By Neale O’Connor
What to look for when sourcing smartwatches and wearables? A factory visit.
According to data from the report Year 2015 China smart wrist wearable market research published by IDC, the market volume has expanded significantly from 2013 through to 2015 and will continue through 2016 and beyond.
Wearables represent smartwatches and smart bracelets and are becoming a must have for the connected society. Like many consumer electronics products, it is critical that buyers and importers on record know the factory that makes the products they are selling. This is especially the case with my previous factory review and blog post on Hover boards where I highlighted the various parts of the manufacturing process where quality gates need to be set up.
In November 2015, I had the opportunity to visit Kingsmart, a smartwatch and wearable factory in Shenzhen to check out the key quality-related questions that buyers need to be aware of when auditing a factory. The details provided are not intended to cover everything but to provide a starting point for further detailed dialogue with the factory. Kingsmart is a high-tech company engaged in developing, designing, producing and marketing the smart wearable products. It established in 2014; the manager used to work for a smartphone manufacturer and video production company as a designer and then he left the company and set up his own factory.
Their main products are the smart watches, like Fitbit, iWatch, but the price is much lower than that, their highest smart watch only costs around RMB 260. What is more, they also produce sports bracelet, anti-lost device, and kid’s tracker watch.
As for the payment arrangement, if the finish goods are in stock, the buyers need pay in full, and then the supplier will arrange the shipment. If the buyers want to customize and put their own logo in the smartwatches, then the buyers need prepay 30 percent of the full payment, and after the supplier finishes the production, buyers should fetch the balance before the shipment.
The factory covers an area of 1,200 square meters. It has 5 production lines, among them 3 are main production lines, and their daily production capacity is 1,000 units. At the day we visit, they were running 60% capacity. They normally have 38 people on each assembly line. Each worker has a 10-hour shift.
The general manager bought the shares of the factory together with some other friends of him, including the factory owner. Therefore, the factory also helps other companies do the OEM orders. Normally the factory owner will help find the orders and ask the factory to manufacture the products.
There are 12 members of the QC team and have their own five-step test standards: IQC, IPQC, QC, QA, and OQC. They have a separate import material storage room, import quality control room as well as the bad quality goods returns room. Even more noteworthy is the goods return room is set up for the defective import material, which indicates they have good quality control of the material coming in and management of the production process. They also have a quality testing after the assembling to control the quality of the finish products.
Referring to compliance, they have CE and ROHS, but they do not have FCC.
As Kingsmart factory already had a sophisticated QC system, they will test the products of outsourcing orders based on their standard, and the customers’ companies also send some of their QC personnel to monitor the process. However, if there is any quality problem, the customer will go directly to the factory owner and the owner will turn back to Kingsmart to deal with the quality problem. The factory owner is in charge of the communication and responsible for the quality of the outsourcing orders.
Actually, their relationship with the factory is a collaborative relationship, not a subordinate relation. And due to some reason, their general manager withdrew his shares in the previous factory at the end of the year 2015. Therefore, they do not have their own factory and all of Kingsmart’s orders are outsourcing to other factories.
Our OEM order occupied 40 percent of the total sales, and the rest 60 percent are for our own brand name products. So far, we have 2 co-packing factories, one is an old outsourcing factory which established the relationship at the beginning of our business, and the other is the new factory we found recently, at the beginning of the year 2016.
Therefore, Kingsmart is now doing the raw material purchasing, engineering, sales and after-sale service. And the manufacture and assembly are all outsourcing to the two co-packing factories.
There are not many companies who have their own factories in the smartwatches industry; most of the companies are outsourcing the manufacture orders to other factories. And customers do not know or do not care about this issue because most of the customers only focus on the quality and price, if you can provide the good quality products with reasonable price, customers do not care about where the smartwatches come from.
As for the quality control of the outsourcing orders, Kingsmart will send the QC team to the co-packing factories to monitor the whole process of production and do the finished good testing based on their standard. They take the quality control seriously because the good product quality can save a lot of problem in the after-sales services.
They have around 150 employees, and the turnover rate is not too high, because their average salary is higher than other companies, plus they have commission and bonus. And they also guarantee the accommodation for the workers, which also make the employees feel more like in a family.
Customers for Smartwatches
Most of their sales are domestic, approximate 70 percent. The rest 30 percent are international sales.
Our major overseas market is Russia, and we also have sales are from American, Europe, South East Asia, and Spanish, but the sales of US and Europe markets is less than what had been in the past while the customers in Russia still show the strong purchasing power.
They have a quite low churn rate of customers. The reasons are. First, they have a good relationship with their customers, and therefore, the regular customers will recommend them to their friends. Second, they make sure the quality of their products is good to maintain the reputation.
Their export percentage ranges from 55 to 59 percent. Their major customers are Tesco in the UK, Take 2 Technology as well as Mobile Fashion. Besides their own brand name, they also help other companies do the assembling as an OEM supplier.
They not only focus on the outer appearance but also focus on the operating environment control, such as the temperature and humidity control to guarantee the defect rate is below the industry level. Moreover, they are using an ERP system to improve the efficiency and reduce the chance of mistakes.
No.1 Challenge and Response
Their biggest challenge is sales, like most of the Chinese manufacturing companies facing. The good news is the domestic market for the smart watches is growing due to the entry of several major players, i.e. Samsung, Sony and Apple, as well as Chinese vendors in the smartwatch market. So far their company does not have online sales by themselves, but some of their retailers will put their products to the online shops. They use B2B sites such as Global Sources for their overseas sales. They plan to sell their products online to overseas customers via Amazon next year.
They have a higher standard of the raw materials; they only use brand new screens and key parts from Panasonic, Sony, LG, Samsung, and other domestic well-known brands as well as the chips from Japan, South Korea, and Taiwan.
They also have a professional market research team who is familiar with the global market trends, and have a good knowledge of different market requirements for products and provide the suitable proposals for the customers.
Improvement Points (advice given during our visit)
After inspecting their assembling line, there were some points they could address to have a more sustainable factory. First, they should have the anti-static wrist strap on the workers’ wrist those that directly touch the electronic components. Second, the workers doing the quality control of the finished products should wear gloves to avoid leaving their fingerprint or sweat stain on the touching screen? Third, when they put the watch together into the boxes, there should be some partitions in between to avoid the surface scratch. Fourth, the movement of watches to another area for Bluetooth testing should be done in a sealed container. Finally, the screen protector should be placed on the top with more precision to show a higher quality of workmanship.
And their orders from Global Sources Expo are normally sample orders with a small quantity, but they can meet big potential customers in the Expo. Compared with last year, their numbers of orders increased, especially from July to December, one reason is that period of time is fewer months after the Expo and customers start placing an order after visiting their factory or receive the samples. The other reason is near the year end; customer will place Christmas orders.
For more details of the factory visits and tips and tricks to avoid when sourcing from China please visit the China Sourcing Academy.
Dr Neale G O’Connor FCPA (Aust) is a Cofounder of China Sourcing Academy, a complete training system for professional buyers seeking to source from China. He is the director of Ricebox (Hong Kong), a China risk management consulting company, and is the founder of the China Supplier 1000 Project that focuses on helping suppliers to develop their international business. He has two books on operational and risk management in China that are available on Amazon, and is an Associate Professor in Accounting at Hong Kong Baptist University.