Starting a production or building a range of products produced in China can be crucial for a successful business – but there are many pitfalls, especially for small-business owners.
Pray for the best but plan for the worst is the prevailing mantra.
Alibaba.com, Tradekey or Global Sources are the first choices for many when it comes to finding a supplier, but also the largest and most reputable have their shortcomings. The tangle of fraud that surfaced in February 2011 made importers aware of the image problems that still afflict China concerning trustworthiness.
Alibaba.com employees had provided 2,300 so-called 'Gold supplier certificates' ensuring that the company has been controlled by a third party. These false certificates were provided to companies that had not even been verified by a third party.
So what can you do to verify the authenticity of a supplier?
- Allow a third party to conduct an inspection
- Visit China and do an inspection by yourself
- Find customer references from Europe, Australia or the US and contact these if possible
- Ask for payment details to verify their banking account
- Ask for a copy of the business licence. It will vary depending on whether the company is registered in Hong Kong or Mainland China
- Information regarding establishing year, main markets, how the delivery times vary depending on the seasons
- It is beneficial if the company is specialized in a specific product/category
What should you be careful with?
- Never transfer money to anything else than a company account. In some cases, the supplier might want to receive payments to a private account – don’t agree with payment in which the company name is not the beneficiary!
One should bear in mind that China is still way down the scale for average income, which increases the risk of encountering fraudsters and organized criminals who earn big money when deceiving foreign purchasers
- Never pay by Western Union
- Be wary if the supplier does not allow visits from you or a third party
- Or if the supplier is hard to reach or contact by email or telephone
- Or if the supplier is asking for more money during the order process
One should bear in mind that China is still way down the scale for average income, which increases the risk of encountering fraudsters and organized criminals who earn big money when deceiving foreign purchasers. Visits to suppliers can be crucial for the success of your imports; it is worth a visit or at least hiring an agent to visit on your behalf.
There will be trouble, but stay calm!
Although the quality level is rising (almost) as fast as China’s GDP, you will get what you pay for. Many importers are often very frustrated by the poor discipline and lack of interest they encounter at Chinese companies. But why should workers be disciplined when they earn 150 pounds a month?
It is not uncommon for Chinese agents or suppliers to 'forget' to keep you abreast of new developments, which may cause many problems if the order process has already begun, your clients are waiting for their products or if you have travelled all the way to China to visit your supplier's premises.
At Alibaba.com there is always an MOQ (Minimum order quantity) for each product -the lowest amount that you can purchase – but of what? Usually the supplier doesn't inform you clearly whether the MOQ applies to a colour, size or product.
Those of you who thought you could order 2,000 hangers in 10 different colours will know that it applies only to the standard model – in one colour! All of a sudden the quantity has reached 20,000 pieces and your budget is blown apart.
There are countless scenarios in which problems related mainly to goods being produced based on customer specifications may occur. The problems are rarely serious enough to jeopardize the business relationship, usually just resulting in misunderstandings and changes.
That's why you need to be adaptable - but also very careful to leave accurate information and get this verified during the order process.
During the order process you should remember to:
- Specify the desired quantity in detail, such as sizes, colors, densities, or other product-related specifications
- Understand the shipping options. If you want the products shipped by sea, find out if your desired volume fills an entire container. If not, can you receive your goods in a shared container with a lower price? Don't forget to ask the supplier to check current prices for estimated shipping cost, even if the supplier insists that rates will change every day
- Get your information confirmed during the order process to check you are on the right track
- Make a sample of the product (almost never for free!)
- Find out how the supplier plans to handle a failure of production, such as wrong size or material. Will they produce the products again or will they make changes to existing products? Never accept compensation in the form of a lower price, this is the easiest way for the supplier to get rid of the goods. It might be impossible for you to sell!
- Clarify whether the supplier will outsource a part of the production to another factory. Never accept the supplier to outsource some of the work to a "sub-contractor"
- Ask the supplier to present a timetable based on a hypothetical starting date
Price negotiation
When Chinese suppliers publish a quote with the knowledge that you are outside China, it's a great opportunity for them to raise the price. The Chinese are good price negotiators and will in tend to set prices high so a satisfactory price is reached after price negotiation with a potential customer.
Another phenomenon is that Chinese suppliers list lower prices on their website than if you buy through other mediums. This is often the case with retailers too.
How much you can negotiate down prices differs from branch to branch and can range from halving the list price to no discounts at all. You must bear in mind that low prices in China are based on more than just low-paid workers and many manufacturers are fighting hard to keep down prices to both domestic and foreign competitors.
Bad luck and being overly forceful in price negotiations can lead your supplier to outsource part of the job to a subcontractor. If this happens you've lost control of the quality; they might buy cheaper materials or delay production.
However, do try haggling over the price – it often pays off.
You can try referring to other suppliers who produce similar products at lower prices. When your supplier says that they can't lower the price a single dollar because the margins are already so bad, it doesn't necessarily mean you can't ultimately haggle them down by 20-30%.
A good strategy can be to calculate the suppliers’ product costs and profits yourself and then present your own price. When you submit your price you must also be prepared to take a few knocks on the price – upwards.
The solution is to undercut the price, and when he or she calls your offer derisory, it doesn't mean that they won't agree to your price the next day.
Be humble but firm with the supplier. Don't assume that your specific order is crucial to the supplier's survival – the provider might refuse to accept your order.
Order samples if your order contains products requiring certain qualities. Be aware, though, that when the order arrives it could consist of lower quality goods than the original sample.
China has festivals that are not celebrated in Europe and other parts of the world. The biggest of them is the Chinese New Year, which lasts for almost the whole of February.
Business leaders and workers throughout the country work in shifts of about two weeks each. As a result, delivery times will double, which is problematic if your order is urgent.
The second biggest holiday is National Day, which runs from 1-7 October. Much briefer than the Chinese New Year, National Day has a more modest impact on delivery times, but is nevertheless worth noting.
Big events, such as the Olympic Games in Beijing 2008, Shanghai Expo 2010 and Asian Games in Guangzhou 2010, have had a noticeable impact on delivery times. During large events cargo flights can be disrupted and more rigorous customs checks result in longer delivery times.
In some cases products have had such severe restrictions placed on them that they might not be sent by air mail during a major event.
Counterfeits
The Chinese are renowned for their ability to imitate everything from cigarettes to Rolex watches. Most people are aware that it is illegal to import goods with other companies’ logos and product names, and you can expect it to be seized by customs immediately. Products with similar names, for example Badidas or Mokia, are also considered to infringe trademarks.
However, there are cases where it is difficult to interpret the law, for example products with a similar design to a product from another company - but without the use of other companies' logos or product names. Large and well-known manufacturers are inspired by competitors on a regular basis, and sometimes the design is replicated exactly.
So what should you import?
Many people labour under the misapprehension that only famous brands sell. This is absolutely not the case.
Since industrialisation accelerated in the 80s much has happened and Chinese suppliers now have a much better understanding of the quality we expect in the West
Small-business owners have plenty of opportunities to choose from among millions of products. If you want to embark on a long-term investment you can start your own production, and in fact there are many small factories that would be only too happy to receive your small orders.
Another myth is that anything made in China is useless junk. Many in the West repeat this falsehood and in their next sentence laud the quality of their new iPhone4. The iPhone and many other high-end products are manufactured in China.
Since industrialisation accelerated in the 80s much has happened and Chinese suppliers now have a much better understanding of the quality we expect in the West.
Many costs can arise from Chinese imports, and as a beginner it is not always easy to keep track of these.
Costs arising from importation of goods
- Raw materials
- Processing
- Shipping
- China domestic (example: from producer to the agency)
- From China to Europe
- Home
- Unloading in Port
- Storing imported products
- Insurance – often optional and based on value of goods
- Customs – varies depending on products (Current levels can be found at your country's customs website)
- VAT – Often 20% surcharge on admission
- Quality control – often required when ordering goods to be produced and he first time you buy from a particular supplier
Other costs
- Transaction fees (The client usually pay for these costs)
- Cost of currency exchange
Customs & VAT
The person or company specified as a recipient of products is classified as an importer and by law must pay taxes and customs fees.
The value of VAT
VAT can be calculated by adding the declared value of goods with the transport costs and customs duty.
Example when calculating the duty:
- Duty averages between 5-9% (Let’s say 4.5% in this case)
- Goods: Five MP3 players
- Value of goods: £200 + £20 for transport to UK
The duty can now be calculated:
Duty £220 x 4.5% = £9.90
Example when calculating VAT:
Value of goods £200 + £20 for transport + £9.90 for duty
Total VAT: £229.9 x 20% = £45.98
In total:
VAT (£45.98) + duty (£9.90) = £55.88
Shipping and transport
Basically there are two ways to get your goods from China: by boat or plane. Air mail is for smaller orders (lightweight) while shipping by boat is suited to large and heavy orders.
For entrepreneurs with small businesses, for whom airmail is an expensive option, there's an opportunity to team up and send goods in a container shared with another importer. This service is not offered at every shipping company though.
Delivery time via sea is usually 35-60 days.
For regular imports via airmail, it may be better to ask your supplier to send the goods with domestic airlines such as EMS Speed Post or China Post. Delivery time is just a few days longer than with more expensive companies like DHL, FedEx and UPS.
If you want to cut your costs further, you can sign a contract with a local shipping agency. They will have a large number of companies linked to themselves and therefore can offer discounts of up to 50-60%.
Delivery times vary, and the flights are often delayed. Normal delivery time is usually 5-15 working days.
