There is one reason and one reason only that decision makers elect to have products manufactured in China and that is cost savings. Assuming that manufactured costs are lower in China due to labor savings, there are many other cost levers to consider when manufacturing offshore in China. Here are the top five:
1. Freight Costs
Freight and logistics should not exceed 10-12% of your total cost of goods. In other words, if you ship a 40 foot container to the U.S. this will cost on average $5,000 including import fees, duties, tax and drayage (overland transportation to/from a shipping port). So if you can’t move approximately $50,000 of product, that should already be 20-30% below existing manufactured cost, you need to re-evaluate whether it makes sense.
2. Carrying Cost of Capital
Cash is king in any business. It is critical to produce inventory that will move once it gets to the U.S. otherwise each month that inventory is tying up capital and not producing top line sales revenue, you are eating into your cashflow.
3. Warehouse Space
Every square foot of a warehouse used to store products has a fixed cost. Unless you have excess space available, you need to be certain you are allotting this valuable real-estate to products that are generating revenue. Otherwise the savings will be offset by the additional cost of warehouse space.
4. Due Diligence
For items #2 and #3 it is imperative that analysis be given to not only finished goods but also raw material and components. Often overlooked is the advantage of using China to absorb the financial burden of not only managing but paying for commodity purchases, raw material, components and works in progress. Every month of financial responsibility taken on by your China producer is a month of cashflow freed up for your business.
5. Start-up Costs
Your China factory will absorb many intangibles associated with start-up costs including learning curve, purchasing coordination, and in many cases tooling not to mention infrastructure such as plant, property and equipment.
Quality, consistency and timing should only be the “cost of admission” and no sacrifices should be made in these areas.
Interested in learning more? You can right here.
We’ve all heard the term “he could sell ice to Eskimos” to describe the consummate salesman who is able to convince someone to buy something for which they either have little need or likely have ample supply on hand. Or perhaps we’ve heard “he could sell them the shoes off their feet.” In either case the idea is that for those with the gift of persuasion, it is possible to convince someone to purchase something based less on need and more on charisma and charm. There may soon be a new term in our vernacular that could describe one U.S. company, Georgia Chopsticks—“They can sell chopsticks to the Chinese.”
In a town ironically named Americus, Georgia two hours south of Atlanta, that is precisely what Jae Lee has set out to do, producing 2 million Chopsticks each day destined for Japan, Korea and yes, even China. In May of this year, the Americus-Sumter County Payroll Development Authority (PDA) made a formal announcement that Georgia Chopsticks, LLC would open a production facility in Americus that employs 150 people. According to Lee, China with its 1.3 billion population lacks ample natural resources to support demand for chopsticks and on Tuesday, May 31 a formal ribbon cutting ceremony was held to mark the opening of their plant.
According to the Atlanta Journal Constitution Lee who started his chopsticks business in Cochran last November, sent a couple of samples overseas, and within a few months needed to expand. Said Lee, “I knew there was a need and I thought I could make a profit.” Imagine that.
“We tend to think that the Asians take care of that pretty well,” said David Garriga of the Americus-Sumter Payroll Development Authority, the economic agency that owns the plant that Lee rents in the city’s old industrial park. “For Americus, the chopsticks factory represents a flashback to its days as a manufacturing center,” Garriga said. But as many companies shifted work overseas, many shops shut down.
So why aren’t more companies strategizing to include China in their plans? In an October 6, 2010 Bloomberg Press report it was estimated that China market was valued at $150 billion in potential goods and services or a top ten global opportunity for U.S. companies. “U.S. companies have experienced tremendous commercial success in China’s market and the prospects for future growth are significant,” says Erin Ennis, vice president of the U.S.-China Business Council.
China has become the U.S. third largest customer for things like Greentech, machinery, luxury items and even wine. China’s expanding consumer market clearly has an appetite for Western brands. Thanks to the gateway of information available through the internet, television and other media there is almost built-in demand for products from the West. As long as companies are focused on things like quality and safety the market is stronger now than in the history of our trade relationship.
“The Chinese appetite for fashion has become voracious,” says Farooq Kathwari , chairman, chief executive officer, and president of Ethan Allen Interiors. “The observation that ‘we first dress ourselves, then we dress our homes” applies equally in China. For years, French, British, Japanese, and American clothing designers have taken China by storm. It was a natural evolution that consumers so immersed in couture and inspired by the biggest names in fashion would turn next to fashion for the home. The demand is there and growing.”
Kathwari should know. He’s been in China since the 1970’s when he began buying arts and crafts there. Today they are marketing Ethan Allen —a quintessentially American brand—in 53 locations in major cities across China. They ship 60 percent of what they sell there from their well-established U.S. manufacturing base and in turn buy Chinese products to be marketed in Ethan Allen Design Centers in North America.
The U.S. exports about $100 billion annually to China in goods and services, supporting about half a million American jobs. According to the White House new deals in the works with China will support up to 235,000 new jobs in the U.S. In addition to major players such as General Electric, Honeywell and Navistar, there are opportunities for companies of all sizes to exploit increased demand by the growing Chinese middle class.
For now, the man who would sell chopsticks to the Chinese quietly goes about his business of working toward a goal of producing 10 million chopsticks per day. As of June he’d received 450 job applications. For many of those Americans out of work in the little Georgia town, the Chinese market for their products could soon mean the good fortunes in their cookies may very well come true.
As the #1 manufacturer in the world China now produces nearly $2.5 trillion of goods. While this is around 28% greater than the U.S., manufacturing makes up an astounding 30.5% of China’s GDP vs. 12.3% for the U.S. One thing experts acknowledge is at $2 trillion in manufactured output the U.S. produces more with less labor. It also indicates that low value added jobs with less profit margin have gone and remain overseas. So what does that mean for us? It means that China is still the factory to the world and if operations decision makers haven’t developed a competent model to outsource redundant, high labor and low value add processes, they are tempting fate. There is a cost to and not to doing business in China. and the time has come for most organizations to analyze synergistic offshore-onshore manufacturing & distribution strategies.
Assume for a moment that you are the SVP of Operations for a U.S. firm in Des Moines that manufactures some sort of metal and plastic assembly. Sales have been flat and finally in that Monday morning meeting the inevitable question arises. “What are we doing about China?” your boss asks. You have a solid team of purchasing professionals, none of which can point to Hong Kong on a map. However, through the internet one of your go-getters, Bill, has begun to put a spreadsheet together of die cast and injection molding companies in the Guangdong Province, which he’s researched as being a hotbed for these industries. Since Guangzhou is a FTZ (Free Trade Zone) Bill with his Operations Management degree, has identified this as the logical place to start. He’s shared a couple of months of emails with “agents” posing as direct factory managers and is ready to take his associates to China. Just say the word.
Assuming that Bill and the others now have passports and visas in hand, they begin booking flights, hotels, trains, and ferries to venture out into the Middle Kingdom. In all they’ll be gone for just under three weeks. Since this is the company’s first sojourn to Asia, you’ll undoubtedly accompany them on this exciting new foray into the land of the dragon along with your Ops VP. Now you and your four valuable employees will be out of pocket the majority of a month leaving yours and their day to day responsibilities to others or to simply take a break from existing projects. How much time and capital do you think this will require? You may be surprised.
The following lists conservatively typical expenses by line item for a 2 ½ week trip to China.¹ Remember, you’ll require a full 24 hour day of travel to and from and a day of recovery once you’ve arrived.
The good news is there are competent firms in place to assist in your project management initiatives. In a poll on Linked In, 150 Supply Chain professionals weighed in with their response to the question, “What is the best way to manufacture outsourcing in China?” (See diagram below). 57% of respondents chose “Establish a trusted partner in China.” Perhaps a good portion of the voters had already been through the trial and error process. Or it could be that those who have succeeded in tandem with a firm watching out for their best interests can easily quantify the decision to engage a reputable partner for monitoring manufacturing, quality control, packaging, labeling and logistics.
In his article https://baysourceglobal.com/10-tips-to-better-china-sourcing/ William Atkinson of Purchasing Magazine explains that regardless of their China story, those who have enjoyed a successful relationship with China have done so through proper guidance and preparation. In this critical juncture of global commerce, fluctuating currencies, and competitive pressure, it is imperative to select a reliable partner whom you can trust, knows the local governments and regulations, has engineers on staff who understand your products and who can help you gain a foothold in this valuable region of the world.
¹Airfares, four star accommodations and RMB exchange rates as of September, 2014
Baysource Global President, David Alexander can be reached at firstname.lastname@example.org
As companies weigh the pros and cons of working directly with a factory vs. dealing through an agent for their China sourcing needs there are many points to consider.
Top 10 Pros and Cons
1. The scale or dollar volume purchased annually. (I published an article in M&A Magazine which argued it requires $40-$50MM in throughput for any ROI on a direct sourcing office.)
2. The number of varying categories and SKUs being sourced.
3. The complexity of products being sourced. Cotton socks are a lot less difficult to make and package than electromechanical items with sophisticated firmware and specialized components.
4. Experience levels, competence and proficiency with the language of the country with whom they’re dealing.
5. The sheer number of factories the buyers/agents have worked with including access to the owners or very least factory bosses and relationships with those individuals; the length of time and history with those factories and dollars of business placed with them; the ability to get production bumped forward in the schedule; the ability to receive favorable payment terms which impacts cash flow of any business.
6. Competency with provincial government regulations and requirements. (How would a New Yorker fare in an Alabama factory or vice versa?)
7. Ability to travel to/from factory within one day for urgent matters, product/packaging changes, and production oversight.
8. Quality Control-Generally considered the most critical. The standard process for measuring QC and the depth of practices such as random and in production sampling, testing equipment and facilities, reports, photos, and now video.
9. Experience with logistics, freight terms and all export documentation and activities.
10. Does the agent or factory (for direct) share your sense of urgency and same philosophies and principals? Are they vested in the outcome and long term success of the business?
Many companies go it alone when embarking on an outsourcing project for the first time. Commonly, purchasing personnel will rely on web and email correspondence when initiating a sourcing project in China. Small and mid-sized businesses do not necessarily have the resources or personnel required to successfully launch a manufacturing outsourcing project in China.
Commonly, people will seek out a “sourcing agent” or other types of representative in China to act on their behalf. Baysource is different in that our team has been working with a select group of factories for over a decade and with that comes the required credibility to negotiate price, terms, and ensure products are manufactured to our customers’ specifications and expectations. Baysource doesn’t “sell” anything. What we do is get our clients exponentially closer to their project goals accomplishing in one month what would usually take a company one year.
We have all heard about or seen the Tip of the Iceberg illustration, illustrating what makes up Cost of Goods. When one considers the costs of overseas sourcing, often enough he/she does not place enough value in what goes into overseas sourcing. The expenses of travel, shipping back and forth of samples, and of course employees’ time out of the office are huge components to take into account. But what is the cost of failure? Out of spec product? What is the true cost of not having your product available for months at a time?
This is where having an organization such as Baysource, acting on your behalf and with only your interests in mind pays off in spades. Few companies will work on a no-obligation basis such as Baysource, side by side with your key decision makers, to help you accomplish your goals.
- Product Development Costs
- Distribution Channels
- Inventory and Startup Financing Capital
Educating the Masses
How will you announce the arrival of your new product to the world? Magazines? PR campaign? Put an ad in the paper? Direct Response Television (DRTV) is a great but often expensive form of advertising and one of the best ways to demonstrate a new application or use as well as building brand equity. It’s great to have a video on your web site but again, how will you drive viewers and a following?
For Part Three we turn to renown and widely respected author and expert, Jim DeBetta, who has led firms such as TV Goods, Rymax Marketing and Carson Optical. As one of the foremost authorities in helping inventors and consumer product entrepreneurs develop and launch their products through infomercials and retail store placement, Jim is widely sought as a guest speaker at many nationally recognized events.
BaySource Global: What are emerging methods, tactics and strategies for introducing new products in the public domain?
Jim DeBetta: “DRTV can be effective to quickly brand a product but the costs are very high. Internet marketing techniques offer the least costly and potentially most effective way to introduce new products – whether your own or on other’s sites. Its also critical to have a comprehensive social media campaign that can include Twitter, Facebook, Pinterest and others. This can be a fast and effective way to reach many people while allowing them to provide instant feedback.”
BSG: What are overlooked tactics for getting a product into retail distribution?
JD: “Using a broker or rep is always a good idea as they have the contacts and experience to get products introduced to retail buyers. Again, it’s also a good idea to start by marketing your products online. Having a powerful internet marketing plan is a great way to start and often not seriously pursued. Also, using distributors to sell your products to mom and pops and even larger chains can be effective as they already sell other products to their customers and can offer yours as well. You may make less working with a “middle man” but the sales you achieve more than compensates for it.”
Price vs. Value
In the initial phase of a product’s life-cycle there will likely not be the scale (volume) to drive down production cost. Unless you can convince consumers they should pay a premium price point at retail break even may be longer off than you expect. Plus, buyers will tell you whether your SRP (Suggested Retail Price) is in line with their category.
BSG: Where do inventors miss the mark on price vs. value, either in over pricing or under estimating suggested retail price? (Retail sometimes dictates a cost not attainable in the startup phase due to lower initial volumes at manufacturing)
JD: “Many inventors often feel their products are worth more than they are and so they price them at too high of a retail. Also, they often do not offer enough margin for the retailer…So instead of them offering a cost of lets say 10.00 to a retailer when the MSRP is 20.00, they offer them a price of 12-13 dollars which does not give the retailer enough margin. It’s critical for inventors and startups to make money but they cannot get too greedy and have to understand the margin requirements of big retailers
Jim DeBetta is President of DeBetta Enterprises and is a mentor, coach and consultant. He is the author of The Business of Inventing and offers Group Coaching courses for inventors. Jim can be reached at email@example.com Facebook-Get Retail Ready or 770-826-2606.
David Alexander is founder of Baysource Global specializing in contract manufacturing, new product development and distribution. David can be reached at firstname.lastname@example.org or 813-251-4184.
In our 4 part series dedicated to new product developers, innovators and inventors, we explore the 8 top considerations when developing a new product. Whether a seasoned marketing professional or first timer, these eight critical components include aspects related to product design, positioning, manufacturing, distribution and financing.
What You’ll Need to Start: Ample Capital
Beyond personal savings, innovators look to family and friends, explore small business loans and even tap into retirement accounts to raise money for their startup products. The initial outlay of inventory capital—that which could be tied up for months is often the greatest obstacle to overcome. Minimum order requirements (MOQs) by factories usually cause a lump in the throat for the first time product developer. Even if you have the greatest gadget in the world, how do you plan on financing that first big P.O.? You’ve likely invested significantly to develop your innovation—a figure that has hopefully been taken into consideration for ROI and overall budget. While established corporations have ample cash flow for typical starting inventories, this may be the greatest initial hurdle for those new to the process.
Inventory Financing / Purchase Order Funding / Factoring
There are a half dozen inventory financing groups (IFGs) in the U.S. who provide bridge capital, purchasing and taking title to inventory which goes to a third party distribution warehouse. You then pay the IFG as for the cost of goods plus any in and out fees required by the warehouse as you sell merchandise. Purchase order financing is a new twist on Factoring, an older practice in which small businesses sell invoices at a discount for faster recovery of cash, providing the factoring company with a substantial fee. The caveat is that the invoices must be to reputable clients, i.e. Walmart to be considered.
These can be good options that allow you to purchase greater quantities thus commanding volume discounts. Another benefit is that you don’t have to give up equity to outside investors. Many times the factories’ terms require money down at the time of placing the purchase order. IFGs make it possible to abide by these terms. These companies will want to know:
- Your sales and marketing strategy (refer to Part I of the series) and about your team
- The quality of the products produced
- Your margins
- Inventory turns
- Your credit worthiness and track record
Personal guarantees and background checks are almost always standard protocol which usually means demonstrating some form of net worth whether savings, retirement funds, property, creditworthiness and no criminal records. They may also not take a chance on a new client—one who has no real balance sheet to speak of. Another downside is that these lenders charge interest rates that can be as high as 40% annually. Lastly, there is always a time requirement (term) for making good on these loans which are usually around 60 days. If you are unsuccessful in meeting your sales plan, stiff penalties may be imposed.
In just the past few years companies like Kickstarter have created tech based forums which bring creative projects to life and are open to investment by the general public. To date, over five million people have pledged over $800 million and funded more than 50,000 projects to date on Kickstarter in categories such as films, music and the arts, video games and inventions.
Crowdfunding is catching on and becoming more accepted as a means of raising capital. Investors do so at their own risk and there is little to no governance or regulation meaning no reporting or other administrative overhead. Crowdfunding is really an eco-system for philanthropy and those playing in this space have an entrepreneurial spirit. Mostly, investors do not generally require any form of equity or preferred stock so your ownership is not diluted. On April 12, 2013 the JOBS (Jumpstart Our Business) Act, was signed into law and is designed to increase job creation and economic growth. The good news is that it eases fundraising regulations imposed by the SEC enabling more entrepreneurs to raise capital.
Because blocks of investments can be minimal—as low as $1,000 or less, investors may be less motivated to provide insight or contribute to the long term success of a project.
Seed Capital / Angel Investors
The difference between Seed Capital and Venture Capital is that Seed money comes from individuals vs. institutional investors. Most angel (seed) investors have a wider appetite for risk and a savvy track record for assisting startups with building their businesses. These professionals are also versed in providing feedback on pro-formas (financial targets for top line revenues and margins; cash flow models and debt. Generally seed investors are less hands on in the day to day running of the business once they have a sound idea of your business plan. Seed investments are less administratively complex with less formal corporate contracts and governance.
Seed capital usually comes at a cost—Equity. There is risk on both sides. The investor may never recover their investment or you may give away too much ownership. Usually the latter results because it is just so tempting for the inventor to commence their dream.
Many have asked me what it’s like doing business in China. I’ve always said that if you are doing it by yourself it can be as dangerous as swimming with croccodiles. I finally came across a photo that captured the essence of this concept.
- Resource Center
- Beginner’s Guide to Outsource Manufacturing
- The Beginner’s Guide to Doing Business in China
- China Product Sourcing
- China Contract Manufacturing
- China Manufacturing Consultant
- Plastic Manufacturers China
- Pros and Cons of Outsourcing to China
- Shipping from Chinese Manufacturers to Your Market
- Case Studies