China 101: Sourcing from China Survival Guide (Part II)

This is the second part of a guest post by Renaud Anjouran, founder of Sofeast, a QC firm in China, and writer of Quality Inspection Tips blog, a must read blog if you are sourcing from China.
If you missed the first part of this article you may read it here.

China 101: Sourcing from China Survival Guide (tips 16 to 29)

III.Before any payment is made
16. Get pre-production samples that represent your exact requirements (in 90% of product categories, it is not a problem technically for the factory).

17. Ensure the product meets, or is designed to meet, your country´s safety standards.

18. Ensure the supplier knows what you expect in terms of packaging.

IV.If you are developing a new product with a Chinese manufacturer
19. Document product characteristics before approaching a manufacturer. Pay an engineer if the product is complex.

20. Document production processes if you are lucky enough to be in the factory while they are setting the machines up for sampling or a pilot run.

Be aware that if you decide to switch suppliers later on, you are not likely to have that information (points 19 and 20) unless you have taken the precaution of documenting it.

 V.Negotiate Reasonable Payment Terms
21. On T/T (Telegraphic Transfer, or bank wire)
This is he most common payment method. The standard terms are a 30% deposit before the components/materials are purchased, with the remaining 70% to be paid after the supplier faxes the bill of lading to the importer.

If special molds/tools need to be developped before pre-production sampling are approved, you will certainly be asked to pay a deposit accordingly. Make sure the supplier writes that these molds/tools are yours. If large sums are at stake, a lawyer can help you draft a contract.

22. Irrevocable L/C (Letter of Credit)
Try using an L/C with new suppliers (because it’s better not to wire a deposit that might get lost) or for large orders (because the bank fees are relatively low).

Bank fees are higher than a simple bank wire, but you are much better protected. Most serious exporters accept an L/C if you specify reasonable terms (don’t ask for 60+ days of credit).

It is always better to send the draft to your supplier for commenting, before the L/C is “opened” by your bank.

 VI.Quality Control
23. Control your product quality in the factory. Do not count on the factory’s own QC staff. Visit the Factory yourself, or appoint a third party inspection firm.

24. Inspect:
a) when the first finished products get off the lines (to catch issues early).

b) after 100% of the order is finished (to verify the average quality level, and to check packaging).

25. Do lab testing if neccessary. Take advantage of the inspections: pick up random samples at that time. It important not to let the supplier choose the samples by himself.

VII. Final Warnings
26. It is possible for an importer to sue a Chinese supplier successfully. But only in China.

27. The worst is to simply accept a supplier’s pro forma invoice. A slightly better solution is to issue a purchase order with your terms, and to get it chopped by the supplier. Yet this might not be enough if you want to keep the option to sue the supplier successfully.

28. The best solution is to work with a lawyer who is familiar with China’s business environment. He will draft a contract that addresses the major risks you should watch out for, and he will remove any ambiguity. Again, when buying from China, you need to be so detailed and clear that there is no room for interpretation.

29. Be sure to put this entire system in place before you start negotiating with new suppliers.
a) Tell them it is your company’s policy, and your boss/partner requires it.

b) They will be more likely to agree. If you mention a contract after you have spent days with them and they know you are in a hurry to produce, they will refuse.

What do you think? Would you like to share your tips?

You may read more about sourcing tips and negotiating with suppliers in the links below:

* 36 Tips on How to Deal or Negotiate with your Chinese Suppliers
* 21 Steps to Follow when Sourcing from China (part I)
* 21 Steps to Follow when Sourcing from China (part II)
* Sourcing from China: Who are the Happy Buyers?
* Do not Interrupt Me & 6 Reasons Why you Should Not Do It
* 4 Tips to Succeed in Times of Silence

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China 101: Sourcing from China Survival Guide (Part I)

This is another guest post prepared for the China 101 project.
This post has been written by Renaud Anjoran, who founded Sofeast, a QC firm in China in 2006, and has been writing advice for importers on his blog Quality Inspection Tips since 2009.
I would like to thank Renaud for his collaboration.

 China 101: Sourcing from China Survival Guide (Part I)

Thousands of new companies start importing from China every year, but they don’t know where to start and they tend to forget critical safety measures. Here is a “survival guide” that can help buyers eliminate 90% of the risks associated with China sourcing.

I.Finding a Suitable Supplier

1. Getting a nice sample does not mean a supplier can actually manufacture the product. It is only a basis for easy communication about your requirements.

2. Online directories (Alibaba, Global Sources…) and trade shows are only a starting point. Suppliers pay to be listed or to exhibit, and they are not rigorously screened.

3. Run a background check on the companies you shortlist. A “Business Credit Report” costs only 255 USD on Globis, and will help you spot the intermediaries that pretend to own a plant.

4. Check the factory. Look at the products they make, the processes they operate in-house, their other customers, etc.

5. Order a capacity audit, if you can´t visit the factory yourself. Every third-party inspection firm offers this service.

6. Get customer references, if possible in your country. Note that a manufacturer might refuse to tell you about their customers, and not always for bad reasons.

7. Do call those customers! You’d be surprised how often these references are fake… or these customers are actually unhappy!

8. Make sure the factory is familiar with your market´s regulatory standards. Ask a few questions, ask for relevant certificates and/or lab test reports.

9. Consider working with manufacturers of the right size. If your orders are small, very large manufacturers will probably quote high prices and not care about your orders.

10. Monitor small factories very closely. They often have no established management system. So either you trust the boss to personally look after your orders every day, or you keep a close eye on production.

11. Include a clause in your contract that prohibits subcontracting. Production might not take place in the factory you were shown, and in general product quality suffers greatly in these cases.

II.When drafting the contract

12. Clearly define your product, labeling, and packing requirements. Write a detailed specification sheet that leaves no room to interpretation.

13. Specify methods you will use for measuring and testing specifications.

14. Specify tolerances whenever applicable.

15. Specify penalties for non conformities. If you want the option to enforce this contract one day, make sure there is no room for interpretation on penalties.

Coming soon, Sourcing from China Survival Guide (part II), where we will read a lot more tips on:
-what to do before making any payments
-new product development
-payment terms
-quality control
-and some final warnings.

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China 101: Chinese Negotiation. 10 Top Tips for Chinese Negotiation (part II).

This is the second part of the article by guest contributor and Chinese negotiation expert Andrew Hupert. You may read the first part here.

10 Top Tips for Chinese Negotiation (Part II- tips 6 to 10)

6.  Have a strategy for getting information.
In Chinese negotiation, it is more important that you know the right questions than the right answers.  You have to know enough to assess his proposal and solution.  Western partners have a terrible habit of relying on their Chinese partner to keep them supplied with basic information about markets and regulations.  Plenty of great sources of information and knowledgeable contacts are available – make use of them.  Depending on a counter-party to keep you informed and up-to-date is suicidal.

7.  Beware the balance of power shift.
Chinese partners are known for purposely appearing weak and non-threatening at the start of a deal and manipulating the Western partner into injecting valuable assets or teaching vital information.  Once the Chinese side closes the gap, you can expect their negotiating style to become much more aggressive and demanding.  Guanxi relationships are a function of utility value, and once they no longer need you then they are going to squeeze you.

8.  Have a strategy for adding value.
They have to need you more than you need them.  Their learning curve will flatten much earlier than yours.  Once they understand your technology and your procedures, they will feel they no longer need you.  If you are dead weight, then it is worth it to them to get rid of you.  Know what your Chinese partner can’t do, and then make it central to your partnership.  Innovation, branding, new product development, and overseas sales are examples that have worked for Western partners in the past.

9.  Pick the right partner before you start negotiating.
Know what your strategic and operational gaps are, and then conduct a methodical search for a Chinese counterparty who can close the gap. Novices often find China overwhelming and tend to start negotiating with the first Chinese person they meet.  Most of the time the Westerner ends up giving away his business strategy and marketing plan to a potential competitor, without getting anything in return.  Know what you want from a local partner, and keep screening until you find an appropriate candidate.

10.  Trust with vigilance.
It’s possible to find Chinese partners who are honest and loyal, but your chances improve if they need you more than you need them.  Trusting the wrong person in China is fatal -but being too suspicious and controlling will alienate potentially valuable partners, staffers, and colleagues.  The Chinese side has to feel vested in the profitability of the enterprise, and see a clear path to their own success.  Striking the right balance between common-sense skepticism and healthy confidence in a colleague is a real challenge, but it often is the most significant factor to your success in China.

What are your views?

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China 101: Chinese Negotiation. 10 Top Tips for Chinese Negotiation (part I).

This article on “Chinese Negotiation” is part of the China 101 project. I would like to thank Andrew Hupert who has kindly accepted my invitation to join this project and has shared with us his best advice on the topic.
Andrew Hupert has spent the last 9 years as a corporate trainer, writer, and lecturer in Shanghai, working with both local and multinational businesses.  His professional work has focused on improving the deal-making and negotiating skills of both local and multinational corporations.

Andrew publishes several websites and weblogs concerned with international management and cross-cultural negotiation involving China:
ChinaSolved.com addresses management issues for international managers already engaged in running a China-based operation.
ChineseNegotiation.com focuses on China-US negotiating issues.
He has also published articles in business journals such as Shanghai Business Review and the China Economic Review.  He has recently published his first book – Guanxi for the Busy American.

China 101: Chinese Negotiation. 10 Top Tips for Chinese Negotiation.

Negotiating in China isn’t a special niche for an elite group of international lawyers and diplomats any more.  China is the second largest economy in the world and is becoming a vital counterparty for many individuals and businesses that have never done cross-border deals before. If you haven’t done business with a counterparty from China yet, then it is probably only a matter of time before you or someone in your organization does.  Plenty of Westerners have had great success in China, but it requires preparation and a little research.

Chinese negotiators have an undeserved reputation for being difficult, enigmatic, and unpredictable.  They simplyhave their own approach to business.  Since the global financial crisis of 2008, however, Chinese dealmakers are more confident and secure in their own methods.  Westerners who expect Chinese negotiators to accommodate American or European notions of best practices are setting themselves up for failure.  Chinese negotiators aren’t about to abandon traditional methods like relationship-building and guanxi that have been successful for them, especially since Western standard operating procedure has been looking so shaky over the last few years.  When you negotiate in China, you are in their house – and if you don’t understand the local rules then it is your problem, not theirs.

Here are ten tips that will help Western negotiators be more successful in China.

1.  Don’t disregard guanxi.
Chinese negotiators don’t have to like you, but they have to feel that they know you and understand how you’ll behave as a partner.  In the West, successful transactions lead to relationships – in China, successful relationships lead to transactions.  You have to understand the difference.  Relationship-building rituals like banquets and boardroom meetings where you are introduced to the entire management hierarchy aren’t a prelude to serious negotiating — they are the negotiation.

2.  Guanxi and relationship-building are the traditional Chinese version of due diligence.
They care more about the kind of person you are than the assets your company controls.  Show them who you are if you want to move forward.  While it’s true that Chinese negotiators don’t like to settle details right away, they are still “on the job” during the social meetings and banquets.  To the Chinese side, understanding your character, business philosophy, risk tolerance, and commitment to China determines what kind of partner you are going to be.  If you are evasive, uncomfortable, or withholding during the initial meetings, they may consider you to be dishonest or untrustworthy.

3.  Chinese negotiations don’t end.
The Chinese side feels that they aren’t supposed to.   Westerners believe that a signed contract regulates the partnership, but Chinese feel that an understanding between honest people is the only true constant in an otherwise unpredictable business world. Traditional Chinese negotiators don’t draw a sharp distinction between relationship and negotiation, so as long as the relationship is intact then deal terms are in play.   They feel that environmental shifts and changes in relative circumstances are valid reasons for renegotiation.Plan for the post-contract negotiation in advance, because it is most certainly going to occur.

4.  They will make a play for your IP. 
Technology, processes, and know-how are considered private property in the West, but many Chinese still consider them to be intangibles that are up for grabs.  Saying they can’t have something only makes it more desirable.  Don’t expect to collect rent on last-year’s innovations.  Chinese only pay for technology once (if at all).  The best way to handle software and technology sales is to start planning significant upgrades early.  Apple keeps partners honest and stays profitable in China by perpetually selling the next version.

5.  The same people who can open doors can shut them and lock you out.
Don’t assume that you will be running the show.  If your strategy involves relying on local partners, key staff, or powerful connections to keep your business going, you are in a precarious position.  Successful negotiators are constantly building up their network and adding new connections.  Negotiating strength is a function of the size of your contact list.

Coming soon. China 101: Chinese Negotiation (part II)

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