Leaving China.... returning to Panama.

In all my years spent in Beijing, the only constant was change. What I've came to call home for many years has dramatically changed since 2005. But even though I embrace change, it's never easy. So when I was asked by my parents to come back to Panama to manage the family business, I was quick to accept, but bitterly said good-bye to home.

The time was right. Having a baby boy in one of the most contaminated cities in the world is no easy task. We had 2 heavy duty air filters at home and struggle to find non contaminated produce. In that sense, it was a no brainer... for the baby, it was better that we move.

On the professional side, China was showing signs of a slowdown and I was becoming tired of the many bureaucratic problems plaguing the Chinese government system and the rise of a dangerous nationalistic pride that might overshadow all my entrepreneurial efforts along the years. But I love a good challenge and I was very resilient to give up on my dream. But it was getting very hard to find the kind of customer that INPASIA needed being in China, and if I wanted to grow, I would inevitably have to spend more time in Latin America. Ehhh... so going back might not be a bad idea.

My parents wanted me to manage Eco-Klean, a company that with the help of my Dad and my brother, during my early youth we made it to be the first and most important environmental company in the country. The company was suffering inadequate managerial practices and had problems with cash flow and liquidity.  Moreover, it was my brother who had been managing the company during the time I wasn't in Panama. It was not going to be an easy task.

I arrived on May 31st and the next day I was at the plant. Eager to make changes. Eager to keep the company afloat.

Being in China for so long, having to struggle everyday with language barriers, miss conception about foreigners, the government, competition, strategy and basically starting from zero (no network, no help, no family)... this was not a walk in the park, but it was relative easy to understand what I had to do in the next few months: establish administrative policies and help the operation department increase their efficiency and speed. But the hard part was taking my brother off the team and facing my family over my decisions.

Sourcing and Procurement Process Part II: Supplier Identification

A trading consulting firm must have a vast network of suppliers to be able to procure products / services at the right quality vs. price.

In this part we explore the 2 different ways to create a relevant supplier list for your client.

Overview of our Process

 

Searching for the right Supplier – Supplier Identification

Yearly we procure around 600 items from different industries. Over the years we have built strong relations with factories that cover our core client’sindustries products. At the same time we are usually asked to procure products that we have never worked on before. We have the technical capacity to understand the products but searching for the right supplier becomes paramount.

Most procurement firms and middle men use websites to find their suppliers such as the following:

www.alibaba.com
www.made-in-china.com
www.globalsources.com
www.hktdc.com
www.b2bchinasources.com/

Based on our experiencewe are of the opinion that Alibaba is probably the most complete supplier search engine for the Chinese market, covering every single type of industry and product. We believe that made-in-china has better industrial product factories (such as Pipes, H-Beams, Machinery, etc).

The biggest drawback of using these websites is the lack of reliable information, making an initial due diligence an important part of our process. Some pages at this website sell themselves as a factory or a trading company, sometimes they are neither. We have also had the experience of finding fake companies who sole purpose is to frame clients. There are various ways to check on the validity of the information posted but we will talk about this in detail later on.

One of the best way to find reliable factories is visiting trading fairs around China. Though the canton fair is the biggest and most famous, it’s not the only one. There are sourcing fairs that specialize in industries such as:

Power Transmission and Control (PTC) Exhibition (Shanghai)
China International Medical Equipment Fair(Shenzhen)
China International Clothing &Accessories Fairs (Beijing)
China International Auto Parts & Accessories Trading Fair (Ningbo)
China International Auto Products Expo (Shanghai)
China International Petrochemical Technology and Equipment Exhibition (Shanghai / Beijing)
International Trade Fair for Infrastructure, ITS Traffic Management, Safety and Parking (Beijing)

This requires time and money to assist to this types of fairs. But one thing is for sure we can cover more ground on a fair and accomplish a lot more in less time than working on line.

From the fairs and the websites we make a list of suppliers to quote which looks like this:

This is the guide that will help you keep track of your progress. The more suppliers you contact the better chances you have to meet the right company to work with.

Over the years we have built a data base of over 10,000 suppliers making our job easier and our dependence on websites and fairs less and less.

Tips on Communicating with the Factories

1. Have all your product information and specification in a document (as we discussed on Part I)

2. After contacting the suppliers and giving them the document take the time to contact them again and asking them about their past customers, the countries they have sold to before, when did they started doing business, if it’s a private owned company or state owned, etc.

3. Ask for a copy of their business license. A Chinese business license looks something like this:

4. Ask for a copy of their company profile.

5. Ask for an electronic catalog of their product.

6. It's important to talk as much as you can with the supplier via phone. IM is very popular, but at the same time you lose a lot of information if you don't call.

On the next part we will be discussing about Due Diligence and what information is important to get from the supplier before making a decision to work with them. 

JLC

Sourcing and Procurement Process Part I: Requirement Analysis

In 2009 when we started International Partners Consulting Asia (INPASIA), an international trade consulting firm, I knew exactly who our competition would be. On one hand, we had the one man company – local person - that can speak English and Chinese with no other professional skill or experience than just communicating needs between parties (middle man), and on the other hand, the - I’m too big of a company to deal with small and mid-size companies (Procurement Firms). We knew that small and mid-size companies were in need of professional procurement firm’s services that were tailored to their specific needs and that had the flexibility and quickness of execution of a middle man. We also knew that eventually we also wanted to work with companies that were purchasing more than 20 million USD a year from China.

For us to be able to make this happen we needed a straight forward process that could be tailored to each of our client’s needs.

In the next few series, I will be describing our process in detail. By this I hope I can get enough feedback and suggestions to improve it and hopefully help others that are in the same business.

Overview of our Process

 

Understanding the client and the product – Requirement Analysis

During our first interaction with our clients we talk a lot about the product itself: its function, its specification, problems in quality, prices. It is important that during this stage we are able to clearly describe the product. How else could we ask and get what we want from the supplier? The complexity of this phase not only depends on the complexity of the product but also the knowledge the client has on the product and is able to transmit to us.

Some of the most important questions we need answers during this first interaction are the following:

1. English name of the product: to avoid confusion during translations.

2. Specification: a technical description of the material being purchased.

3. Statement of Work: basically this describes what the product needs too, methods it need to use and how often it would be used.

4. Price and Payment Terms: most clients are very reluctant to give target prices and sometimes if they do, they give impossible to reach target prices. This hurts the quotation phase as we try to find factories that reach that sweet spot between quality and price and discard factories that don’t comply with it.

5. Purchasing amount and Frequency: this is very important for negotiating price as the amount of orders the client is able to put in a year or the frequency of it means the factory can buy materials in bulk for production, making things cheaper.

Optional information we request:

1. Pictures or video of the product.
2. Manuals.
3. Lab test or Certifications.

After we get all this information we create an RFQ (Request for Quotation) document that usually looks something like this:

After we have done our list of factories to contact we would send them this document in order to avoid confusion and get the information we need in an efficient way.

Some products are more complicated than others. Some require technical drawings others must follow certain standards. But I believe following this steps our consultants can gather all the information they need to understand the product.

Finally, some of the clients don't understand their products as well, so it's part of our job to investigate making things slower.

On our next installment we will be talking about Supplier Identification and where you can find suppliers for a wide range of products.

Culture

My understanding of China as a country and nation comes through my Dad. He is now 83 years old, born and left China before the Culture Revolution. I want to be clear, being here for almost a decade, I believe that Chinese generations before the Culture Revolution has a different mindset than those after; for good or for worse.

Dad says that during his childhood he was forced to memorize Kongzi's (Confucious) Analects, write them and repeat them without understanding them. Reminds me of what my middle east friends tell me about learning the Koran. But he says that as grew grew older and confronted problems and other situations in his life, usually a verse from the dialects would pop up into his head. I saw first hand from my Dad's action how a big of an impact Kongzi was to his life through filial piety. Though the hard relationship that Dad and his Dad had, respect and subordination was always the norm for him. Dad was also a planner for our family, laying his ideas on what he wanted us to accomplish in the future and always reminding us that we have a duty to protect and take care of him and Mom.

At the age of 13 I stole my Dad's copy of Sun Tzu's The Art of War.  Honestly, I just liked the name. At that age it sounded like a good Chinese Kung-Fu (Gongfu) story. Even though I was disappointment I read it all and did not get to talk to Dad about it until I started to work full time with him at age 19. We would both agreed they were logical points to follow in any manner of business, war and politics.

Chinese food taught me the diversity of its people. No single dish can represent the variety of its people. China is not one group of people. It's a nation conformed by different people with similar history, language and traditions. Sort of like if Latin America was one big country.

Chinese opera was easy to like at a young age. The dresses and make up are amazing. But it took me a while to like that pounding of the drums and the cymbals crashes and the high pitch notes of the singers. But I do enjoy it now. Perseverance my friend.

China is a universe in itself. I'm grateful for my Dad to have introduced it to me in a way that all has been useful until this day.

JLC - 140107

Our first big client

When I first approached Luis, one of my clients, to introduce him about our services he was really skeptical about a foreigner running a sourcing and procurement firm in China. He had been a few years back to China in search of matches to sell to Latin America, a trip that took him mostly to the southern regions of the Middle Kingdom. His contact during that time, was a Chinese trader that took him to see the factories and evaluate them. This business venture didn't succeed basically because the prices were not competitive, specially if you compared them to factories in India where he later visited (without a need of a "guide").

His other business venture in China was the sourcing of industrial safety boots, something that he had already been doing for almost 2 years but was not satisfied with the quality and the price.

His first question to us was: being a foreigner, how can you get a competitive price for our products? For one thing, I said, I can speak Chinese, but most important, I can use this skill to talk to many suppliers in any given region to get an X amount of quotations. This will first give me a sense of the market, a feel for the price. I continued, we would still have to evaluate each factory, make an initial assessment and due diligence to then start getting samples for evaluation. But I think what you will value most  is that I understand the quality and price you are looking, I understand our market.

He wasn't convinced yet and we had to wait for the right opportunity to showcase our skills. A few months later his supplier of boots (which was a trader) decided to hike up the prices by 30%, making it unfeasible to buy from them. When Luis called me around 2:00 a.m. he was angry and said: I need to find a reliable factory, I need to have in the next 2 months 3 containers of industrial safety boots here. Let's see if you are more than talk.

I explained to Luis that we don't mark up prices. What prices we get we give to our clients. Our commission is fixed, so the clients know exactly what the factory cost is.

Now the problem with the Latin American market is that they are price sensitive (now-a-days who isn't?), but how can you be price sensitive when you are talking about safety equipment? Luis sent me specifications of the product he was looking for and I talked with him for maybe an hour trying to understand what made this product expensive. We needed to move fast so to shorten the huge list of suppliers that we had, we narrow it to factories that had CE or ANSI certifications that were up to date and compare their prices. My team got each of the factories business license and checked that they had no problems with the law.  From the list we chose 3 companies with really good experience, history and clients and ask for samples of their products. When the samples arrived to Luis' office, Day 15th of the project, we had found a supplier that fit his needs. The product from this supplier was 3USD cheaper than his previous one and had both CE and ANSI certification, making it easier to sell the product to Latin American companies.

But we were lucky.... to get an opportunity to showcase our skills.

It's still economically viable to manufacture in China

It is. 

In recent years there has been a constant buzz about factories in Vietnam and Thailand. Mostly based on the idea that low labor wages are the key to cheap products. I won’t deny that low labor wages affect the cost of making a product, but as I tell a few of my colleagues in China, there are other factors that come in to play here:

a.    Infrastructure:  China has invested over the last decade in the confection of roads, trains and ports. China has especially strengthened their container transport system in ports at Dalian, Tianjin, Qingdao, shanghai, Ningbo, Xiamen and Shenzhen. These ports are listed among the top 50 container ports in the world and each one exceeds freight volumes of over 100 million tons a year, number that Vietnamese ports cannot reach. 

b.      Skill labor worker: the Chinese labor workers have a lot of experience working in an array of manufacturing factories (from plastic to textile). Unless you are buying arts and crafts from Vietnam, the experience of the Chinese labor workforce will ensure the quality and minimize the problems of the products they are producing.  

c.   Supply chain: as mentioned in an article by The Economist citing Professor Zheng Yusheng of the Cheung Kong Graduate School of Business, the right way to measure manufacturing competitiveness is not by comparing labor costs alone, but by comparing entire supply chains.   This means if you do not have a certain supplier of a component that is necessary for a product a factory produces, it might make it uneconomic to make it in that area, as opposed to make it in a place where it has available all that it needs. 

d.      Productivity:  we agree that Chinese labor wages are rising, but is so is their productivity.  They are paid more basically because they can produce more. 

e.      Local Market:  factories can also curve their costs in China especially if they are producing for both the Local market and the international market.

Contract and Rule of Law in China

"You are a foreigner, you don't know how China works", yes, this might be true, but I do understand how business works and what our clients in the American continent expect and want.

I got told this quite a bit when I started and maybe people tell me this now but I think my minds cancels its like spam in my email inbox. I think there is only one way to do business and is the right way. A lot of this comments came up basically when I forced suppliers/factories to sign a buy and sell or manufacturing contract. From my Chinese counterparts they would tell me that contracts are useless in China. From the foreigners who have lived here for a long time I would get, surprisingly, that contract are useless in China.  Both parties didn't know what they were talking about.

This comes from the misconception that in China there is no rule of law. The misconception comes from their experience in the inability to prosecute when their Chinese counterpart do not comply with what was agreed upon in a contract or verbally.  

Life in Asia is about negotiations and to be able to negotiate you have to be able to adapt and be flexible.  As +Jason Sheets, an in-house lawyer for an American Software company puts it: “As soon as Chinese counterpart breaches a contract most of the managers and top people in the US want to sue. What they really should be doing is preparing for another round of negotiations. That is what they expect you to do, but most foreigners just lock themselves in the contract they have already signed and fail to be flexible.” He also points out that Chinese will breach contract usually only when a situation has happened (for example, an appreciation of the RMB) and the contract doesn't benefit them anymore.

This doesn’t mean that if you would like to make your commercial rights to be honored there wouldn’t be a viable way to do it. By August 2012 the Chinese courts have handled 370,000 cases, 25 % more than during that same period in 2011; as well you can see an increase in the arbitration cases with about RMB113 billion in settlements last year, up 22 per cent from a year earlier.[1] The number shows that there is a rule of law and that it’s gaining strength with each passing year.

But our recommendation: be flexible, be opened to negotiate. 

But as I also told Jason, for companies like INPASIA, who basically buy products from small and mid size companies, the contract sets the tone for our cooperation. It shows them our seriousness and puts into paper everything that we expect and want. Usually the Chinese companies (even though they are small) would not sign anything that they would not be able to comply with and would change clauses to try to benefit them. In one occasion, when a delivery date was not complied with, the manufacturer paid the penalty fee agreed on the contract, and we didn't even have to go to court for that. 

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[1] Financial Times: http://www.ft.com/intl/cms/s/0/e4e57188-e455-11e1-affe-00144feab49a.html