Sourcing & Import from China Tips and Guide

 

 

The way to get best deal is to learn all we can before negotiating. The more we know the stronger we will be in discussions. We are talking of course mainly about buying consumer goods direct from China and/or other emerging exporters like India and Indonesia for resale in our respective countries.

 

1. We will likely negotiate with …

 

1. Manufacturer (factory), or

 

2. Middle Person between us and the factory (generally called a “trader”), or

 

3. Our own Sourcing Agent (an independent person we appoint to source product and negotiate price for us). 

 

A ”Supplier” is either a manufacturer or a trader (who buys from the factory or from other traders for on-sale to us).

 

2. We use our Step 2 knowledge to quickly weed out dud suppliers …

 

Knowing precisely what product certification we need, if any (see Due Diligence Step 2) is one thing. But, discovering whether the certificate actually exists is quite another. We use this discovery process to quickly eliminate most, but not all, of the dud suppliers (and, something is not normal if dud suppliers are not chasing our order).  

 

Broadly, each Western country has its own compulsory Standards for consumer goods. Certification that a product complies with Standards is issued by an independent laboratory after rigorous technical tests. There’s UL, and EN and AS and etc for different countries seen in Step 2. These certificates / lab tests can cost $10-$50k for a product that retails for just $10. 

Words like ”Made to UL xxx Standard” are commonly seen on suppliers’ marketing and quotation material. However, those words per se mean nothing. I find that about 70% of suppliers who respond to my buying leads hold no certificate for these reasons:

 

1. The supplier merely believes the product is made to the Standard but the factory has not submitted the product for testing (hence words like “Made to xxx Standard” can arise from mere belief rather than from existence of an actual certificate), or

 

2. The factory’s main buyer, not the factory, holds the certificate/s because the buyer itself obtained and paid for the certificate/s, or

 

3. The factory has commenced the certification process but the certificate will not be available for a further 3-6 months, or

 

4. The supplier’s marketing claims in respect of certificates and quality standard are outright fraudulent.  

 

Don’t forget the Chinese domestic market is huge. Accordingly, many thriving and very genuine Chinese factories don’t really understand foreign “Standards” when they start selling to the West.

 

It’s easy for a learner-buyer to get hooked into the long process of getting quotes, obtaining samples, doing market research and financial modelling around a product only to discover six months down the track that the project is pie-in-the-sky because the product is not certified.

 

In summary, knowing our Step 2 Due Diligence technical knowledge and then applying this knowledge in our very first discussion with a supplier is critical to the decision of whether to deal further with a supplier. Typical discussion goes like this:

 

Buyer: “I need a UL certificate.”

Seller: “We make the product to UL Standard.”

Dumb Buyer: “Great.”

Smart Buyer: “Do you have the certificate?”

Seller: “Yes.”

Smart Buyer: “Will you send copy of the certificate to me before I order a sample of the product?”

Genuine Seller: “Yes, no problem.”

Dud Seller: (any one of 1,000 reasons why the certificate is not available).

3. MOQ is a reasonable requirement …

 

Minimum Order Quantity (MOQ) causes much tension between buyers and suppliers. The problem is that many buyers see their order as “large” while in reality the order may represent just 2 minutes of production line time for a large Chinese factory servicing the world.

 

It is uncommercial for a factory to deal with buyers who want just 2 minutes of its production line time. Basically the job of a modern factory is to produce goods straight off big production lines directly into 20′ and 40′ containers for immediate dispatch to warehouse / shipping. And, middle traders

, who buy container loads from the factory, are not virtual retailers of just half a dozen products to western buyers. 

 

MOQ is all about “economy of scale”. The cost of a job to paint only one square metre of our home will vastly exceed the cost, per square metre, to paint our entire home. The planning time that went into that one square metre job was near the same planning time as painting our whole home. The same principal applies to a Chinese factory or a large trader in quickly moving goods. Hence the need for “MOQ” else the manufacturer or trader would also be retailers.

Think of a single product as a pyramid where “shop retail” is the base of the pyramid. The closer we get to the base the greater the mass of activity and therefore the greater price. Our order worth a couple of million dollars puts us near the top of the pyramid in paying smallest price but our order for 20 items puts us near the retail price base.

 

Buying less than MOQ for market research:

 

Buyer: “We understand your 1,000 unit MOQ but we need your help for market research.”

Seller: “???”

Buyer: “Do you think buyers in our country will like your product?”

Seller: “Of course.”

Buyer: “We need 100 units to see if you are right.”

Seller: “Many people in your country already buy our product.”

Buyer: “I know, but we want to sell to [our town / age group / income group / or as applicable]. They don’t buy your product.

Seller: “I see.”

Buyer: “We want to try your product on 100 of these people before we buy MOQ.”

Seller: “That will cost more than MOQ price.”

Buyer: “It’s only research. Our research budget is MOQ price. We must see if our target market will like your product. We need your help.”

Seller: [blah blah and finally agrees]

 

4. Don’t be afraid of Middle Persons …

 

Middle traders raise uncertainty in the mind of the buyer. The buyer naturally wants to trace the manufacturer for better price (not knowing the manufacturer has huge MOQ and is not interested). Chinese traders too often try to get around this buyer psychological problem by representing they are the actual manufacturer. The pot boils over when the buyer finds he/she is not dealing with the manufacturer.

 

Don’t be afraid of middle persons who buy large quantities from the factory for resale to Western buyers. Small Western buyers (of less than $1m pa turnover) could not exist without them. But for these traders, near all Chinese products would go direct to the Wal-Mart’s and other huge chain stores of this world. We need these middle Chinese traders for buying big chunks from factories and on-selling smaller chunks to us. Their margins are typically only around 5-10% (or should be).

 

If in doubt, hire one of the good little Chinese helpers who are well know in these forum pages to sort the wheat from the chaff. These helpers can do some pretty amazing work for a one or two hundred dollars. Might just be the best investment you ever make.  

 

5. Hidden costs … price is not just price …  

Our negotiation posture will include all or many of these real costs:

 

1. FOB price (Price is usually quoted FOB, save where goods are sent by air or courier.)

 

2. Manufacturer’s Warranty (What happens when end consumers claim for product replacement or repair, in context 5-10% is not unusual?)

3. Percentage of defective goods allowable per shipment (There is near no such thing as a shipment “free of defect”.)

4. Late delivery costs (What actual financial damage will I suffer if my order is not supplied on time?)

 

5. Supplier’s moving input costs (What happens if the cost of raw materials to the supplier sharply increases before my order is produced, in context the supplier will usually request me to pay more despite a quote that looks like fixed price?)

 

6. Product Liability Insurance (What happens if I am sued in my own country for manufacturer neglect and/or product misrepresentation and the like?)

 

7. Freight Forwarder Issues (Particularly for Broken Container Loads - BLCs - in mainland China.)

 

6. Our negotiating posture, in summary of above …

 

1. Are we dealing with Manufacturer, Trader or our own Sourcing Agent?

 

2. We use our knowledge of Certifications to weed out dud suppliers and to save getting caught up in fruitless negotiations for product we cannot, in any event, resell in our own country.

 

3. MOQ is a reasonable requirement but the supplier may sell smaller quantity for market research (if we push hard).

 

4. We are not afraid of middle traders. They are our partners to get around manufacturer’s big MOQ requirements.

 

5. Price is not just price. Many supplier related elements other than the quoted price make up the supplier’s real price and each needs to be negotiated. 

 

And, for a hundred dollars or so we can hire a smart independent Chinese helper to assist when the going gets tough.

 I trust my little post can help somebody and I know the issue of Hidden Costs in para 5 above needs expansion.

Guangzhou has a fantastic and very modern metro system, with four lines currently open, as seen in the map shown in the photo here. Some stations are still under construction. All signage is in both Chinese and English, at both ticket machines and platforms. Tokens are used instead of actual paper tickets but the concept is the same. If you need change to buy a token at the machine you can get it from a person in a ticket booth, but they don’t sell the tokens in the booth, they just give change.