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

November 22nd 2013, Accounts of My Start Up - II Part

It would have been wise to have had a client before opening operations. It would have been wise also to have marketing material prepared to approach possible clients. I had none. I learned the hard way.

My Dad is pragmatic man, hard and cold when it comes to business. I was hoping that he would be my first client but when I approached him about the subject he said: You are not Chinese, how can you get better prices? Your company is based in Beijing, not where all the factories are, like in Guangzhou, so how good can your service be? Tough man.

After this I decided to sit down and make my marketing material and business plan. I created a list of services that could be tailored to any client, I also listed my Pros and Cons. This helped me answer my Dad's question: The fact that I'm not Chinese actually gives me an advantage over Chinese Intermediaries / Consulting firm, because factories take us more serious and believe that we mean business, we are not speculating.  To his second question:  yes, the south probably have more factories concentrating on textile and consumer products, but the norther part of China has factories that concentrate on industrial equipment and accessories (products that we focus on because of my involvement with the energy sector); and anyways Guangzhou, Shenzhen, Ningbo, Shanghai, Suzhou, Nangtong are only a few hours by plane. But most important, Beijing holds an elite group of investors from all over the country, where better to meet them?

The first documents were not at all good. It was later on when my friend +William Dey Chao pointed out some deficiencies on my presentation I was able to create something good. This is important, the people that surrounds you is the most important asset when you start your own business. William's insights on my business have been really helpful.

We did many small projects in the beginning: medical accessories, construction materials, furniture, car accessories, solar products just to mention a few. It was until almost a year of being in operation that I got a steady client who started just buying 200,000USD a year of products in China and with our help now they are buying closer to 2 million dollars.

 

November 21st 2013 - Accounts of my Start Up Part 1

It's always hard to start. Beginning are usually full of complications, insecurity and distress. If so, I guess every day is a new beginning.

I started International Partners Consulting Asia more than 4 years ago with the idea that companies in Panamá and Central America needed a secure and practical way to find qualified suppliers in China and keep an eye on the whole process of acquiring products from those suppliers. Later on, as we got more experience and clients, it also became necessary to handle our client's suppliers relation, which is important when it comes to negotiations.

In late 2008 I started registering the Representative Office in Beijing. I used this form of incorporation due to the fact that it was the cheapest way to do it in those days. The other forms of incorporation for foreigners have an initial investment of a minimum of a 25,000USD, which I think is a consulting WOFE. I did all the paper work an registration by myself, it was hard but by February 2009 I was running.

Doing the paper work gave me a lot of insight of how the Chinese government works. It also made me understand which branch regulates what, and that as a foreigner, it was going to be hard. Half of the population thinks that as a foreigner you are wealthy, the other half thinks that you come to make money off of them, net very helpful thoughts.