Posts

Using a China Agent vs Going Direct

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?

New Product Development and “The Adaptation Curve”

Nobody has an ugly baby.  The same goes for new product developers.  Whether an independent entrepreneur or seasoned marketing team, once a new product concept is developed and months, even years in some cases are invested, our babies become prettier every day.  The same unconditional love and support that builds as our children mature and develop transfers into the professional mindset of innovators.

Calling All Product Developers

Creating a viable and robust market for a new product takes enormous resource, planning and resolve.  The sheer capital to unveil and furthermore generate brand equity is often the most overlooked aspect of getting a product to market.  Take the Segway for instance.  This emission free, efficient mode of personal transportation has been around for over a decade.  With some quick, simple training even children can master riding this marvel.  Reaching top speeds of 12.5 mph it has a range of up to 24 miles on a single charge.  Still commercial acceptance has been scant.  Why wouldn’t every warehouse and airport have a fleet of them?

Recently two Swedish designers have developed an entirely new concept for biking safety in the form of the Hovding, an airbag which deploys vies-a- vie algorithmic intelligence protecting riders from head trauma in the event of a fall or crash.  This revolutionary “bike helmet” is worn around riders’ necks and actually becomes a stylized accessory.  At $520 prospects for commercial distribution of any scale in the next five years may be slim.  However according to Forbes writer Jeremy Bogaisky this startup has already taken in $13 million in venture capital.  He cites bicycle industry analyst Gary Coffrin who gives a great summation stating “The adaptation curve for such a unique product at this price point is not likely to be rapid.”

Taking the tech factor down a notch, in my own gym sits a clever form of a door stop called “James the Doorman.”  I would imagine the designers, Black+Bum had their “Eureka” design moment and the wheels started spinning.  Honestly I have never seen such a cool variety of a door stop and  without knowing much about how they developed this unique version of an age old application, I can’t comment on what lengths they went to in commercializing their product.  I do know that the one in my club is the only that I have ever seen.

Every week we hear from inventors and product developers who have put great thought into products which offer unique solutions to every day needs.  Often though there are many missing pieces to their overall strategies.  Below are the Top 8 Hurdles to Successful New Product Launches.  In the coming months, I will be writing a series which individually expands on each of these, why they are often overlooked and how they are important for taking new products to market.

1. Product Development Costs 

Most inventors underestimate the cost for designing a manufacturing ready product.  Tools and molds can easily run into the five to six figure range and can dwarf first year profits.  Developing engineering drawings—those that translate into production and material specifications  require time and money.

2. Distribution Channels

Some products are ideal for Big Box retail but unless you know how to navigate this space, most category managers are not going to take a chance with a single line item vendor.  It creates additional administrative work for the system, and most inventors don’t have the capital to market their products.  Specialty and on-line retailers generally are better proving grounds for a products’ acceptance but you still have to generate interest and traffic.  Oh, and did you get a UPC code yet?

3. Inventory Capital 

Minimum order requirements (MOQs) by factories usually cause a lump in the throat.  Even if you have the greatest gadget in the world, how do you plan on financing that first big order?

4. 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?

5. Price vs. Value 

In the initial phase of your 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 retail price, 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. 

6. Regulatory and Testing Requirements 

With your product in the public domain, most retailers will require some sort of regulatory or product safety testing and compliance with groups such as the Consumer Product Safety Commission (CPSC), Underwriters Laboratories (UL) and others.  Depending on what industry you are in, your item may require testing and certification by default.  To you this means additional time, red tape and money.

7. Patent and Intellectual Property Protection 

This is perhaps the most critical and misunderstood area of product development.  In many cases developers could have saved themselves months of work simply by doing some basic research and analysis.  The United States Patent and Trademark Office site has become more navigable and efficient thanks to improvements in their search functions.  There are three ways to begin your inquiry using key words, designs or a combination to see if someone else has registered a similar product.  Even if they have you may be able to make some functional changes to distinguish yours but again, many underestimate the time and capital required to protect the investment of your innovation.

8. Aftermarket Sales and Support

Now that you’ve got a patent pending, finalized your business plan, raised early stage capital, have product on the warehouse shelf and are starting to generate traction don’t forget the basic administrative requirements.  If you hit the lotto and are selling to Wal Mart, using retail link is a requirement.  This entails sending a staff member for training and ultimately using their on line tool daily or weekly.  Is someone manning the phones for product questions and concerns?  How robust is your web site?  Oh, we haven’t even discussed how much this will cost to build.

While these hurdles aren’t surmountable, it is critical to factor in all the critical and time consuming elements of bringing a product to life.  Even this list is not comprehensive enough to account for the unexpected turns in the pathway to new product development.  If it were easy, everyone would be doing it.

Read Part 1: New Product Development and the Adaptation Curve

David Alexander is president of Baysource Global and has a decade of experience with new product development and contract manufacturing.

Playing Football in the Rain

football-in-the-rain11
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.

82024646

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.

83022265

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).

83971317

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

A Conversation on doing business in China

baysourcelogo The following is a recap of a January 21, 2009 panel discussion hosted by the Orlando Chapter of ACG (Association for Corporate Growth) on the ins and outs of doing business in China. David Alexander, president of BaySource Global www.baysourceglobal.com was one of the featured speakers along with Brian Su of Artisan Business Group and Jim Gaynor, CEO of Lightpath Technologies.

ACG Moderator: Discuss how this global recession has impacted doing business with and in China

Alexander: The Credit crisis affecting all industries. Volumes are down and many factories dependent on U.S. retail and consumer volume have closed. People are strongly revisiting “In-Sourcing” due to attrition in volumes. A local trade association predicts that by late January, Dongguan and its neighbors Shenzhen and Guangzhou will lose 9,000 of their 45,000 factories.“Many factories are looking at completely empty order books,” warned Stephen Green, head of China research at Standard Chartered, who believes the export sector may even shrink next year. Green believes China will see 7.9% growth in 2009 – well below the double digit figures of the past five years.“Government statistics show that 67,000 factories of various sizes were shuttered in China in the first half of the year,” said Cao Jianhai, an industrial economics researcher at the Chinese Academy of Social Sciences. By year’s end, he said, more than 100,000 plants will have closed. The wave of factory closings began in Guangdong province, where the nation’s economic reforms were launched three decades ago. The region accounts for about 30% of China’s exports, but over the last couple of years, Shenzhen, Dongguan and other cities in the area have sought to clean up the environment and create an economy based more on services and higher-value products. Makers of labor-intensive goods such as shoes, garments and furniture no longer felt welcome.”Stanley Lau, deputy chairman of the Federation of Hong Kong Industries, a trade group with 3,000 members, has estimated that as many as 15% of the 70,000 factories run by Hong Kong businesspeople in the mainland will close this year. He says many more are likely to shut after Chinese New Year in February, when millions of migrant laborers will return home for several days. “Once workers go home, they can close down the factory quietly,” he said in an interview in Hong Kong.

ACG Moderator: Given this recession, specifically, how has the outsourced manufacturing space been impacted?

Alexander: People have been forced to re-analyze bringing manufacturing back due to lower volumes. Less scale means reduced leverage with factories. Reduced demand = longer lead times with higher volume/less frequent orders. Carrying costs of capital increases; customer response times impacted. IKEA for instance has recently opened a plant in Virginia.In an April survey of nearly 1,000 companies by RSM McGladrey, the number planning to move offshore fell by 20% from a year earlier

ACG Moderator: Further explore the costs of shipping/freight as they impact this model

Alexander: Increased energy costs toward the end of 08 meant freight as a % of COGS increased. There were fewer containers coming into port—first declines since 2006; down 1.5% from Nov 07. At $150 barrel 40’ container $8,000 vs. $3,000 a year ago or $100. At $200 it would be $15K. Through July 19, U.S. railroads had carried 5 million shipping containers, down 3.4% with the same period last year. Containers that slow to 23mph from 29MPH save 20% but this means freight lines have to add containers. However, freight increases alone not cause in wholesale trade pattern shift back to US mfg. The Economy is key driver. Higher fuel costs will also cause a shift in Lean inventory. May see proliferation in warehouses to be closer to customers. The Freight Transportation Services Index dropped 1.4 percent from October to November to 107.6, the lowest level since January, 2004. The index is down 4.9 percent from its historic peak of 113.1 reached in November, 2005, the Department of Transportation’s Bureau of Transportation Statistics reported.

copy-of-china-08-031

ACG Moderator: Discuss the Chinese economy both how it’s being impacted by this economy internally and how externally the commodity markets are being impacted around the world.

Alexander: China’s exports fell in November for the first time in seven years and manufacturing activity shrank in December for a third straight month. Material costs will always fluctuate globally and are consistent around the world. With fuel and energy costs subsiding a bit and with material costs softening, Labor is still the key driver for the feasibility of offshore manufacturing.

Still it seems like the economy is chugging along normally though. In the city where one colleague lives there were more than 4000 cars newly registered in the first week of Jan alone. This is a city of 3M people and the roads are already crowded. We are not sure how many weeks like that one in Jan. we can survive and still keep cars moving along. Also, remember, the Chinese are good at saving money. The China economy is predicted to be as large as U.S. by 2030. All this said, this crisis has been a time of reckoning. Americans are buying fewer Chinese DVD players and microwave ovens. Trade is collapsing, and thousands of workers are losing their jobs. Chinese leaders are terrified of social unrest. Having allowed the renminbi to rise a little after 2005, the Chinese government is now under intense pressure domestically to reverse course and depreciate it. China’s fortunes remain tethered to those of the United States. And the reverse is equally true. The Treasury conducts nearly daily auctions of billions of dollars’ worth of government bonds. For the past five years, China has been one of the most prolific bidders. It holds $652 billion in Treasury debt, up from $459 billion a year ago. Add in its Fannie Mae bonds and other holdings, and analysts figure China owns $1 of every $10 of America’s public debt. The Treasury is conducting more auctions than ever to finance its $700 billion bailout of the banks. Still more will be needed to pay for the incoming Obama administration’s stimulus package. The United States, economists say, will depend on the Chinese to keep buying that debt, perpetuating the American spending habit.Many firms in the auto, luxury, travel & tourism and real estate industries have begun reporting a significant decline in spend. Where the greatest opportunity lies, is in the rural economy. It is the economy that has lagged far behind the others – It is the economy that has more than 700 million people – It is the economy were small nominal gains can equate to large.

ACG Moderator: Discuss the idea of building markets in China coming from the U.S. or Europe

Alexander: According to The Kiplinger Letter, for 2009, trade will shrink worldwide by 2.1 percent to $115 billion and U.S. exports will drop 0.5 percent. It said the hardest hit areas will be machine tools, chemicals, plastics, mining gear and turbines, while medical products, farm goods and construction equipment should weather 2009 relatively well. Kiplinger predicted no worldwide growth for gross domestic products in 2009, and negative growth in the U.S. There are still good opportunities for growth. Certain products that sell well in China and come from USA are mostly niche items. Examples: Zippo Lighters, cosmetics from famous names like Estee Lauder cars, and famous brand clothing. Western brands will always be in demand.

ACG Moderator: Discuss how the Chinese government is impacting companies that want to either invest in China financially or via a joint venture or with manufacturing facilities – VAT rebates, and clean industry versus smokestacks

Alexander: In July, 07 VAT rebates were rescinded for 553 industries. The gov’t just increased the VAT refund for exported goods to help with the economy. The price of raw materials is way down now so batteries, and other items have gone down in price about 30%. China will increase the export tax rebates for some machinery products as of Jan. 1, 2009, in a bid to alleviate cost burdens on exporters (back to 17%). The most recent increase took effect on Dec.1, covering 3,770 items of labor-intensive, mechanical and electrical products, or 27.9 percent of the country’s total exports.

ACG Moderator: Discuss product quality concerns in Chinese manufacturing

Alexander: Any U.S. concern marketing a product manufactured in China is ultimately responsible for product/project management. This means clearly stating product specs and tolerances, material specs, defect rates, etc When we leave too much in the hands of Chinese manufacturers is when we run into issues.China does need better IT and process control. There is a lot of opportunity for IT/IS but also the Chinese don’t know they need this. They don’t even use part numbers in most businesses… Our biggest opportunity from US to China is to engrain our production management know-how. One of the main problems in producing quality here is that the workers and managers themselves don’t know what to expect in a quality product because they don’t consume such items. “They have no feel for what quality is.”There is also little accountability for goods that fail after some time in service. Example: If you buy a new house, everything will be perfect when you buy it but things will soon start to break because they weren’t made well. They might try to fix it but how can you fix a tile floor if all the tiles were installed following a standard that is not up to par? Example: they paint bare wood or walls without priming the wood first. The paint looks great for a year, then it lifts off in big sections but it’s too late for anyone to be accountable then. Your average Chinese homeowner has no idea how to paint or do other home repairs compared to the average American.This is why you need to have your interests well looked after. Also, a serious weakness of Chinese engineers is their reluctance to ask questions. This has to do with the cultural myth of “lose face.”Because of the importance of relationships and family sometimes they will hire their friend/family member instead of hiring the best person for the job. This also limits their success in some ways. Take Auto parts for instance. The Speed at which China has been industrialized means quality concerns and recalls are growing. Their revolution happened in a quarter of the time that ours did.The Chinese are unfamiliar with or don’t care about U.S. auto quality standards. Under federal law the importer of record is responsible for recalls and quality concerns. Many small importers (anyone can be importer) aren’t familiar with regulations and suppliers don’t have the capital to handle recalls.We also have to communicate the long term implications of the business opportunity to the Chinese factory. If they think a project is ‘one and done’ then this impacts price Everything is a negotiation.

ACG Moderator: Discuss the cultural differences especially as it relates to building relationships in China.

Alexander: The Chinese always consider their relationship with another person when they do business with that person. For example, they can never turn away from doing business with a friend even if there is a better product they should be seeking. At least they can’t do it in front of everyone so they might do it secretly. The Chinese prefer to deal with people they know and trust. Western companies have to make themselves known to the Chinese before any business can take place. Furthermore, this relationship is not simply between companies but also between individuals at a personal level. The relationship is not just before sales take place but it is an ongoing process. The company has to maintain the relationship if it wants to do more business with the Chinese. The relationship sometimes begins based on money then moves to integrity and trustworthiness. Frequent contact is important.

ACG Moderator: Discuss other emerging markets such as Vietnam, South America and Mexico briefly as they relate to the evolution of the Chinese markets and increased shipping costs.

AlexanderMuch is predicated on fuel costs. Also higher expenses, plus higher taxes and stricter enforcement of labor and environmental standards, are causing some manufacturers to leave for lower-cost markets such as Vietnam, Indonesia and India.Despite its huge pool of unskilled rural laborers, China’s supply of experienced, skilled talent falls far short of demand. The gap has been pushing wages up by 10 percent to 15 percent a year.Inland cities like Luoyang and Wuhan, outside the traditional export zones of Guangdong and the Yangtze River Delta, near Shanghai are emerging. In inland China, wages still lag far behind the richer eastern and southern coastal areas.

The Top Books on China

Recently I posed the question asking what the best books available on China were. My intention was to highlight both Western and Eastern perspectives on topics ranging from everything from business culture and protocol; political climate; culture, and basic life in China. There was a great response which is compiled below. Overwhelmingly there was sentiment that there is no substitute for the experience of living and working in China. However, for those without this limited or practical experience here is the top 30 that members from three Linked In Groups–China Trade Group, Business in China, and Procurement Professionals said: (listed by title and author)

Mr. China, Tim Clissold top 4
Managing the Dragon, Jack Perkowski top 4
The China Price, Alexandra Harney top 4
China Inc, Ted Fishman top 4
One Billion Customers, James McGregor
China StreetSmarts, John Chan
The Art of the Deal in China, Laurence J. Brahm
The Art of War, Sun Tzu
Chinese Business Negotiating Style, Tony Fang
Inside Chinese Business, Dr. Ming-Jer Chen
Chinese Business Etiquette, Scott D. Seligman
The Chinese, Jasper Becker
Business Leadership in China, Frank T. Gallo
The Coming Collapse of China, Gordon chang
Luxury China, Michael Chevalier
Elite China, Pierre Xiao Lu
Where East Eats West, Sam Goodman, Michelle Ree
Poorly Made in China, Paul Midler
Factory Girls, Leslie T. Chang
All the Tea in China, Kit Chow, Ione Kramer
China Shakes the World, James Kynge
China: Fragile Superpower, Susan L. Shirk
The Tiananmen Papers, Liang Zhang, Andrew Nathan
Gifts Favors and Banquets, Mayfair Mei-hui Yang
Capitalism with Chinese Characteristics, Yasheng Huang
The Great Wall, William Lindesay
What does China Think?, Mark Leonard
The Search for Modern China, Jonathan D. Spence
Chinese Religiosities, Mayfair Mei-hui Yang
When Asia Was the World, Stewart Gordon