Made in China

(Journalist Kristen Le Mesurier recently visited Shanghai to study supply chains. She writes exclusively for Mysmallbusiness on how SMEs can recognise and avoid the pitfalls when dealing with the world's largest manufacturer. )

Just about everyone has heard a horror story about importing goods from China.
Between June and September last year, three of the world's largest toy manufacturers, including Mattel and Fisher-Price, were forced to recall more than 20 million toys worldwide because the toys' paint was found to contain lead.

While these high-profile incidents are unlikely to stop the thousands of business owners looking to shift manufacturing offshore, they should serve as a clear warning: nothing short of an intricate strategy is needed to make manufacturing in China a success.

The experts warn that challenges arise at every stage in the sourcing process. Reputable manufacturers are hard to find. Some factories promise more than they can deliver, some ignore the order specifications altogether, and others simply pocket the cash without producing a product.

Trading companies are known to masquerade as manufacturers; product regulations are often misinterpreted or not followed; quality needs to be monitored during the production process and tested before the goods are shipped; contracts with dispute resolution clauses need to be negotiated; and delays are common at any stage in the process.
On top of all of this, when things go wrong there are few roads to recourse. Once container loads of goods arrive in Australia it becomes too expensive to send them back. The alternative, pursuing Chinese manufacturers through the courts, is time consuming, expensive, and hit and miss.
The bottom line, according to the experts, is that all of these variables must be controlled. Chinese manufacturers must be micromanaged.

Yet here is the frightening reality: few business owners follow any kind of strategy when outsourcing to China.
Lisa Goodhand, trade consultant and director of AJL Global, says the cost savings give business owners tunnel vision.

''Or worse than that, business owners import blindly. They figure that the different culture, the different laws, the work that needs to go in to building maintaining a relationship with a manufacturer, is all too hard. The goods are so cheap they figure they'll risk it. They mentally prepare to throw their money to the wall,'' Goodhand says.

No one knows this better than John Hunt, who sits on the Australia China Business Council's committee in Queensland, and runs Mox Group, an industrial hardware and software provider with more than 400 employees.
He says that alongside wilful blindness, many business owners who come to the ACBC for advice have been arrogant in their dealings with Chinese manufacturers.
''The dictator approach runs something like this: 'We know exactly what we want and we're going to tell you how it needs to be done.' That attitude is hardly conducive to a long term relationship,'' Hunt says.

DealsDirect.com.au, a fast-growing online retailer with revenue of about $40 million in 2006-07, has been buying direct from Chinese manufacturers since 2005.
The founders, Michael Rosenbaum and Paul Greenberg, started out as most Australian business owners do - attending trade fairs and using a local agent.
But the big profits were out of reach while middle men carved out commissions.
''The future of retail is selling direct from the manufacturer in China to the customer's front door,'' Greenberg says.
They spent the first few months of 2005 testing their business model with trading companies (these are similar to wholesalers in Australia).
''It's important to get comfortable before committing to sourcing on your own,'' Greenberg says.
Their next step was to hire a Shanghainese buyer that had spent the previous decade working with Go-Lo - the pioneers of discount retailing in Australia - and open a small office in Shanghai.
Their representative then started sorting through the factories that presented at trade fairs and building relationships with those that had a strong reputation.
''Now that we've been in China for a few years manufacturers will travel to us [in Shanghai] and line up in the passage way to show us their wares,'' Greenberg says.

Their Shanghai representative now runs an office of eight. He receives a commission for each product he sources himself, and he is paid a fee for maintaining close relationships with each of the factories DealsDirect buy from.
A big part of his job is quality control. He gives factories 3-4 hours out of Shanghai spot checks and arranges for each container load to be randomly sampled before it leaves China's ports. If faults are found the goods are sent back to the factory.
''We do visit factories and I've never seen sweatshops. We wouldn't deal with sweatshops. We go to professional factories that are impressive by any standards. Quality is important so the goods can't be manufactured in a backyard,'' Greenberg says.
Faulty products do occasionally reach Australian customers, but Greenberg says he has never dealt with a manufacturer that refuses to send replacements in a later shipment.
''If you go in there with the right attitude and work with courtesy you're not going to be left in the lurch. In any case, the Chinese are looking for repeat business. They don't want to sell one container, they want to sell 101 and more,'' Greenberg says.

For business owners without the resources to hire a Chinese representative, the experts stress the importance of researching the manufacturer you plan to buy from.
''Especially with business to business portals like Ali Baba, it can be difficult to establish the true nature of the person holding themselves out as the manufacturer,'' Goodhand says.
Goodhand outlines a common scenario. ''You strike up communication with someone who claims to be a manufacturer, you're sent a sample and asked whether you like it. If you like it, you're asked to transfer the money to a bank account and you're told the goods will arrive soon. After waiting patiently, nothing arrives.
''But the only record you have of the contract of sale is a bank account number and a hotmail address. Impossible to track,'' Goodhand says.
The importance of local knowledge and an understanding of business culture cannot be underestimated.
Gaffs are often made by Australian business owners when they jump on a plane to check out the Chinese manufacturer and turn up in board shorts and thongs while claiming loudly that they are the manufacturer's next biggest client.

''Chinese businessmen would never send their CEO to do the groundwork straight away so it sends the signal that you're not nearly as important as you present,'' Goodham says.
If you're small, talk yourself up, says Austrade's senior trade commissioner in China, Peter Osborne.
''Talk about who you sell to, who your buyers are. Spruik your big clients. And make sure you meet the Chinese equivalent of yourself in the factory. If you're the chief executive but you've never met your counterpart, they're not taking you seriously,'' Osborne says.
One lesson often painfully learned by Australian business owners is that every order placed has to be extremely clear and detailed.

Emails between DealsDirect staff and Chinese manufacturers are in dot points to minimise the risk of miscommunication.
''Ordering whatever you've seen in a picture, or even ordering the sample, will get you into trouble. You need to spell out exactly what you want. If you want the blue MP3 player you've got to specify the exact colour, size, and what accessories, if any, you expect to be included,'' Goodhand says.

Negotiating a contract with each manufacturer is important. It forces each party to settle on procedures that kick in when something goes wrong. It is also an opportunity for the Australian business owner to gain respect and build a relationship with the manufacturer.

''The Chinese are likely to say yes to any order. They want to get their products out of the country. But they'll work out the other party's weaknesses very quickly.
''If in your eyes you don't offer long term potential they will take advantage of whatever short term opportunity you represent. But if you can convince them that you're serious and you're the right company to work with, long term benefits will flow,'' Hunt says.

(Source: Smh)

Can you speak American?

Australian businesspeople operating in American markets know this all too well – they do not speak English in the 50 States. They speak American. And they will ask you if you do too.

This is not just parochialism in action – there is a grain of truth to it. Oscar Wilde knew this when he remarked, “We really have everything in common with America nowadays except, of course, language” – and 120 years later, the language of Corporate America presents even more of a communication challenge than you might expect.

The trap for young players is to assume that a lifetime of watching American TV is adequate preparation. It is not.

Sure, you may be comfortable translating ‘economy’ to ‘coach’, ‘lift’ to ‘elevator’ and ‘jumper’ to ‘sweater’. But it’s the first ‘reaching out’ that gets you. To the Australian ear it sounds a little more dramatic than ‘contacting’ someone should really be. This is followed closely by ‘relevancy’ and ‘normalcy’, which one assumes at first to be Bush-style ‘mis-speaks’. ‘Planning ahead’ becomes ‘being planful’, and ‘healthy’ follows suit as ‘healthful’.

If you’re brave enough to speak, you’ll find your reference to meeting ‘fortnightly’ will be met with confused expressions, a rhetorical question like “have we just gone back to mediaeval times?” and some advice to use ‘bi-weekly’ in future.

At all times avoid mentioning your ‘diary’ – no one wants to hear about your personal musings or indeed the prospect of a memoir. Talk about ‘schedules’ and ‘calendars’, and ‘sked’ instead of ‘diarise’.

When you hear that you’ve ‘lucked out’ you can rest assured that you have not missed out but are in fact, counter-intuitively, in luck.

Expect to hear expressions like ‘quarterbacking the project’ (shepherding it every step of the way), ‘hit the cover off the ball / knock the ball out of the park’ (knock them for six), ‘we’ll take care of the blocking and tackling’ (the basics, the everyday stuff), ‘clipping coupons’ (not adding any value), ‘from the get-go’ (from the very beginning) and – my personal favorite – ‘off the reservation’ (off-message, lost the plot).

Invited to go on a boondoggle? That’s a junket. A catywumpus? A mess, a debacle. Circle back? Get back to you. Soup to nuts? End-to-end my friend, because apparently meals start with soup and end with nuts. Somewhere. In America.

When you’re ready to pull your hair out over all this, you can safely express this as ‘going third rail’ – a wonderfully New York City expression that refers to the third rail on subway tracks, which electrocutes on contact.

Of course, I’m sure an American in Australia would find its equivalent, ‘going berko’, just as indecipherable.

Advil*, anyone?
* American Panadol

(Source: Smh)

Stepping into China

In Shanghai, it's easy to stare transfixed at the streams of shoppers trampling over half-finished roads to get to the big, new shopping centres. Open 14 hours a day, longer on weekends, these shopping centres are hives of activity.
But this buzz is a double-edged sword for Australian exporters. It means big opportunities, but it also means fierce competition as the world's brands clamour for a slice of the burgeoning market.
Long and involved negotiations, enmeshed and often conflicting regulations at provincial and local levels, heavy bureaucracies, local partners that may or may not be trustworthy - these are just some of the challenges that threaten to trip most small businesses.
Toss in the market entry strategy - whether or not to open a representative office, sign away an exclusive distribution licence, form a joint venture, or go the whole way and set up a wholly-owned foreign enterprise - and watch what started out looking like a money spinner morph in to a nightmare.
It took one Australian environmental consultancy, now owned by GHD, almost 10 years to crack China.
"It was quite a number of years before we could say, 'We're making a dollar out of here,'" says Peter Wood, founder of the business and now general manager of GHD's operations in China.
More Australian businesses than ever before want to sell to China. The proportion of small businesses exporting to China has doubled in the last two years, according to recent data compiled by Sensis and Austrade, and more than 50 per cent of Australian exporters have China tagged as their biggest growth market in the next twelve months, according to the latest Austrade and DHL export barometer.
With a large and rapidly urbanising population, China's demographics are a big drawcard. By 2020, 55 per cent of Chinese households will have climbed into the ranks of the middle class, according to the Policy Research Office of the Community Party of China Central Committee. Right now, just 5 per cent of households are middle class.

Demand for branded goods and services, hot new technology, infrastructure, and finance is expected to grow with these annual incomes. Based on similar projections, AC Nielson in its report titled China Trend Watch 2007 estimates that manufacturers and retailers have an untapped market of about 850 billion RMB ahead of them.
It's not just coal and resources that Australians are good at selling to the Chinese. Food and beverage exporters have doubled their shelf space in the last five years, and products and services trading on Australia's clean and green image such as organic products, body care, fitness training are in high demand, according to Austrade's senior trade commissioner in China, Peter Osborne.
With China expected to be home to half of the world's building construction between now and 2020, there is also an unprecedented appetite for green technology. Subsidies offered by the Chinese government in the lead up to the Beijing Olympics and mandatory energy reduction targets are driving demand. "When you've got a country that has 16 of the most polluted cities in the world incentives like those will only grow," Osborne says.
Business owners who think that turning up with some expertise or a container load of goods is enough to make a sale, think again. Consumers are brand conscious and spoilt for choice. And as customers or partners, Chinese businesses want to know you are there for the long term before they commit to doing business with you.
"In Australia, if you tender a bid and it is clearly the best there's a good chance you'll get that contract. In China, if you haven't developed a strong personal relationship with the organisation it really wouldn't matter what your proposal was like. From their perspective you're too risky. If they don't trust you, you won't win the work," Wood says.
The first challenge for exporters to nut out is how to enter the market. There are four options: open a representative office, cut a deal with an agent or distributor, form a partnership or joint venture, or set up a wholly owned foreign enterprise (WOFE).
The majority of Australian exporters start small by selling via an agent or distributor. Online trade portals such as Ali Baba may be the easiest way to make contact with potential agents, distributors, or retailers, but the ease belies many challenges.

It's important to research distributors or agents to make sure they will take your product, which is often one of tens of products they are trying to sell, seriously.
Hotch-potch networks of agents and distributors can give rise to disputes regarding who has the exclusive right to sell what, where.
And it can be difficult to assess whether or not agents have the muscle to get the shelf space they promise.
Partnerships or joint ventures, while requiring investment and long-term commitment, can be the best of both worlds because partners offer local knowledge of the market and contacts with key decision makers in government or retail. Rather than handing agents or distributors a fixed fee, joint venture partners share in the profits.
But choosing a suitable joint venture partner takes time. Wood met with about 25 prospective partners over two years before settling on one in Wuhan. "The decision was really based on countless discussions, meetings, and when it came down to it, gut feel about the partners and how well we could work with them," Wood says.
Austrade and a Chinese born and educated engineer he had hired in Australia ended up helping him sift through the potential partners. "If you can develop strong personal relationships there's a good chance you will succeed. If you can't or don't there's a good chance you won't," Wood says.
Going one step further and setting up a wholly-owned foreign entity means skipping the challenges that arise with joint venture relationships.
Legislative reform in the last five years has made the registration process simple and easy, but experts warn this is the most involved business structure - in time, effort and money.
Richie Guo, who runs Business Strategies International's China consultancy, advises his clients to have the paperwork ready to submit to China's Ministry of Commerce as early as possible. "China is so fast moving, if you're an exporter that spots an opportunity you've got to be ready to move then, at that moment. Gaps in the market disappear so quickly," Guo says.
A mistake Guo sees business owners make is leaving the debate about business structure to the last minute. By the time the business entity and bank accounts are sorted in China, for example, the opportunity has been snatched by someone else.
China's deference to hierarchy throws many Australian exporters. Multiple people will work on a single transaction and there can be a long ladder to climb to get to the main decision makers.
Wood warns that formal meetings with six Chinese negotiators does not necessarily mean that the Chinese party is serious about working through the tough issues.
"The real negotiation rarely happens around a table with lots of people. If there are half a dozen negotiators that meeting is all about process and formality. Serious negotiations are always done one-on-one, behind closed doors, between the key decision makers on both sides," Wood says.
"You do need to get the support of the people doing the negotiating, though. They have the key decision maker's ear," Wood says.
And beware of Chinese business culture. Guo recounts a meeting between one of his Australian clients and a Chinese business owner. His client was looking to acquire the Chinese business and at the first meeting the Australian asked within minutes whether or not the Chinese business was turning a profit.
"What a disaster. Those sorts of questions, if they can ever be asked, require a relationship of trust and mutual respect. To the Chinese, that question was rude and arrogant," Guo says.

(Source: Smh)

Biggest slump

Almost all markets are down today.
Shanghai, over 7%'s slump.
Australia, worst fall since WII.

I feel it might be a beginning of a bear market for Aust. and other western countries.
But not for China.

In the past, China was always the one escape from the effect of US. Why not again this time? Sounds to me like someone (might be the fund companies) purposely gave out some negative information...

It's said US would lower the interest rate 75bp tonight.

Let's wait and see.