Outsourcing in China Today

Hong Kong-based consultant Peter Zapf talks about the risks and benefits of moving production to the mainland

Every week seems to bring news of another recall or safety issue involving a product manufactured in China (BusinessWeek, 8/17/07). But despite the highly publicized problems, U.S. companies will continue moving their production to China, says Peter Zapf, vice-president of community development for Global Sources (GSOL), a Hong Kong trade show producer and consultancy. The firm, founded 36 years ago, aims to assist business owners who want to find manufacturers and suppliers in Hong Kong, Taiwan, and mainland China. Zapf spoke recently to Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.

There's been so much negative publicity. Don't you think that importers are going to be scared off of manufacturing in China?

I think anybody that's looking to grow a long-term business has to look at China as a sourcing option, for two big reasons. One is the very competitive labor costs, and the other is the increasing number of new and innovative products that are coming out of that lower-cost labor market. In the past, 20 or 30 years ago, manufacturing was done in Japan, Taiwan, and Korea. In the future, who knows where it will move? But it's necessary for every company to evaluate the different sourcing options and understand the risks and benefits of each of them.

Frankly, China has lower labor costs, but it also has higher logistics costs, especially to manage a production line and have packaging done in English. Someone who wants to source in China needs to think about total landed cost, and whether they will get the product they need. It's not enough just to have something manufactured at low cost. It also has to meet all the company's specific product requirements and the country's regulatory requirements.

Your company does a lot of education for importers. How important is that now?

It's very important. We put on China sourcing fairs in Hong Kong at the AsiaWorld-Expo and in Shanghai and Dubai. The most popular of all our conference programs is "What new buyers need to know." It covers quality control processes, shipping logistics, payment and money transfer options, China business etiquette, cultural differences, and intellectual-property considerations. This is not to say you can't figure all this out for yourself, but it's tricky. And if you don't do it correctly, you may end up in the press.

And possibly not in a good way.


Do you have small business owners and startup entrepreneurs attending these shows?

We have everyone from the top 200 global retailers down to eBay (EBAY) power sellers and everybody in between. There are tens of thousands of folks from almost every country in the world who are new to importing, and others who are already established and just want to hear about how other people do things, whether they're facing the same problems as everyone else, and how they can learn from other business owners.

Can you give us some highlights from the program?

Let's talk about logistics. Your first decision is whether to ship by air, which is expensive but fast, or by sea, which is slower but cheaper. The exception is if you have a shipment that's less than 2 cubic meters in size. In that case, the minimum fixed costs for ocean shipping are so high that it almost universally makes sense to air ship, unless your shipment is extremely heavy.

The next question is, should you take legal possession of your products at the factory, or at the port, or not until the goods get to your warehouse? If it is your supplier's responsibility to get your product to the port, the cost is higher than if you take possession at the factory and arrange transportation to the port yourself.

Of course, if you request "delivered duty paid," where the supplier manufactures the goods and gets them all the way to your warehouse for you, that's even less hassle for you, but the cost will be even higher. Often, many people find that China suppliers know the best way to get the goods to the ports. Then importers use third-party firms called "logistics service providers" to get the goods from the port, through customs, and eventually to their warehouses.

What about quality control? How do you put processes in place when your engineers and designers are so far removed from the manufacturing plant?

It's absolutely critical do to two things: get samples made up, with packaging, and review them thoroughly. Second, submit very precise and detailed requirements and instructions for manufacturing your product with the purchase order. The supplier may not have made this product for the U.S. market before, and it could be that the requirements for power cords are different than the supplier is used to. So the more specific you get, the better a job you're doing of avoiding problems late in the process. Because by the time you notice that a problem has occurred, it's too late. You're kind of in trouble!

What about inspections?

Many importers hire a third-party company to do inspections in China so that the mistakes are caught before the product arrives in the U.S. market. If you have the details written down up front, and there's an inspection that turns up a problem, you can show that you've clearly given instructions. Some of the recent problems that have occurred wouldn't have happened if some of these companies had more appropriate inspection processes in place. There's not enough of that happening.

What's different about Chinese business etiquette compared to American business etiquette?

The biggest point to realize is that Americans are very used to fixing a price, agreeing on it, and then that's the deal. Other cultures, including China, are coming from the perspective that when you agree to a price, that's the start of the negotiations. There may be requests for changes along the way, and Americans aren't used to that.

Again, one way to help manage that is to have everything clearly defined up front, in writing, as part of the purchase order. At that point, what may move is materials and deadlines, rather than price, which is still hard for American companies to accept. But I've had the opportunity to talk to a lot of the China suppliers, and I've heard the other side of the story, too. They complain about buyers who put 30% down when their company is in the middle of bankruptcy and then go out of business. So the supplier gets stuck with a huge inventory of manufactured goods that they can't sell. That'll bankrupt a supplier.

It sounds like importing is not for the faint of heart.

There are a lot of challenges on both sides. The key is to take things step by step. Start with having samples made. Then put in a small order. There are a lot of processes to learn, but none of them are rocket science. A lot of folks are doing it successfully, and it's accessible for folks with patience who are willing to learn. I think it's important for businesses to recognize what they're getting into, and to recognize that some product categories, like food and toys, require you to do more work than others. Folks in those categories will need to better understand the steps they need to take to avoid any particular problems, and use the recent incidents in the news as an example of how not to do it.

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