Mike came to Asia in 1993 and is now responsible for sourcing $200 million of product on behalf of his clients at his boutique sourcing agency – PassageMaker. Mike has supported customers in the supply chains of Apple, Wal-Mart, Dell, Home Depot and of course Amazon. Mike will talk about how to leverage Chinese law & contracts to your advantage when sourcing.
Presentation title: China Sourcing for Amazon FBA: Tips, Best Practices & Mistakes
Speaker: Mike Bellamy, Founder (PassageMaker Sourcing Solutions)
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China Sourcing for Amazon FBA: Tips, Best Practices & Mistakes
..take on. Thanks. Everything Renaud said about outsourcing was spot on and so Bernie asked me, well, if that happens, what are some tips? How do I control it with my suppliers? And one of the things I do is just tell them, “Hey, I’ve been in China long enough to know that outsourcing happens. But I don’t want it to be a surprise to me. So I put in the contracts, that if anything can change in form fit or function, let’s just talk about it first.”
Because sometimes it can benefit me that there’s outsourcing. Maybe my main supplier is going to miss a delivery at Christmas, and now certain components. Okay, but give me the opportunity to make sure that that sub-supplier is able to get the job done.
Outsourcing is a dirty word when you don’t know about it. But, and I even put in some of my contracts the production will take place at this GPS coordinates and I will ask for, and I will, I want the right to have an independent inspector come unannounced. And if your supplier says “Oh no, we can’t accept that.” Well, they’re going to outsource it but if you put that in your contract and say I’m being open about my expectations. If you want outsource, let’s work together. So being open can often find a solution.
Well, the coffee break went over a little bit but I’m going to fit a lot into a short period of time. So don’t worry about, take pictures, but don’t worry about taking a lot of notes. I’m recording it. Leave your business card up here at the back and I’ll send you the video recording. I’ll send you five other YouTube videos there just like it. So if you get in touch with me, you’ll get plenty information.
However, I won’t stand up here and give a sales pitch. I hate it when I go to a presentation, the person up there says how great they are and why should I pay him money. So I’ll tell you what I do and why I was asked to present today because it’s relevant to my reason for standing up here but I’m not going to hit you up with a lot of sales pitches. Talk to me afterwards and it’s a different story.
Also, we’re going to save a lot of time for Q&A, I hope. But just so that I can get a feel for what you want to talk about in the 45 minutes we have left. Quality control was covered very well. I’m going to add in some project management and some tips on quality control contracts. I’m going to cover a lot. Who has an idea that they’re worried that their competitor or their supplier might knock them off? Anybody interested in protecting secrets or protecting patents? Okay. All right. I’ll give you 10 minutes to my best stuff then at the end, alright?
Yeah, sorry, you can hear me in the back, I hope? Okay.
I start off all my presentations I’m sorry if you were here last year and you may have heard this but I live by the “Don’t hope” rule. What I mean is if you come to the trade show and you found what you think is a good supplier, now you’re flying back to Canada, you’re going home and you’re on that flight and you’re saying I hope that supplier understands my specs. I hope that supplier is not going to knock me off. I hope they can really produce a thousand units a day. You’ve already lost the battle.
So you really have to find a system for defining that yes that supplier can protect my intellectual property, can meet my quality. And that takes me to the next point that ‘everything is possible, but nothing is easy’.
To give you an example of just what’s possible, when I started PassageMaker, my sourcing agency,20 years ago, I was an exchange student, thought that I was come to China for a couple months. That was 20 years ago. I knew less about China sourcing than you do now after attending the presentations today. But I had a loan from my parents for two thousand bucks and I got a part-time assistant in Shenzhen and I rented an apartment and started serving as a consultant and advisor. We grew the company to at our peak. As was mentioned before, about 200 million dollars that we were responsible for managing supply chain. Not my revenue, unfortunately.
I had about 250 employees at our peak and what PassageMaker did was our customers were worried about some of the things you were talking about today and the questions about how do you prevent the supplier from seeing too much information? How do you set up a team in China that you can really trust? So we created something called a virtual factory in a virtual sourcing office. Many of our customers are large enough to set up their own factory in China or set up their own sourcing team in Hong Kong. But they don’t want the headache and the tax issues and management. So we break off a little piece of our existing operation and I don’t have any local partners. So I owned 100% and we set up a factory within a factory.
That factory in the factory can be a black box so the components come from sub-suppliers, they’re kitted together so that only the client sees how these parts come together, and then they’re shipped to Walmart. Or Amazon, whatever.
We can also be a firewall. The big-box retailers are really smart and this sooner or later is going to happen at Amazon, too. For example, you’re selling to Walmart…Target and they know that you’re buying from China but they don’t want to ask that you don’t want to give up who the China supplier is because you have a loose contract. If Walmart knocks on the door and says they want to buy a million units what you’re buying a thousand, hundred thousand from of course that factory’s going to be tempted.
So we created a reverse firewall where Walmart will come to you and say your products being made in China. By the way, the pickup point for Walmart is now in Zhejiang province and they say that because it’s a way of forcing you to deliver the made-in-China product to their inbound receiving point.
Now if you don’t have a business in China, if you don’t have complete trust in your supplier, it’s really easy to get yourself cut out of the loop. So luckily my company is registered as a manufacturer so I don’t really make anything but I have a lot of product that’s delivered to my facility. My people kit it together, polish it up, touch it, check the quality 100 percent. And then, we’re the manufacturer of record. In reality you pick your manufacturer and we just serve as that firewall.
Long story short, I’m very in tune with what the big-box buyers want. Understand, you know, the aspects affirmed by Amazon. I’m not here to talk to you about which products are hot or how to do the analytics and the marketing. That’s above me, I learned a lot this morning.
But today I’m going to talk about the nitty-gritty of how do you find suppliers and manage them in a way that’s to your benefit.
Long story short, my main business is PassageMaker but I’m kind of semi-retired from that as it runs by itself. And about eight years ago, I wrote a book called the Essential Reference Guide to China Sourcing.
Sounds like it’s got everything you need to know in there. And luckily enough, I found that once I was an author listed on Amazon, of course, now I would start getting phone calls from like the Wall Street Journal and CNBC and you know, major, CNN even.
And so my book was all about all the mistakes that I made. I never claimed to be an expert. I just made a lot of mistakes. And so, once I started getting picked up in the media, this little book paid for my villa in Thailand. That’s pretty cool!
And then, Neale and I, Neale approached me about hey, let’s take that content but create a video course. And now we’re working with Global Sources to make that content. I think we’re up to our 30 hours of materials like you’ll see today. So if you like what you’ve seen today and what Neale has, know that you can find out a lot more at the China Sourcing Academy and that’s for free. Some of it is paid, some of it is free.
Also, I run a little bit of a private equity fund called AmAsia and we invest in small businesses that are focused on providing services to China. At one time I was part owner of Asia Quality Focus, which is a leading inspection company so I know the inspection business from the inside out as well. And now we’re launching a legal services firm called Asia Bridge Law to set up contracts and register intellectual property and do due diligence to check on suppliers and stuff like that. So maybe I was asked today because I’m kind of a well-rounder. I got a little bit sourcing experience, law, and also quality.
Okay. Enough about me. Let’s get to the fun stuff.
General Trends & Opportunities
I run into a lot of buyers that you know they’re applying strategies that were appropriate 10 years ago to China today and China has changed so much. Let me give you a couple examples really quick.
Ten, 15 years ago I’d be visiting a factory, have a couple beers or…with a supplier and I’d send down into the owner “Hey, Mr. Wong. What were you going with this factory? What do you really want to do?”
“Mike, I’m glad you asked. Our goal is to buy property in Vancouver. We want to get out of manufacturing. It’s tough.”
I heard that all the time that the suppliers wanted to get out of manufacturing and get into the property business because it’s easy money. You know luckily those days are kind of behind us. Nowadays, when I talk to suppliers, ask the same question, they say we want to have our own online brand, we want to be the leader in this marketplace. You know they’re serious about manufacturing. So as Renaud pointed out, there are a lot of sloppy manufacturers but on the other hand there are a lot of great suppliers out there and if you do your homework to find them, you can both make a reasonable amount of money. So don’t anybody run home and say sourcing is not going to happen after hearing Renaud’s presentation about all the nasty things that happen. There are also some good news coming your way. Okay.
The other huge difference between 10-years-ago China and the current situation is contracts actually mean something.
It was a watershed moment when China joined the World Trade Organization and they’re bound by things like intellectual property. You know, a proper system, don’t let anybody tell you that a foreigner can’t get a fair shake in a Chinese court of law. I’ve been involved in 10 court cases and we either settled or won in nine. And I’m not Chinese as you may realize. So you know contracts mean something but you have to use the right kind of contracts in the right jurisdiction which we’ll talk about.
You know, “guanxi,” special relationship. Back in the day you would always hear pick our factory because I have a cousin that works at the Port Authority and we’re going to get you a higher VAT or we’re going to get you special access to raw material. Maybe that was true because the system didn’t work back then. You had to rely on relationships. Now it is a danger, it’s a risk for you if you’re basing your entire business on somebody’s guanxi, someone’s relationship especially with the crackdown that’s happening now. So whenever I hear some supplier trying to tell me that I should do business with him because his cousin’s the governor’s sister, I just walk away really quick. All right.
You’re not the only game in town. It was great, you know, 20 years ago I didn’t know much. I just had finished my MBA. I could barely speak Chinese at the time and I would sit down with a supplier and they think I’m Walmart. Okay, he’s you know, he’s a white guy from the US, must be a big buyer. I wasn’t, but the assumption was that I appeared that way. Now it’s the exact opposite. There’s so many foreigners walking around, getting pricing that you have to show the supplier that you’re a real legitimate buyer or they don’t take you seriously.
So that’s how fast the game is flipped. It’s up to us as the buyers to put on it not a good show you want to be honest but you want to show that supplier why you can be a good partner. Maybe you bring some technology, maybe you just pay on time, maybe you’re opening up a market in New Zealand or Australia that they haven’t opened up yet. So you got to find ways to sell yourself to the seller. Okay.
Old headaches, new location. You know, Renaud mentioned that when you go into the interior, it’s like going back 20 years. But the Chinese government has realized that there’s disparity in the income between the people on the coast and the poor interior. And whenever you have you know unbalanced economy, it’s not good for politics. So there is a clear plan from Beijing to develop the interior, the tax incentives, like when I started my factory 15 years ago, the government said okay, don’t pay tax for three years and then after that we’ll give you half tax and here’s we can help you hire people and let me give you a discount from this landlord. It was like the Chinese government welcomed me to set up a factory.
Now in that same location every week I’m hit up by, oh you’re, you need to spend more money on codes and let’s review your tax policy. It’s like they’re encouraging factories in Shenzhen to pick up and move to the interior. So your suppliers that you’ve done business with for many years might find themselves instead of Zhejiang and Fujian and Guangdong province, they’re out in Anhui, and Hunan and Chongqing. And it’s like stepping back in a time machine—quality, customer service, local mentality, corruption issues. So as China opens up the West, it’s opening up a whole set of headaches and I’ve already seen before and I don’t have much here left. So I tried to work with suppliers that are stable enough that they can make that transition.
I was asked to talk about scams but you’re smart enough to be at a trade show. You know, you’re not going on Google and typing in smartwatch manufacturer and picking the first person that you deal with. If you are, your team should be ashamed.
But let me talk about some ways to avoid scams including bad suppliers.
Oftentimes, I find you know someone approaches me, Mike, I met you at the show. I was scammed by that supplier. Okay, what happened? Did you use a contract? No. Really clear on your specifications? No.
You know, often it’s up to us as the buyers to protect ourselves. So let’s talk about not only how to avoid scams, but how to avoid bad situations. The first one is, we’ve heard it began and I’m going to, it’s worth repeating—don’t be seduced by the sirens song of low price. My experience has been that if I beat up a supplier to give me a low price they’re going to just the quality level to meet that pricing point.
Also, if the first thing that you say when you sit down to a supplier is you know how much does this widget cost? He’s already pegged you as someone that doesn’t care about intellectual property or quality control. He’ll do whatever it takes to get your order and then raise the price the next time next order.
Don’t gamble. Many FBA sellers (we’ll get to an FBI story in a minute), so many FBA power sellers are just getting started. You got a war chest of a couple thousand dollars in your pocket. So you say I’m going to gamble a little bit, I’m going to go to China, I don’t have the money for a contract, I’m not going to spend $300 for inspection.
Okay, but let’s be honest. It is a gamble. In my experience, you should take the ferry over to Macau and spend that money and you might have a better return on the investment. So if you’re going to gamble, don’t get mad if it doesn’t work out. The good news is with a war chest of $5,000, you can really set yourself up sweet to protect yourself.
It was mentioned before, ask for references. Obvious, if a supplier cannot give you a couple happy customers, run away.
Link your performance to payments. What I mean is it’s very, almost impossible, unlikely unless you’re a huge buyer, that your seller is going to allow you to pay net term. So they’re not going to ship it to you and then 30 days later you pay it. So what happens is you probably give a deposit, then you may pay after pre-shipment inspection, you make another payment. Then a final payment after the goods have been received. So that might be a 30-40-30, for example. Now you’ve got to link their performance with those payments. It’s not enough to say I’ll pay you when it ships. That’s just good for cash flow but it doesn’t protect your quality.
So you need to say all right, I will pay you a deposit up front and in exchange for this deposit I want proof that you have bought the raw materials for my order. You know, not that you’re using my money to fund somebody else’s supply chain. And then I’m going to give you 40 percent when it ships. But after I’ve seen independent inspection done and that the gates are closed on the container as it’s about to ship out, then here’s your money. Not I’m going to pay you upon provision of documents. I’ve seen truckloads of rocks get shipped so that the supplier can see that, I’m sorry the customer can see that there’s a bill of lading but it’s a pile of junk inside.
Sometimes the suppliers are in such cash or they know that they can get that next payment so they send junk and say we’ll sort it out later, we’ll give a discount later. You really got to inspect things. That’s not going to happen with most suppliers because it does happen.
Who are you paying? You would not believe the number of buyers that set up an agreement with a supplier and then when it gets time to transfer money, that supplier says oh send it to our CFO’s private account in Hong Kong or send it to our corporate headquarters in Hong Kong. That way we don’t have to jump through a lot of hoops and it will give you a discount.
They didn’t mean to trick you but what happens if a couple years from now you have a warranty issue and you need to take that supplier to court? I’ll tell you what happens.
You’ll go to the Court of Law in China and you’ll say I have this nice contract with Mr. Lee’s factory in Zhejiang and we sent money and product was shipped but was defective. Mr. Lee will say, you know we had some purchase orders going and we did some business. But we didn’t receive any funds from you and we’re not legally obligated to provide any recourse. And you say, what Mr. Lee? I sent you money. Never received it. Here’s our open accounts on our Mr. Lee’s Factory. And said, no, you told me to send it to Mr. Wong in Hong Kong. You bring in Mr. Wong into the courts but you can’t bring them to a Chinese court because Hong Kong is a different jurisdiction.
So you’ll somehow if you’re lucky you’ll get you’ll subpoena Mr. Wong and he’ll say, “Darndest thing! We don’t have a contract with this American company but some funds showed up. Yes, the money showed up in our accounts we’ve spent it already. So it’s just impossible to connect the dots.
In your contract, make sure that the people you are paying ideally are the same people on the contract, and hopefully the name on the factory door. The Chinese name because so many of these factories have like Sunny Day Manufacturing. You know, One Billion Million Happy Customer Manufacturing. That’s their marketing name. That’s not their legally binding name. Their only name, not even the Pinyin, is you know, their name is Happy Factory in English. Their name in Pinyin is Kai Xin Factory, but Kai Xin could be spelled 15 different characters. So you got to get the actual Chinese character on the contract, not just their Pinyin. And you know English name means next to nothing.
Global Sources does an excellent job of providing you a list of wonderful suppliers. You want a list of bad ones to stay away from? Check out SupplierBlackList.com. It makes my day every morning to see that somebody else is dumber and lost more money than I have. So I usually start my coffee in the morning with looking at how much money someone else has lost on the profile of SupplierBlackList.
Verify the verifications. You know, it’s not enough that the supplier says yes we’ve done business with Disney or we’re ISO-certified. An ISO document costs I think you can pay off an inspector for a couple thousand dollars. Documents can be faked. I’ve seen a lot of Photoshopped Walmart certified suppliers. Luckily, there’s going to be a call center or a number where you can verify it. After you see the verification, you got to verify it. I know it sounds like a lot of work.
Some good news. Scam artists and poor sloppy suppliers don’t pay tens of thousands of dollars to advertise in Global Sources, come to a show, get passports and visas for the Chinese staff. I’m not saying you can just ignore contracts and that everything is safe at a trade show like this, but the supplier is downstairs starting tomorrow will be a cut above what you would find online.
Protecting your interests
Earlier, presenters in the day did a great job of talking about the importance of relationship and guanxi. So important I believe that you need a foundation based on three sides.
Certainly, the relationship is important but you also need, I wrote contracts, I meant to say documentation the written word. And also monitoring. You need all three.
The old model was, Oh Mr. Wong and I were great friends, our children are pen pals, he’s visited me, brought his family to Las Vegas on my dime, he would never break the contract because we’re such good friends. That’s risky. But it is important to maintain a professional relationship. You don’t have to buy gifts, you don’t have to you know spend expensive dinners, you do some little things like sending a Christmas card.
I invite all my major suppliers to come to my hometown outside in Niagara Falls. None of them have ever taken me up on the offer but the fact that I’ve extended it gives a lot of goodwill.
Relationships important but so are contracts and monitoring. And we’ll talk about how these overlap through the rest of the presentation.
Negotiating & maintaining the price
I was asked to insert a million-dollar question “how to find a perfect supplier?”
And I think what’s important to mention is that finding a supplier is really easy. There’s so many suppliers out there. It’s easy to find a supplier, but how to find the right supplier for me? And even if we’re all buying the same product, you know watches, digital watches or smartwatches, I mean. We’re going to have a different dream supplier.
So before you start talking doing your research, you really need to write down what is important for you, what would this supplier look like? I get there’s so many suppliers out there that there is one that’s perfect for you but you got to find them. You might be saying hey I’m a smaller buyer so I want a factory that has under a hundred employees yet my product is going to Japan. So I want to make sure that supplier’s experience of the Japanese market. I don’t mind Korean batteries but I can’t accept Japanese battery. I’m sorry, Chinese batteries. Whatever it is. You know, write that dream supplier down and then start your research.
What usually happens is the buyer goes online to Global Sources. Oh my God, there’s 500, there’s 50 legitimate suppliers of smartwatches. Where do I start?
It’s better to go the other way saying I want the supplier in Zhejiang province or whatever because it’s close to the port that you’re dealing with. So you make that dream list and then you start researching and you look at things like equipment and location and experience with the Amazon supply chain stuff like that.
Be picky, and please don’t focus on price too early. What will happen is you will have maybe narrow it down to 10 suppliers and you make the mistake of asking them all give me your price. Subconsciously, you will lean towards the supplier with the low price and can try to convince yourself that well maybe they don’t have the quality systems, maybe they don’t have the lead time I want but that price is so nice.
Usually, the lowest cost is not the best. Sometimes the lowest cost can mean the overall most expensive option.
What I mean by that is a low unit price might mean that you have to spend more trips to the factory, that you have to spend more on quality control, that you have to fight them to get money back. So often the lowest price is the most expensive option.
I know it’s counterintuitive but it’s true.
So now you focus on all these other things, you know their capacity, their experience, and then you narrow it down to two or three. You do an audit, you don’t place the order right away. Then you get it down to one, and you don’t place the order. You place a test order first because the most dangerous thing, the most dangerous question in China sourcing is “Can you make this?”. Because everybody can make this. I can make you the Space Shuttle with enough resources and infinite amount of time so it’s not a lie to say yes, I can make this. That’s a lot different from have you made this? Are you making it right now?
And then when you do the test order, it better go smooth. When you start hearing things like what material did you want or oh we’re wrong with that delivery time it’s going to be 60 days not 30 days. You know, if you get a lot of questions during that test order, it’s better to hear about it then than after you placed $100,000 and now you realize that you’re in bed with a supplier that doesn’t know what they’re doing.
And you would think that the hard part is over when you place the purchase order. Sadly now you get set up the quality systems and the project management but we’ll talk about that.
One of the hardest things to do is to make an apples-to-apples comparison. You ask five suppliers to quote on smart watches. One supplier gives you an email it says $12, no specifications, is that FOB/XW? Another supplier in that five might give you a long list of all the materials’ specs. Which one’s better? You don’t know because it’s not apples to apples.
So what I like to do is I make my own quotation sheet and I give it to my narrowed down suppliers in the top of the shortlist. Give me your standard quotation package and fill in this form so that I can compare apples to apples. And if the supplier’s standard package is very professional, you know that that’s a good sign. If they don’t have a standard package, they’re maybe not even a manufacturer. They might be a trading company or something like that.
Some things are often overlooked. Taking a step back, there’s two major strategies for winning the buy box on Amazon.
To make it a very top level perspective, you either are really good at the analytics, you don’t care much about the product but you know how to get in front of the market, how to manipulate the customer service, you know how to get that buy box. You got to be pretty smart and there’s some people in this room that definitely fit that category and I wish I was had that intelligence.
The next group are, okay, you want a superior product at a better price. So you tweak things a little bit different, you want to retain the time on the buy box before someone else knocks you off, you build a brand, you adjust it some ways, some customization. Now as soon as you do something customization—customized, maybe it’s a package. You know, that’s easy. But you’re opening artwork, aren’t you? You’re probably paying for a master film somewhere and that’s hundreds of dollars.
Maybe you take this, you found a great smart watch manufacturer but you want to make a special band unique for you, just for your customers and that’s your point of differentiation. Great! Well, molds need to be made.
You know, think of it as you’re making chocolate chip cookies. Someone has a cookie cutter, well the factory owns the cookie cutter for your band and say that that factory does a bad job and you want to go somewhere else. Well, they’re going to keep making cookies and selling them to someone else and they’re your cookies.
Long story short, my suggestion would be watch out for suppliers that do things like oh it’s very expensive to set up the tooling in the customization but we’ll do it for free. Or, we’ll amortize it into the first 10,000 units that you buy. And your CFO is thinking that’s great! We don’t have to pay for the upfront cost but I guarantee you if something goes wrong, it’s between unit zero and unit one. Not between unit 9999 and unit 10,000.
So from early on, you want to if that technology or that concept is important for you, you want to own the means of producing it. So be aware that some suppliers will try to quote it under quote the tooling. Others will amortize it. That can be dangerous.
Realize that different suppliers have different pricing points. One supplier is giving you 100% upfront, you would expect a low unit cost because that’s a lot of risk on your part. Another supplier might be willing to do 50-50 or 30-40-30. So different pricing point, I’m sorry, different payment terms also affect the bottom line.
Quality requirements. So important. You know one battery is Japanese, the other’s Korean, the other supplier’s Chinese. They’re going to be different pricing points so when you put together a spec sheet, you need to tell the suppliers what you want or you’ll get exactly what you didn’t ask for.
Bill of Materials & Certs. Basically, Bill of Materials. For this product, let’s say that batteries I want Panasonic, real Panasonic batteries not the Phonosonic or something like that made locally. And you know that should be in the Bill of Materials. What is used to make my product especially if it’s in textiles and electronics, things that where the guts if they change it affects the final use of the product.
Shipping/Duties/Tax. Don’t forget that duties and customs and applicable taxes can change overnight. And I’m not talking about you know Donald Trump saying everything from China’s 45%, I mean, just day-to-day, things change. You know, the import duty into North America for certain products can change almost overnight. So before you place that order and commit to something, make sure there are no surprises on the inbound into your destination market.
Duty Delivered Paid. Sounds great. The supplier says alright how would you like the supplier to organize the shipping? And DDP means the supplier is responsible for getting it to your doorstep. Sounds great. No headaches on my part. Just deliver it to Amazon USA or deliver it to my warehouse in North America or Europe. The problem is that most suppliers, especially manufacturers, are very good at manufacturing, but sloppy at logistics. So let the logistics, the third party logistics, customs brokers fight over your logistics business; let the manufacturers fight over the manufacturing business. So doing that apples-to-apples comparison, I asked all my suppliers quote me FOB nearest port. I don’t say quote me FOB Shenzhen because that would be unfair to the northern suppliers. So let everybody quote FOB nearest port and then you can start to make sense apples to apples.
Are samples readily available? You know, we talked about suppliers can make anything but have you made this? Because if it takes like a week to get a sample for something that’s supposed to be in production. Do they really make that?
I was asked to do a couple minutes on negotiation and some people have the misperception that a negotiation with a Chinese supplier is like negotiation ninjitsu. And whoever has the better negotiation is going to get the better price. And we’re warriors, were coming into the squared circle and I’m going to get a better deal because I’m a better negotiator.
Almost never works like that, you know. I remember as a kid I went to Mexico and my Spanish teacher said whenever you buy something if they say 100 pesos, you say 50. There’s no rules like that in China. Suppliers will have different ways of negotiating. So I hate to do it but I’ll quote my Chinese father-in-law. He said, “Mike, Chinese have been negotiating with each other for 5,000 years of continuous history. You’re not going to walk in here overnight and out-negotiate us.”
He’s kind of right. I hate to say my father in law’s correct so I don’t try to negotiate with the suppliers.
I do a lot of research beforehand and my negotiation usually goes like this, “Mr. Lee, it’s been a pleasure to have this dinner with you. I’ve enjoyed the tour of the factory. You obviously have quality product. I’ve done some analysis of it. It’s the type of product I would like to put my name on front of. However, per our standard operating procedures, my staff have been instructed to get multiple quotes and missed and another factory in this other province is same quality level but they’re 6.2% less than you are. Could we split the difference and do business?”
It’s not necessarily, it’s not a take-it-or-leave-it. But now the supplier knows that I know what the pricing points are and it’s almost yes or no. But you can’t go in there and say ‘Mr. Wang, you’re full of it. I want 20% off’ because then he’ll know that you don’t know what you’re talking about and he’ll out-negotiate you every time.
So doing your research and that’s the beauty of a trade show like this you can get some quotations, get an RFQ Request-For-Quotation package going together and then use that research to negotiate a fair price for both parties.
10 lessons I learned the hard way
I could probably do a hundred lessons but in the interest of time, I’ll even give you the bonus eleventh one.
Use the purchase order and get it chopped. Hopefully, everybody in this audience is more enough as professional and realizes that an email is not a legally binding purchase order. Now you’re excited to do some business. You say, “Mr. Wong, here’s $5,000 let’s get that order going”. That’s not a purchase order.
A purchase order list defines what are you buying, how many units, you know just like you wouldn’t do that in North America so why try it here? Be clear about your purchase orders.
The fact that you just have a purchase order, you’re going in a big step in the right direction.
On that purchase order/purchase contract, you need to list the penalties for missing lead times or poor quality. In 20 years in China I have never had one supplier, not even one supplier, miss a lead time and say, ‘Mike, our bad. Let us FedEx those replacement parts to New York’. Never once. Until I started putting in my contracts that the supplier is responsible for rework or replacement.
I also like to use a penalty clause for mislead times and this happens all the time. You’re a smaller buyer, you’re just getting started, you found a professional factory but you’re not one of their big customers yet. And so you place a purchase order and then that supplier gets an order from a bigger customer and they use the raw materials that you thought were set aside for your order to supply that other customer.
In my case, I was dealing with some personal toys and I thought I had a great supplier in place. Then Disney came in and like placed an order 10 times bigger than mine. And so the factory at least they called me rather than just missing the date but they called me two days before it was supposed to ship. Christmas time. And said, ‘Mike, we’re sorry. You know, but we got to take this order for Disney. It’s huge, we’re going to make a lot of money. Do you mind if we ship your orders a couple weeks late? I take it – deep breath, I’m not going to pound, I’m not going to take you to court, you know. That’s like maybe in New York that would work but not here. And so I said ‘Well you know, thanks. I appreciate you calling me and I knew something like this might happen. So I built in a 2-week padding, but actually I really want that discount that we pre-negotiated in the contract. Remember it says 5% discount for every week that you’re delayed? That’s going to really make me a lot of money. So by all means, please delay it two to four weeks.
Guess what? It went out on time the next day. [laughter] Having the contract means something.
Plan for IP protection. We’re going to dive into this a little bit later.
If you don’t have a plan for non-conforming goods in advance written in the contract or at least discussed, if something goes wrong you have to negotiate with no leverage. So think to yourself, what could go wrong? And then talk to the supplier about it before you give them any money.
Know your risk. You are the importer of record. Say that you’re importing these new smart watches that monitor your pulse and you’re dealing with a supplier that you’ve never dealt with before and they use different kind of materials and starts causing a rash on your customers’ arms or, God forbid, it hurts somebody. It burns them. Do you think the lawyers in your home country are going to try to go to China to bring a court order against the Chinese supplier? No. They’re going to go after you because you’re the importer of record.
So know that it’s our responsibility as buyers to make sure the product is safe. And you know that might mean, okay, let me stick to another product category—stay away from medical and anything that touches the human body. Let alone, especially if it’s for children. Be careful with the products you select.
We talked about the tooling before.
Legal jurisdiction. So important on the contracts. I’m not a lawyer. I’m on the board of advisors. The law firm is their kind of their business guy. But what I’ve learned long ago is jurisdiction is so important. I guarantee you ask your lawyer back home where should I put the jurisdiction with this contract with the Chinese supplier? They’re going to say right here where we have a fair chance in New York City.
What they really mean is they want to bill me $500 an hour to tell me that they’ll never be able to win in a Chinese court of law.
So what I do is I say to the suppliers, all right, we’re going to make a bilingual contract. English will be used for translation purposes so I know what I’m signing and that I can share it with other people in my company. But I’m going to admit that Chinese will be the primary language and the jurisdiction will be China. And that’s actually to your advantage especially if the seller has assets that are in China. They’ve got a reputation they want to protect in China. You know, they’re happy to sign a contract with you, with US jurisdiction because it doesn’t really hold their feet to the flames. So I always put my jurisdictions in China with one exception.
If you come across a large factory perhaps a state-owned enterprise in a small town in the middle of nowhere, there is a chance that the judge is the cousin of the general manager. So in those types of situations, I generally put the nearest provincial capital on the contracts.
Bilingual contracts. So important but don’t have like a 20-page document in English and then a 20-page document in Chinese because I guarantee I know which one the supplier is going to read. So if it’s important enough to be in the contract, it’s important enough that you should explain to the supplier.
And what I like to do is have a big meeting, the signing ceremony, and my contract’s generally never more than 5-6 pages long and it’s translated paragraph by paragraph, not page by page. And then I go through each paragraph and I have everybody sign off on it. And what I like to do is have the contract signed in front of the factory’s peers. So if you’re a big buyer, they’d probably invent the mayor’s here, the QC manager is there, the engineer, all these people are around this big table and you’re going through these points, Mr. Wong, I chose your factory because you promised me that you would never deal with my competition in Canada and that you won’t take an order from Walmart. Okay, I’ve said that in front of Mr. Wong’s peers. He’s shaking my hand. Even though it’s contractually written, if he breaks those terms a year from now, he’ll lose his face to everybody in that audience. They know that he’s a liar, not a man of his word. And that actually sometimes has more power than the thread of litigation on a contract. So use face “miàn zi” to your advantage.
We talked about payments to performance.
QC Plan is so important. Renaud talked about a plan, I called a product quality manual. It was too big to hand out. But if you go to my website at PSSchina.com, you can download one for free and see what does a quality manual look like. I’m not saying you need to replicate it for your company, but when you’re visiting suppliers and they say the old, oh we don’t have a quality plan because we make the same widget over and over again for ten years so we know what we’re doing. Okay, what if you have a flood? What if your chief engineer quits? What if 20% of your workforce doesn’t come back after Chinese New Year? All those things happen, so it’s so important for a factory even a trading company to have a written manual for how they assemble the widget. And if they don’t have it, run away.
Okay, the same name I’m going to probably say 4 or 5 times in this conference, but it’s my top 10 list and this is number 11 because it’s so important. The same name in Chinese characters, not in Pinyin, not in English, should be on the contract, the bank account and the factory gate. If you do that one thing, you’ve probably eliminated 50 percent of the dangers that can come your way.
Intellectual property and business secrets
In the last few minutes, let’s dive into protecting intellectual property. But I would like to expand this beyond just intellectual property. Meaning, something you can legally own. But let’s talk about business secrets like who are my customers?, how many units am I selling?, who am I selling them to? Those are kind of soft information that if it falls into the wrong hands, it can hurt your business.
How do you protect yourself? First, the most important thing to know if you are lucky enough to have some type of intellectual property that can be registered, the first thing you got to know is that China is First To Register (FTR), not First To Market (FTM), like back home.
That means if you’re walking around the trade show and you’ve got a famous brand that everybody knows is yours but you haven’t registered that brand entry in China, every one of those suppliers that has your business card can go to Beijing pay a couple hundred dollars and now they own the rights to your brand in China. Scary.
People like Michael Jordan and other, Apple even, have fought major court cases because they didn’t spend a little bit money up front. People often think well I’m buying from China I don’t need to register my Intellectual Property there. I would argue that even if you’re buying from China before you even disclose your information to suppliers, you should register your Intellectual Property. And I guarantee that the proper lawyers will speak tomorrow will second that.
Let’s assume you’ve got it registered. But you know, what if you’re dealing in a product that it’s a new design or it’s something that can’t be legally protected? It’s just a secret that you want to keep close to the chest.
During limit your exposure, for example. Before production starts, are you walking around the trade show handing out your sensitive information to potential competitors—meaning suppliers?
I’ll give you a scary story. One of my good Chinese friends owned a factory and I was visiting him and luckily we had a couple drinks over lunch so I could ask him some really direct questions. And I said, Mr. Lee, (name has changed to protect the innocent) Mr. Lee, your R&D department is an empty closet with dust on it. Yet, every season you have the coolest new gadgets. How do you do it? And he says, the trade show. What are you talking about? Tell me. And so of course, Mr. Lee’s company would go to the trade shows to get new customers. But just by sitting there, there would be plenty of foreign buyers that walked over and handed them specifications, new great ideas without signing a nondisclosure agreement. Basically, those buyers might come back to the show next year not so much this one but in the mainland and find that their product, their great idea is now under Mr. Lee’s wings being sold.
As we’ve learned this morning, the Chinese are so fast at going to FBA, you got to keep your idea really tight. How do you do it? Well, one way is don’t disclose your secret sauce to every supplier that you meet. If you were, say, smartwatches, maybe you take your competitor’s smart watch or maybe take a smart watch that’s similar to yours and you go around to those 15 suppliers and say fill up my RFQ form, what’s your price?, narrow it down to the top two and then you show them yours after you’ve signed an NNN.
What’s an NNN? I’ve heard of an NDA, but what’s an NNN? An NDA is a Non-Disclosure Agreement. An NDA says if I give you the secret information, you can’t tell it to anybody else. It does not prohibit that supplier from taking your idea and making money themselves. So you need to have an NNN—a non-disclosure, non-circumvention, non-compete. So the NNN is like the new NDA on steroids. Contract by itself is not going to protect you but at least it sets the tone that you’re serious about these issues. So that you can’t see the supplier year from now and he goes oh I’m sorry I didn’t know you cared about the intellectual property. My suppliers know that I care about it.
Compartmentalize. You know I talked earlier I don’t want to be a sales pitch but there are companies like mine that can kit products together so that the guts come from one supplier than that fancy packaging and the fancy band from another supplier. And then behind closed doors, my team kits it together. So there are, there is black box manufacturing in China. If you type black box manufacturing in China, you’ll find all sorts of stuff.
Big supplier/little project. If you’re a small buyer and some giant factory says we love your new great idea, we’d love to produce that and we’re going to give you a great price. You might be so they could steal your technology. Be aware when a deal is too good to be true.
It’s pretty, it’s really easy to register your Intellectual Property. It’s fairly easy to protect ideas but for most people that are uninitiated into the ways of China, monitoring it sounds so difficult. How am I going to know what’s happening in that factory? Believe it or not, there are some simple and free or affordable ways to monitor your suppliers to make sure that they’re not abusing the information they have or stealing your technology or making counterfeits. Here they are.
Not just this trade show, but the trade shows in China especially the inter-industry shows that are Chinese-for Chinese where stuff isn’t in English. You might see that that product that you told your supplier not to sell to anybody else is on display. So you know, check out some of the trade shows (look) because usually what happens is the owners of the factory say we’re going to respect your IP but the sales guy wasn’t privy to that information and he goes into the sample room and takes a bunch of stuff and goes to the trade show.
Tooling room. So let’s say that you just bought 10,000 customized smartwatches and you were smart enough to pay for the tooling. I’m going to give you $5,000 to open the tooling. That tooling belongs to me. When you’re visiting the factory, check if that tooling is there. Not sold to the factory’s cousin so he can make some product. I like to show up unannounced and say hey let’s see my tooling. And then I also know that I place 10,000 units and if the wear marks on the tooling went up appears to have gone up a hundred thousand times, I know that maybe there’s 90,000 units sold out the back door on Taobao. So your tooling, especially if some things are customized, is a great way to keep track of what the supplier is really doing.
You want to find out if your supplier is selling to your competitors. And you know, you can look on their website but you don’t see anything. I hope the doors are closed and my suppliers don’t hear this. But what you can do is you’re not going to be allowed to take pictures very easily. You can’t just walk around and take pictures around the factory floor. But what I do is I’ll go to the outbound warehouse where all the goods are packaged up ready to ship to my suppliers’ customers. And I will say factory would it be okay if I do some drop testing? I want to do some measurement. I want check out if this cardboard’s strong under a 1 meter drop test. I’m gonna need to document it. Is that okay? And they always say okay. And then I have my co-worker with a camera and me smiling and dropping boxes. But I’m moving the box so they can see the master packaging information because it always says Made in China, who is it selling to in a website? Then I go home and I work Google and I find out who my suppliers doing business with, and I ask questions like you know, how’s your experience been? Does the supplier respect your non-compete clause? All that kind of stuff. So you get a lot of information from the tool room, the warehouse and the stock, I’m sorry, the sample room.
Now, Taobao. You’ve heard it already. It’s basically you order 10,000 units and the supplier makes 12,000 because they want to make sure that they have some extras in case they have some defects. So they don’t miss deadlines. I guarantee you if you don’t buy those 2,000 units, they’re going to be sold to someone else and they usually go out the back door on this wonderful website called Taobao. So lookup taobao.com, do some research, you might be horrified to find that your product is already for sale in China.
Now if the supplier says they won’t say you’re in Australia and you’ve signed an exclusivity agreement for this factory’s smartwatches in Australia, the only seller licensed distributor in Australia. I have a friend who’s Australian, call the factory, be a dummy customer and say hey I saw this really cool watch. I’d like to buy 10,000 units, factory-direct. Can we make it happen? And if the factory says yeah, no problem. They’re not being honest. So, dummy customer, you can get a lot of information.
It’s easy to register. It’s fairly easy to limit your exposure. Monitoring if you know some tricks is not that hard. Enforcement, believe it or not, is perhaps the easiest out of all these. Now, I’m not saying that you’re going to get your money back during counterfeiting. But by enforcement, I mean, support of the local legal system and authorities to stop things and assume you’ve got a good contract in place, and demand letters, cease and desist.
You know, in the US, it’s like people just ignore them when they show up. In China, it’s a shot over the bow of the suppliers. It says, Wow! My customer knows that I’m cheating them. I bet it usually what happens as Mr. Smith, I’m so sorry that you found those products on Taobao. I do not know how it happened. One of my employees must have gotten greedy and saw the margins you were making on Amazon and decided to sell some out the back door. It’s never going to happen again.
You know, I’ve invested so much time in that factory, I don’t want to change. So, all right. Now it’s an opportunity to tighten up some of the agreements and now they know that I know what they know. And usually, a cease and desist letter if it’s in Chinese by a Chinese law firm. You know sending one from New York in English isn’t going to do that good.
So you know, I’ve been in court cases and it’s kind of fun. You know back home there’s so many legal expenses and the lawyers or I could just see it like a taxi meter ticking how much I have to spend every minute. In China, I feel like you know OJ Simpson. I got the dream team and pulling people together because the labor rates are similar to like the labor rate of a lawyer in the US, versus China similar to the labor rate of a factory worker. So you can actually get highly qualified lawyers and they will do a good job for you.
Inside look at China wages
Somebody asked me before about what are the labor rates and it’s a little bit technical. But I have six different class of employees and if you want to see what should an engineer with five years of work experience; what’s their salary; what’s their mandatory compensation for social benefits—leave your business card out there or give it to me and I’ll send you this PDF.
Shameless plug for the China Sourcing Academy
I told you I wouldn’t talk too much about my main company but here’s a shameless plug for the Academy and Neale will probably tell you a little bit more later. But Neale and I started this online course and now Global Sources is helping to take it over. So if you like the information we talked about today, we have like 30 more hours on various topics.
Before I get to question and answer, if you only remember one thing, make sure that the company you’re dealing with their name is on the wall, it’s the name on the contract in Chinese, and it’s the name on the bank account when you’re sending money. You do that, you’re going to have save some problems.
Now some resources. When the show starts, myself and some of the other speakers will be hanging out down in Hall 11 and ILS. Come by, talk some more. Also if you type in my name on YouTube, I’ve got my own YouTube channel. But if you type Mike Bellamy, I think there’s a famous British soccer player that usually pops up. But if you type Mike Bellamy China, it’ll be my smiling face and a bunch of videos.
Some of the resources we talked about, my company at the top [www.PSSchina.com], the law firm I’m associated with [www.AsiaBridgeLaw.com], some of the blogs where I write at [www.ChinaSourcingInfo.org; www.SourcingServiceCenter.com], and the Academy [www.ChinaSourcingAcademy.com]. And of course, that SupplierBlackList [www.SupplierBlackList.com].
I think I got us back on schedule. We have a few minutes for questions.
Very few minutes. Yes, you can take two questions.
Question: One of the big differences we’ve seen from maybe five years ago to today is most of our mainland factories now are doing house brands. They’re doing private label brands. Would you have any advice, what shifted in your advice? You know, with this shift towards factories competing with our customers?
Yeah, sometimes depending on your position, that can be a good thing. If you have exclusivity to that brand and you’re in your country and you’re not big enough to develop your own brand, maybe you can piggyback on the supplier. But in your case it’s the brand and you’re worried that your supplier is becoming a competitor.
So some of the things we talked about, you know, that setting up that NNN is important. But more importantly, just the contract is really sitting down and explaining. I had one supplier where the customer was buying from the suppliers like the 800-pound gorilla in the market. This American company dominated it but the supplier didn’t realize that and so they took an order from a competitor and they lost everything. So it’s really important to sit down and explain to the supplier why you’re in it together and why it’s to their advantage. Just do your right. And if it makes economic sense and it’s the right thing to do and they’re contractually obligated, then you have a fighting chance.
It’s not necessarily a bad thing and unless it’s in direct competition. But if you don’t ask about it, there’s no feeling of even if you’re a good friend with the factory that they’re doing you wrong by developing their own brands that’s what they have the right to do as China develops. So to answer your question, five years ago you would start hearing about that, now you have to assume that it happens. Unless, plan accordingly.
Question: Thank you for the presentation, Michael. It was great. I just want to check, you mentioned the company, sorry, the factory name in Chinese has to be same as a bank account. If it’s in Hong Kong but the bank account name is still the same in Chinese, is that legally strong enough?
Well, it’s highly unlikely that you’re dealing with a factory in Hong Kong. They’ve all moved to the mainland. There needs to be something in your contract that states payment to this account equates to money received by this Chinese factory. So in the contract you need to link the two somewhere.
It’s good that you know about it and I mean it’s okay for the bank account will be the Pinyin name or the legally registered name in Hong Kong. Hong Kong has some more flexibility because it’s a bilingual system. But in China, it’s Chinese.
So, link the two. It’s not uncommon to pay a Hong Kong parent company of a Chinese supplier but if you haven’t linked up, you’re in danger.
So you just need to put wording in the PO? Yeah, because there’s even though there’s the name could be interpreted in different ways phonetically. Thus, the bank account number is a number that doesn’t change.
Great! Thank you.