The goal of this post is to distill some key aspects of embarking on producing goods in China. Consider it a mini-checklist of important points to remember when selecting a factory and evaluating suppliers.
The Great Wall of China - Amazing!
Law No. 1: Do not fall in love with the factory
Simply put, have a backup plan. You will more than likely work with several factories over the course of time as your needs evolve. It does not matter how many sightseeing tours your host factory escorts you to or how many delicious meals you have in private dining rooms, business is business, so keep focused on your goal and not be distracted. Asian hospitality is among the best in the world. Expect to be graciously treated and to have the red carpet rolled out for you, but remember the 36 strategies. Not only do you select the factory, but they also select you, and they can fire you if it suits them, leaving you quite high and dry. Hence, my admonition is to always have in place a backup factory waiting in the wings to pick up the cudgels as necessary. In order to maintain good relations with both, from time to time, give each factory a project to do or a product to make.
Law No. 2: Deal directly with the factory
This depends in large part on what you are producing and the circumstances that surround your objectives. But it is generally best to minimize the number of go-betweens and middle men. It tends to increase the cost and reduce the efficiency. Most factories will have people who speak a respectable degree of or fluent English that should help facilitate communication. So it usually saves time to deal directly with the factory that is producing your goods instead of endless trading partners. If your trading partner is in a tier 1 category and you have the production to work at that level, then it is better to work with your trading partner who can negotiate with multiple factories to get you the best deal. But when you are starting out small, the closer you are to the action of where your goods are produced, the better.
Law No. 3: Date before marriage – no horse before carriage
Take time to know who your factory is. This is why I recommend the “trial basis” which is similar to courtship. Look for the signs that make a good marriage – respect, courtesy, consideration, patience… fill in the rest. These are the same traits you are seeking in a factory. Take time to build and nurture the relationship. As your confidence increases, you can then finally “go to the altar” and increase your orders. You will want a form of “pre-nup” which is an OEM (Original Equipment Manufacturer) Agreement. This document outlines the parameters of your relationship and what will happen under various conditions. For example, what are the payment terms, what happens in the event of defective merchandise, and how will your trademark and designs be protected? Some factories will expect you to provide the OEM Agreement, which is not uncommon, however, if they refuse to sign a formal agreement with you, that is a major red flag.
The next aspect of the OEM is the enforceability. This is where things can get a bit tricky. If you are in the US and your factory is in China and you receive a bad shipment and you have already paid for it, recourse can be difficult. Hence, the more reason for you to do as much due diligence upfront to offset or mitigate avoidable risks. At some point, you may need to retain access to legal representation in Asia. For example, we worked with a highly reputable firm in Hong Kong who created our OEM Agreement and would serve as local legal counsel. This can get expensive quickly, so be cautious to only get the help you need, and not to go overboard. You may not need to do all this day one, but over time, it will become necessary.
Chinese Wedding Tea Ceremony
Law No. 4: Saving face is critical
To westerners, this concept may seem to be a bit of a time warp, but in Asian culture in general, saving face is everything. Think back to the days of the Samurai and the falling on the sword for the sake of honor. This mentality is alive and well across Asia. It means understanding what is important to the person you are doing business with. If you do something to embarrass someone else, either overtly or inadvertently, you will probably pay the price. No one in western culture likes to be embarrassed either, but in Eastern culture the concept reaches new heights of inference. So even though the sky may be blue, know when to not argue to make your point and allow the other person to believe it is aquamarine. This is not giving in or being a push over; it is called biding your time and choosing your battles. Your goal is to win the war not console your ego.
Law No. 5: Maintain clear and frequent communication
This is the most basic and immediately apparent of these seven immutable laws. How well does someone follow your directions? Are you being second-guessed when you ask for a button but get a zipper instead? How long does it take to receive a response to a question? These are the questions to ask as you interact with your factory. Also, how long does it take to get a response? China is twelve hours ahead of East Coast USA. So if I write an email at midnight, I usually can get a response within an hour or by the next morning. If it takes more than one business day to get a response, and you need it sooner, that is an issue. The good news is that communication is relatively easy to evaluate as you can tell from your initial communications the level of responsiveness you can expect going forward.
When communicating with your partners in China use bullet points or numbered points so that you can use it as a checklist. Avoid writing long paragraphs and make your points succinct and to the point. This will greatly facilitate their understanding of what you want and make it easier for you to be clear.
Law No. 6: MOQ is not about the factory, it's about you
Every factory wants you to order 10,000 pieces in your first PO (Purchase Order) because factories are about volume and keeping workers fully-employed. However, if you have no market for 10,000 units, you cannot order that quantity regardless of what your factory is asking you to do. If the MOQ (minimum order quantity) requested by the factory is more than you can afford to have sitting in your warehouse, do not order it. Never order in the hopes that things will sell. This not only ties up cash, but it could become an albatross that kills growth. Sometimes it is better to not have any inventory, than to have too much. Therefore, it is critical to have a reasonable forecasting system in place so that you order the inventory that will best benefit you. On the other hand, if your demand is such that you do not see it growing towards the MOQ levels, then working with a factory in China may not be a good move at this time. Or, select a factory with more flexibility with the MOQ. Just remember, order what you are comfortable with and what you know you can sell, or better yet, have already sold. A rule of thumb is to obtain pre-orders sufficient to cover the cost of your entire production run. This alleviates the pressure on the inventory that might take longer to sell. In summary, do not allow yourself to be put in corner from which you cannot easily escape.
- Container Shipment with a HUGE MOQ
Law No. 7: When Yes means No
Most factories do not like to tell you “no”. You will either get a “yes” response or an indirect response, but rarely if ever a firm “no”. So you will need to be astute to know the difference between a real yes and a fake one. This concept is another one that some Westerners may struggle with. Ask the same question in different ways to check for consistency and to identify the real answer. Westerners like being direct and usually take umbrage to a run-around. Do not get frustrated or lose your cool, this is another test or strategy. If something does not make sense, it usually is not true. Even if it makes sense, or be what you want to hear, it may still be untrue.
Last but not least, common sense is always essential. Sometimes because we are new at something, we tend to doubt our confidence in the things that we already know. Be confident in your innate ability to use common sense and to make a decision based on sound judgment.
For more on planning your first business trip or factory visit to China, read the series “Doing Business in China: Preparing for your First Factory Visit to China.” Don’t miss any of our blog posts, subscribe to our RSS blog feed.
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