kinds of chaos in trying to make the factories pony-up the needed invoices.

As one would expect, something that used to take up to a month to get is now condensed to a few days...  Making our own internal operational changes is not hard, but trying to get these factories to change their habit is very difficult.  Thankfully, it is, after all, an official government law, and the factories have no choice but to comply albeit reluctantly.

So, if you are also exporting from China and have been experiencing delays in the month of May, this is most likely the cause.  It will get better over time as everybody in the supply chain change their routines and rhythm.

But...  Why?  Why did the Chinese government made this change?

Unlike our own government and how new laws are passed, which the public is always made aware of the process and even given transitional periods if implemented, China has always introduced new laws literally on-the-spot.  While I have no doubt that there had been as much thinking and discussion that go into making the law behind the scenes, it's just the way it is implemented that really gets to me.  In China, things can change unexpectedly overnight.

So, why the new law?  I came across an article in Reuters yesterday that happened to explain everything: "China opens new front in war as yuan speculation distorts export data".  By the way, this explanation offered on Reuters is basically unknown to most of the Chinese population.  They've been trained not to question the government's leadership and decisions.  So if you ask China what caused the delay, they'd tell you becaus of the delay in getting the proper document for export, but they won't be able to tell you why there is a change in government policy.  For that, you'll have to read the linked article (above) in Reuters.


Tuesday, May 7, 2013

Boot Camp for a Retail Mall

Retail store workers of a major mall in the city of Chongqing in China was put through a training session that was aimed toward better customer service via public humility.  

At least it wasn't all just an employee-only event, you can see two management-level personnel taking part in this exercise at the head of the line.

Police later arrived to try to dispurse both the crowd and the store clerks.  But by then, the training session was over.  It is still unclear if the chaos was indeed a legitimate training session or a publicity stunt to get notoriety.

Aren't you glad you don't work in China...?






Monday, May 6, 2013

Using your own freight forwarder...? Why that may not work out as you'd expected...

Following is a reply letter to a customer who's entertaining the possibility of doing the importing on his own.

Due to the relatively longer turn-around time involved in overseas sourcing, he's planning to fly in a portion of the products in order to meet his own deadlines while leaving the majority to ocean freight.  He's solicited quotes from freight forwarders to bring in the products from China.  While it is technically feasible, it is not our common practice to do so.

Customer politely asked us to use a freight forwarder he's never met, the lowest price he'd received from the Internet searches, for the pending order, and all future orders for other customers...



Thank you for the referral.  We’ve been working with our select five freight forwarders for over 10 years.  We used to shop around for the best price, but logistics really doesn’t work that way.



You are welcome to use someone else for your air shipments; however, like I said previously, we only do CIF or DDP on the products.  So, your ocean will be stuck with us.  That is, unless you are going to fly everything over.

The quote you received from this freight forwarder includes both air and ocean shipping.  However, in the logistics world, you'd usually get better price and service from specialized freight companies who specialize in either of the transportation mode.



Our prices to you, for both ocean and air, is a price based on the future cost of shipping.  When you shop around, you get a quote if you were to ship within the next few days.  In our business, we need a crystal ball to gaze into the future one to two months and come up with a shipping charge at that time.  So, whatever you get quoted now by others doesn’t really mean what you’ll be paying when the product is ready to ship, especially air freight where fluctuation is almost on a weekly, if not daily basis. 



Please do keep in mind, if you should decide to use your own air freight, once we hand over the product in China to your freight forwarder, we will no longer be involved for that shipment.  You’ll need to work everything out with your freight forwarder on your own that may include all the paperwork and customs issues. 



I also want to warn you about using your own freight company.  Certain product issues may involve shipping.  When such an issue arises, it’ll be very difficult, and time-consuming, to decipher what exactly went wrong and who’s the responsible party.  When that happens, you, as the customer, will usually end up to suffer the most since nothing will get fixed until the responsibility is fully assigned.



There are always hidden charges and many unexpected events that’ll take place.  For example, your other quote email had a fine print that said something about customs exam.  These do happen.  It happens for us, but definitely less common than for you as an occasional importer.  If you get selected for inspection, there’ll be additional costs and time, not to mention tons of other hassles that you may possibly have to handle on your own.

Another hidden charge that wasn't clearly specified in the quote is the need for an import "bond."  For this order, you'd be better off paying an one-time annual fee of $450+.  However, on his quote, he only stated "$5/1000 of Total Inv."  Do you really see that you'll be paying more than $500 on this item alone? 

Furthermore, he specified a MPF charge of: "$0.003464%."  Do you really understand what it means...?  This is obviously stated erroneously since MPF is 0.3464%.  But for an average unsuspecting customer, there is no reason you'll see the finer details.

Please also make sure your quote reflects the exact departure and arrival ports.  I only see "China" marked on the quote, but which port in China makes a difference in freight charge.  The freight forwarder you've found obviously did not make that distinction, this means you are really just getting a rough number, not something you can readily use.

The laundry list of fees found on the quote you shared with me, when all added up, is just about as much as our fees.  The biggest difference is that we did not list all the items that goes into importation since this is part of our services, and that we believe our customers shouldn't be bothered with it.

In importation, you can't just focus in on the cost of ocean freight as the singular cost you'll pay.  Our charges to you is all-inclusive -  DDP (delivered duty paid) to your door.  You do not have to lift a finger or be bothered by customs and paperwork, everything is taken care of by our expert staff.



We insist on shipping on our own instead of letting customer handle it is because of all the issues pointed out above.  Amongst our customers are many very experienced importers.  For them, like for us, importing is just another daily routine.  However, even under those circumstances, they still gladly give up the importing duties to us.  There is something to be said about that.