China: Choose Right Supplier at Right Time in Right Place
|Written by Ann Lee, Attorney at Law
Shanghai DeBund Law Offices
Posted: September 10, 2009 @ 8:00 am
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In Ancient China, the appropriate time, the right place and the union of people are three key factors in rule of the world and in a war. Today, the three factors, time, place and people also play key roles to success. This article will give you an overall perspective on how to choose a supplier in China in respect of the three factors. However, before we elaborate on the three factors, we need to be clear what has been happening in China.
1. The changing attitude about foreign counterpart
Chinese feeling about foreigners is no long the same as a decade ago, when the foreigners were treated to be superior to the native Chinese, especially after the financial crisis. Chinese now come to realize that even a foreign counterpart may run away and Chinese companies are more cautious when dealing with foreigners and treat their foreign counterpart more like a equal even though foreigner parties still enjoy a popular reputation for good price and are more trustworthy compared with the native Chinese companies. Such a change of attitude, more or less, will have influence on the transactions between a Chinese supplier and a buyer from abroad, especially when the status of negotiation is concerned. Chinese suppliers now have more inquiries instead of just taking what a buyer abroad offers.
2. The vague culture
Chinese people are changing, but what is deep inside the culture is hardly changing.
You may find it difficult in pushing the Chinese supplier for an accurate number like the lead time or a definite yes or no. Do not get annoyed about vague worlds like “almost OK” which may mean “yes, it is OK”, “I am no confident since I have no experience”, or “I have not the authority to deal with that”. Try to get the subtle meaning of the vague words your Chinese supplier has delivered. (This will be referred in detail in how to negotiate with a Chinese supplier and how to track the fulfillment of an order.)
3. The new labor law
Ever since January 1st, 2009, when the latest Labor Law came into effect, news come out one after another, one Korean invested factory was closed and the whereabouts of the big boss could not be traced, in Wenzhou, many factories were closed because of high cost the new Labor Law incurred.
China may be no longer a heaven for low labor cost from a traditional perspective. However, Chinese enterprises are struggling to upgrade their managing system and perfect their system for management both internal and external. Comparatively speaking, China may still have cost advantage in the near future on an overall base since the surviving Chinese enterprises are more mature in management, technology renovation and quality control.
After a little touch on the real situation (Guo Qing) in China, we can start with our three factors.
1. Right time
China, a manufacturing center in world, is now becoming a hot place for outsourcing. After several years’ experiences in exporting and after the financial crisis, the surviving Chinese companies are growing up, their risk resisting ability is strengthened and their sense for innovation and development is ever growing. To be exactly speaking, after so many ups and downs, export oriented companies are now mature in their dealing with foreign counterparts.
At the same time, Chinese government recently issue a series of policies like increasing the tax refund for goods export, relaxing the restrictions for loan providing with medium and small sized companies, preferential measures for service outsourcing enterprises and etc. The government backing is never so strong.
This is the right time to outsource from China, for intangible or tangible goods.
2. Right place
If a little time is spent in searching, you may find in China, different regions have different industries of advantage. Take an example, for bath products like toilet, there are two bases for ceramic toilets, one is in Chaozhou, Guangdong Province, south China and the other is in North China, Hebei and Linyi. The difference between these two bases is that the ceramics from North China are better that those of Chaozhou area for the earth in North China is better. However, comparison has to be made before you choose where to outsource. Bosses from Chaozhou have more entrepreneurial spirit that those from enterprises in North China and factories in South Area may have more styles and updated technology than those factories in North China. What’s important is that logistics in south is more developed than that in North, this plays a key role when outsourcing of ceramic products is involved, for ceramic products are fragile and are easily broken which need good hands to take care of. Meanwhile, cost of logistics in North China may be higher than that in South China. So the overall cost for ceramic products in North China may be much higher than those from South China, even though the quality is different.
Therefore a choice for where to outsource in China needs to be made based on the relevant and important factors combined together. After where to outsource is localized, you may find it much easier to finalize your supplier(s) in China.
3. Right supplier
It is hard to give a clear and definite answer to the question what is the right supplier. However, for professionals in your own industry, you may have lots of index or specifications. But in China, in additional to the hard index or specifications, attention may need to be paid to the soft index. It is impossible to exhaust list here for what a good supplier is in China, but the following may give you some references on what a good supplier in China needs to have.
- License of a supplier
Under Chinese laws, business scope places a very important role in what an entity can do. Some business has certain qualifications and only those qualifications are satisfied, will permit for such business be granted by competent authority after application. Ask for the business license of the supplier and check the business scope. If your future sourcing in China falls into the business scope that needs special approval from competent authority, the business license at least will tell you what a potential supplier can do. Meanwhile, a business license may also tell you who the legal representative to the potential supplier is, who always may be the real boss to the potential supplier. (However, this may not often be the case since many enterprises in China may use a third party as a legal representative to the company.) Also, a business license may also tell you whether the potential is a trade company or a factory and whether the supplier can be engaged in export business or not.
In spite of the above, a warning needs to be posted here, do not trust what is listed on the business license completely, for the registered capital and the registered place listed on the license may not be true.
- Scale and output capacity of a supplier
An on-the-spot inspection is prerequisite so that you can have a very direct idea of the scale of a supplier. A supplier with an English website or with English speaking person(s) does not necessary means the scale of the supplier is good. A supplier who welcomes you to his place may show he is confident in his factory. However, the premise you visit may be borrowed from someone else just for show. So ask for detailed questions, like the number of employees. Since it is stipulated under the new Labor Law that the files of the employees should be kept for at least two years, a real boss most probably will be clear of the employees he has hired. If possible, insisting on checking the employee roll which will give you some idea the scale of the supplier.
A good supplier will give you data about his capacity without any hesitation. Prepare a long list like the daily output, the future plan to deal with the surplus capacity and what if the orders in the future may be in excess of the present output capacity. Ask as many questions as you can, problems will finally come out if there is.
- Establishment of management skill
ISO system is no longer a fresh name to Chinese enterprises but not all the suppliers in China understand the significance of ISO system, instead they take it only as an honor or just fall suit since the competitors have such ISO system. Some suppliers may obtain their ISO certificate with inappropriate means. Check the tangible documents under the ISO system. Meanwhile, check the supplier’s management of the raw materials, production record and quality record and whether the documents available match the SOP.
- System of quality control
Check if there exists a system for quality control, review the quality control documents, records and ask the sales person or the QAs or QCs about the process of quality control.
- Experience with clients overseas in the similar or same industry
If you find your potential supplier from Alibaba, at least, the potential supplier has sense for export. But this is not enough. Ask the supplier the basic process for export from China to USA, what is needed when customs clearing is conducted. What their usual delivery terms are with such clients, if possible, check the B/L available, ask how they collect their foreign currencies and etc. A good understanding of the export process in China will indicate rich experience in this area and a good relation with his own suppliers in providing such services.
- Management of his own suppliers and ability for price negotiation
This issue is well related with issue 2 and a supplier in large scale with big output capacity will definitely have more power in price negotiation. Meanwhile, a good management of the suppliers may indicate a smooth transaction in the near future since the raw materials preparation to a certain extent is guaranteed if nothing out of expectation comes out.
- Cash flow
The cash flow has directly effect on the payment term, the ability for the supplier to take the liability for breach of contract and the willingness for try new products in the future and etc. If may be of some difficult to collect information about cash flow from the potential supplier, yet channels for such information exist, like asking the suppliers of your potential supplier whether the payment is in time, checking with the potential supplier how they solve the fund problem, the fund requirement for their daily operation and etc. Some researching companies provide report on the credit of enterprises in China but the accuracy of such reports is doubted, still at least such report may shed some light on the credit status of your potential supplier.
- History records for contract fulfillment
The access to the history records for contract fulfillment may be quite limited but the least you can do is to ask your potential supplier to prepare a list for the problems they meet often when they are fulfilling the orders from oversea clients. From the problems they list, you may find what is wrong with the potential supplier or what you needs to be careful when you starts business with the potential supplier.
Two basic principles
Principle one, shopping after comparison of three shoppers
As the Chinese saying goes, shopping after comparison of three shoppers is made, before a supplier in China is finalized, at least find three potential suppliers in the same line once the place to localize a supplier is determined. Get as much information about the three suppliers as possible through this or that means so that an objective comparison can be made. Choose a supplier that matches your purpose most.
Principle two, always get a backup
Even the nicest supplier may get defaulted in the contract, a backup supplier, on one hand, will strengthen your position when dealing with the other supplier, and on the other hand may serve as an incentive to better the relation between you and the other supplier if such backup supplier can be used in an appropriate way.
The above listed are the basic knowledge you need to have to choose your supplier in China and the following articles will be elaborated on how to negotiate with your counterpart in China, the contract clause, the tracing of the transaction, the procedures for customs clearing in China, protection of your IP when outsourcing in China and etc.