Top 8 Reasons to Use the Internet for Sourcing Products in China

In today’s global economy there’s a dizzying array of sourcing options available for manufacturing overseas. If speaking Chinese seems difficult, imagine the challenge of navigating through thousands of factories that exist all over China whose quality and capabilities span a wide range. Finding the right supplier is crucial, but most underestimate the time and resources required to establish a successful operation overseas. At first glance online product sourcing appears to be the easiest and most convenient solution. A closer look however reveals the reality of an internet only strategy.

As with utilizing sourcing agents, full-service project management firms or any other viable option, online sourcing also presents its fair share of pros and cons. So how does one decide which sourcing channel is best for their company’s product? In reality, there is no “one size fits all” solution to managing sourcing projects. Some endeavors require an on-ground presence with intensive factory oversight while other projects can easily be achieved through the convenience of the internet.

Let’s take a look at the top 8 reasons to source a product online.

1) Having a thorough understanding of the factory’s Quality Control processes and staffing is not important

Most online buyers naively believe that online suppliers enforce minimum quality requirements among the factories featured online. The issue with this is there’s no universal definition of “good quality.” The concept of good quality can mean different things in different countries, and even between individuals. It’s the importer’s responsibility to clearly communicate quality requirements, which are defined through product specifications (e.g. materials and design drafts). Without specifications the factory is forced to guess and fill in product gaps themselves – often leading to major issues.

2) No need for bilingual staff to interact with factories

Without an acute understanding of the local language and culture it’s extremely challenging to communicate with factory representatives if there are concerns regarding quality, certification requirements, product design etc. Most factory representatives do not speak English. The people that can communicate are often not fluent English speakers and possess a low level of proficiency in reading and writing in English. Adding insult to injury, because communication is occurring over the internet with a 12 hour time zone difference replies are often not received, nor sent in a timely manner.

3) Conducting a thorough factory audit isn’t important

When sourcing online the true background of the factory remains unknown. Many importers falsely believe they’re safe as long as their dealings are limited to only “Gold Suppliers”, such as those featured on Alibaba.com. Keep in mind that being a premium supplier is a membership service and is the supplier directory’s primary source of revenue. The website may verify some critical information such as proof of the factory operating as a legally registered entity, amount of registered capital on hand, and possession of a business license. This provides a great start to selecting a supplier, but is only half the equation.  Online suppliers are not necessarily required to meet any standard of social responsibility compliance.  For example, inquiries pertaining to factory emissions, employee treatment, and sanitary work condition standards remain completely unknown. Uncertainty regarding these questions can pose a serious threat to the integrity of your brand (Refer to Managing Profits and Social Responsibility: Protecting Brand Integrity While Manufacturing Overseas).

4) Making changes to your product is not necessary

When sourcing a simple product that does not require a high degree of engineering or product design online sourcing is a viable option. Conversely, online sourcing offers the least amount of flexibility in making revisions or changes to an order once a purchase has been submitted. Chinese factories will not honor any requests for product alterations after making a purchase; whatever you get, you’re stuck with. Worse yet, It’s almost impossible to request a return from a Chinese factory.

 5) Subtle variances in your product are ok

With the absence of a third-party Quality Control inspection team it’s nearly impossible to guarantee that every product will be identical in size, shape, color, and material. Amongst the thousands of suppliers featured online there are several bad apples mixed within the good. Inferior manufacturing companies have low quality materials and outdated, sub-par facilities that are likely to produce products that are not uniform in design or quality. Knowledge and experience is crucial when sourcing online. The last thing you want to encounter is variances in your product due to the expensive mistake of selecting a non-qualified supplier.

 6) No strict defect rate requirement

Conducting proper due diligence on potential suppliers is pivotal in eliminating the risk of product defects. Without having on-ground representation from a company employee or agent this is often a tricky area to manage with online suppliers. A Quality Management System is critical in sourcing the vast majority of products. Without one, defective units are likely to pass unnoticed, ending up in the hands of customers.  Quality Management Systems are used to prevent this through a rigorous process that involves, at minimum, the inspection of incoming materials/components, product testing during production, and product testing after production. This system is also used to specify how a supplier manages defective units. No matter how big or great the factory, manufacturing is still subject to mechanical and human error; defects are bound to occur to a varying degree. Suppliers should be able to clearly communicate how their Quality Management Systems work and verify their responses with credible paperwork.

7) Having a personal representative meet with the factory is not necessary

To have a personal representative meet with Chinese factories is expensive and time consuming. Online sourcing is a great way to eliminate international travel costs and bypass the myriad task of visiting several Chinese factories. This convenience does come at a price though. With nobody on the ground representing the company on your behalf opens up the door for some potentially shady public relations. Does the factory operate in safe, humane working conditions? Do they have the necessary equipment to manufacture your product?  Does the factory meet minimal good housekeeping standards?  Are they currently manufacturing similar products?  Do they have a staff dedicated to Quality Control?

 8) The product has no testing certification requirements

The vast majority of online sourcing websites have no requirements when it comes to product quality and compliance with foreign product regulations.  You may ask yourself, shouldn’t an online sourcing company exclude suppliers that are unable to provide documents proving previous compliance with European and American product standards? This would make life a lot easier for business owners in the US and EU, but has no relevance for buyers in Thailand, Kenya, and Russia. These are also important markets, and often the primary countries for many Chinese manufacturers. It’s the buyer’s responsibility to confirm which product standard or directive is applicable to the products you intend to import. The buyer will also need to verify that the supplier is actually capable to manufacture compliant products – Suppliers will not do research for you. Using a third party testing and certification company is the only way to be sure that your items are compliant.

 

Michelle Scheblein is China Business Analyst at BaySource Global. She has a B.A. in international business from the University of South Florida and has resided in China from 2013-2014. She can be reached at Michelle.Scheblein@baysource.net

Protecting Brand Integrity While Manufacturing Overseas

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In the world of business, financial objectives have traditionally prevailed over the values of social responsibility and ethical behavior. As the global business landscape continues to flatten in an increasingly competitive economy, companies have to find ways to reduce costs and uncertainty more than ever. Supply chains are the low hanging fruit for finding new buckets of savings.

For much of the last 20 years U.S. firms have followed the trend  to low cost country sources for labor savings offered through outsourcing. Technology and globalization have made manufacturing parts in one nation, assembling them in another, and selling them in a third a reality. Although controversial at times, outsourcing has proven itself to be expedient and highly profitable.

Without proper due diligence there can be a dark side to outsourcing. Throughout the years a series of highly publicized public relation nightmares regarding child labor violations and reprehensible working conditions at Asian factories have impacted companies such as Nike and Apple. If not managed carefully, manufacturing overseas can cause serious damage to brand reputation. Consequently, this can have devastating effects on the bottom line for businesses who’ve either shrugged a cold shoulder at or simply overlooked the social welfare aspect of global manufacturing. In a world that’s outsourcing more than ever, the idea of social responsibility has become inextricably linked to a company’s identity.

Consumers and the businesses that ultimately serve them through the B2B framework can no longer simply assume that products are being safely manufactured by highly skilled, adult workers in favorable work conditions. Nor can we afford to assume that all foreign workers are recipients of the same high standard of worker’s rights, as seen here in the United States and Europe. With social media, and the general transparency that the internet brings, today’s highly informed consumers are holding businesses to a much higher standard when it comes to manufacturing responsibly.

Outsourcing affords small and medium sized businesses the opportunity to compete  in the same marketplace as their giant, corporate counterparts. Socially responsible outsourcing must be approached cautiously with a partner you can trust. Having a reliable overseas partner that can provide your business with a factory social-audit check allows your business to mitigate the risk of destroying the good-will and reputation that your product or brand has built up through the years.  Businesses considering moving their manufacturing operations abroad need to consider how to manufacture overseas without risking the reputation of their brand.

Ethical businesses have the power to transform their organizations and supply chains into sustainable practices that people can trust. Rather than viewing suppliers as a network that they simply manage they are valued as partners in a powerful brand  that generates shareholder value and an long term goodwill. Ethical businesses value transparency,  long-term relationships and human rights. A reputable business ensures that products are produced in factories with technically skilled and legal workers that meet both domestic and international safety and work condition standards.

With operations dispersed around the globe, the modern business is a fundamentally different animal from its predecessors. The days of achieving profitability by any means necessary are over. Even as more  companies jump onto the social responsibility band-wagon there still remains a perpetuating stigma that businesses who manufacture their products overseas choose profits over values. Globally-minded companies that take an interest in manufacturing abroad should exercise prudence in selecting an over-seas partner that preserves product integrity and social values, in addition to affording clients the ability to capture the cost-savings opportunity out global outsourcing.

 

Michelle Scheblein is China Business Analyst at BaySource Global. She has a B.A. in international business from the University of South Florida and has resided in China from 2013-2014. She can be reached at Michelle.Scheblein@baysource.net

Playing Football in the Rain

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Growing up in Ohio, I was fortunate enough to play football on a pretty decent high school team. Our season began in the dog days of summer and ran into the first autumn frost. At some point during those four months a good solid downpour during a game was inevitable which meant a contest mired in mud and the need for a revised game plan.

Now the pessimistic coach might consider this to be a disadvantage to his chances of winning the game. But a more strategic and forward thinking leader would understand both teams faced quarterbacks with wet hands, blockers bogged down in soggy clumps of turf and receivers whose completion numbers were going to be anything but stellar. The conditions of the game while presenting new challenges, would be equitable for each participant. So in the end it would be a level headed strategist who understood and exploited his team’s strengths—advantages even we may not have known we had, who would be celebrating victory after four quarters of play.

In low cost country sourcing, I have heard grumblings for the past five years about jobs lost to China. Indeed, the groundwork laid by Kissinger and Nixon in the 70s to open up free trade with China could have been perceived as an overcast forecast for some players. However, just as we discovered, the right plans and execution meant we could be quite successful rather than assuming failure was looming.

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Global Impact

China is set to become the world’s second largest economy. Those Western companies, who have built the equity of their brands over the past several decades, should recognize the opportunities that exist in China and other parts of Asia for marketing their goods and services. The investments U.S. firms have made in intellectual property, trial and error and innovation are unmatched anywhere in the world. So why haven’t more companies embraced this vast market that exists?

Whether we are talking about cosmetics, heavy equipment, apparel, software, consumer goods, or electronics, there is an insatiable demand for Western products overseas. Even in today’s depressed economic times, the needs for world class technology to complete huge infrastructure projects provide rare market opportunities to international companies.

China’s rebound for the first 3 months of 2009 is considerable. Expectations for economic growth for the next quarter are at 12%, so economists generally expect 7 to 8% overall growth this year.

Why then, is China poised for a rebound when the rest of the global economy is experiencing its worst performance in decades?

According to reports out of China, retail sales have continued to increase strongly with the help of the government which has offered China’s 800 Million farmers VAT exemptions on big ticket purchases, namely electrical appliances. The resulting effect is a replacement of exports through domestic consumption without a loss for the state. Retail sales went up 15% this past March compared to the same time a year ago.

China announced its stimulus investment program last October and took extraordinary measures to make it happen. Just prior to year end, 2008, USD 58 Billion of pending projects were approved within one week. Because the Chinese save most in the world they created the largest bank in the world (in deposits) passing American and Japanese rivals JPMorgan and Mitsubishi-UFJ. China is now home to the top 3 banks, reflecting the confidence of investors in Chinese banks. In the first quarter of 2009 new loans accounted for more than all new loans in 2007.

Exports are picking up too. From a monthly all time high of USD 136 Billion in September 2008, exports fell every month to a low of USD 65 Billion in February (25% less the 2008 figure). But, in March they rebounded to 90 Billion.

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New Market Opportunities

China’s size and growth create enormous opportunity in 2009. As a growing consumer market, the number of millionaires has grown to 825,000, many younger than 40. According to an April 30 Wall Street Journal article, the $585 billion stimulus program has “quickly funneled money into everything from bridges to consumers’ pockets.” There are countless municipal projects which now need to be completed including high speed trains, power plants, telecommunication systems, hospitals and water treatment plants–all which will be built in second and third tier cities. Business processes outsourcing (BPO), and high-technologies have been singled out as fast investments on the coast. Hi-tech will continue to rebound driving demand for components – all which will be made in China. Imports have started to recover since the beginning of the year.

Heavy equipment sales have increased as is evidenced by the attendance of almost 200,000 visitors to the China International Machine Tools fair in April. Caterpillar Inc. CEO James Owens, according the WSJ article, says “the company’s excavator sales in China have returned to record levels in recent months.” He goes on to say that “China continues to start work much more quickly than the U.S.”

Lower Manufacturing Costs

According to a recent report by Supply Chain Digest, “between lower wage pressures and the fact that most Chinese factories operating at low levels of utilization, Western buyers are gaining more pricing clout than they have had in years. The Chinese government, for example, says the value of China’s exports fell 25.7 percent year-over-year in February, accelerating from a tough 17.5 percent decline in January.”

Estimates of Hong-Kong based manufacturers in China indicate that business activity is stabilizing 20-30% lower than before the crisis. Forced to reduce prices in an over-supplied environment, Chinese producers have no other choice but to become the most competitive, even against other Asian producers.

“Deflation [in China pricing] is here to stay,” believes William Fung, managing director at Li & Fung. “Buyers have more of an upper hand again.”

That’s because export volumes to the weak economies of the US, Europe and Japan show no signs of recovering soon. However, there are signs that China’s manufacturing sector is recovering on its own, without much help from export customers, as the country’s economic stimulus plan and focus on bolstering the internal economy start to pay off.

By February, the producer price index went down 4.5% year on year, to its November 2007 level. The trend accelerated in March with a 6% drop. The consumer prices naturally followed, resulting in an actual deflation (-1.6% in February and -1.2% in March).

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The World’s Second Largest Economy Emerges

According to Daniel Meckstroth, economist at the Manufacturers Alliance in Arlington, VA, “the hope is that China would become an engine of growth to drive the local economy.” China’s proactive response to the crisis has enabled it to be the first to bounce back. This flexibility will not only result in China becoming the world’s second largest economy, but will also let it take its rightful place atop the value chain. Therefore it will have to invest to improve and maintain its cost competitiveness, as both a viable market and as a manufacturing leader. Should the U.S., Europe and other trading partners be able to weather the current storm, China will play a major role in world economic recovery.

A Winning Season

Those U.S. companies who spend their time, energy and resources embracing this new China market rather than disparaging others who offshore low value added labor, will actually enjoy playing on the muddy playing field that our global economy has become. In the end, the sun will still rise in the East and set on the West. The soggy ground will firm up and those who respond to all elements of the season accordingly will record a win.

David Alexander is President of BaySource Global, a U.S. based manufacturing and project management firm with offices in Shenzhen and Shanghai. www.baysourceglobal.com