So you have your million-dollar product idea. Your mom, best friend and even your relatives think your product is going to change the world. Now it’s time to get it made. It’s at this point when I begin to see panic and desperation in future entrepreneur’s eyes. Finding manufactures is definitely a daunting task, particularly when dealing with factories in China. We’ve all heard horror stories about fraud cases, shabby factories and poor quality products. Don’t fret! The tips below serve as a guide to manufacturing in China so that you can keep your eye out and react when you see the signs.
BEFORE YOU START
- China is a first to file country
Shan Zhai/copycat culture, IP theft, and “borrowed ideas” are still as big a problem as ever in China. When sourcing from a Chinese supplier, you must take steps to protect your intellectual property. China has three types of patents: invention patent, utility model patent, and design patent. Although the name is similar, the utility patent in the United States is equivalent to the Chinese invention patent. Besides the three types of patents, you should also consider filing for the trademarks with which your products are branded; the copyrighted materials in your product instructions, marketing materials and software; and any trade secrets covering your manufacturing processes. We’ve said it before and we’ll say it again: China is a first to file country and this means that whoever files for an IP first gets it. For how this can play out the first-come, first-served front, check out Apple Loses Trademark Lawsuit Against Chinese Firm.
FINDING A FACTORY
- Start your search online
No surprise, the Internet is a good place to start your search, includingGlobalsources.com, a site with a jumbled list of reputable suppliers in a number of categories, ranging from electronic products to kitchenware to umbrellas… pretty much every niche is covered here! There’re some other online supplier directories as well. But here’s the take away— don’t rely solely on them to guide your decision. You still need to filter out the bad actors because it’s a listing of suppliers just like the “yellow pages.” A supplier can pay for a bigger and nicer-looking ad. Don’t naively believe that the “gold supplier” badge means they are a good supplier.
- Beware of middle men
In your search for suppliers, you’ll likely come across trading companies that masquerade themselves as suppliers. Sometimes they do not reveal that they are acting as an intermediary, leading you to believe you are dealing directly with the factory. If your orders take up only 1% (or so) of the factory’s capacity, trading companies will be more willing to work with you than factories. Otherwise, you actually want to avoid them because they add an extra layer of cost or risk getting scammed since they can disappear overnight. To uncover the truth, ask what they are (trading company or factory) or visit their factory and talk to the workers (there are stories of trading companies taking buyers to random factories in an elaborate ruse).
- Guilty until proven innocent
Do your due diligence and verify your supplier before you place the purchase order. Ask the supplier for a copy of its business license. A Chinese business license will show the company’s name, address, legal representative, registered capital, and other official company information. Always request copies of quality management certifications such as ISO 9001:2008, factory audits, and production records to check for manufacturing compliances. Tovet the authenticity of the documents, call up the registrar and ask them if they have accredited this company. You will likely come across suppliers that refuse or are unable to provide these documents. They are probably not worth your time.
- Don’t judge a factory by its look
Factory visits are among the best ways to vet a supplier by taking a peek behind the kimono. Most of the time, you are only seeing “five-star factories”, which is like off-the-books subcontracting. These factories obey the law, treat their workers fairly, pay decent wages, and ensure safe working conditions. But, they outsource more than half of the work to unregulated shadow factories. So go the extra mile and spend time touring the factory. While it may seem like a lot of work at the beginning, it could pay off handsomely in the long run.
- Take their words with a grain of salt
If you ask 10 manufacturers if they can make a product to your specifications, all of them will say yes. The reality is maybe one of those actually can. Never take their word for it. Always ask to see examples and ask for references. Often times, you will come across suppliers who tend to hide their customer information, as they fear their competitors might take advantage and move in on them. As Mike Bellamy of Passage Maker suggested, ask for buyer references that are not located in your home market. For example, if you’re based in the United States, ask for references in the European Union or Australia. But if your supplier can’t provide you with even one genuine reference, run away and don’t look back.
- Be more than a purchase order number
Never underestimate the importance of guanxi (relationship) when doing business in China. Build a strong, cohesive relationship with your suppliers; putting the human effort in is worth every cent. If the supplier can grow with you and likes you as a person, you will find advantage when it comes to lead times, payment terms and quality. Simple gestures like sending Chinese New Year cards, hosting a dinner or visiting your factories in person are all great strategies.
- Engineers are more familiar with the production, not the sales guy
Get in front of a couple of production engineers/technicians, and ask if they understood your specifications. Put your specification sheets in front of them, and see if they are familiar with it. Be sure to provide precise specifications, including material weight, quality, standards for color and sizes etc. Pretend that you are explaining the specifications to your 5-year-old nephew. Yourproduct specifications shall be so ABSOLUTELY crystal clear that the supplier simply can’t find an excuse to misunderstand them – or use cheap and substandard components without your knowledge.
- Take the manufacturer’s capabilities into account
For example, if existing molds exist for certain parts, try to use them rather than opening new molds. Not only will you save the cost of the new mold, but you will also keep the switching costs (from one manufacturer to another) low. Find out whether your potential supplier can be quickly qualified to manufacture to your products. It’s always been the case that a manufacturer that has worked on similar products might be capable of making your products to specification requirements that match with certification guidelines such as CE, FCC, UL etc.
PLACING YOUR ORDER
- Get the bank details right
When making payment, make sure that the beneficiary’s name matches the registered company name. If it does not, then that’s a definite red flag. If you send money to one account and sign a contract with a different legal entity, good luck getting refund if things go wrong.
- Avoid risky payment method
Western Union and wire transfer are not secure payment options so they must be treated with caution. Your best option is to use PayPal, Letter of Credit, or Escrow service. If you get ripped off, you can usually get your money back.
- Limit your risk to the 30% down payment
Most credible suppliers will work on a 30% advance payment and expect 70% balance paid upon inspection and approval. Between 50% and 75% of your payment should not be rendered until after the delivery of goods.
- Keep the supplier on their toes
Time is a major factor in China business. Often times, simply letting the factory knows that you plan to arrange an inspection. They will pay more attention to your order production because they know you are serious about quality. If you find defects early, it is possible that you will be able to resolve the issue in time to save the shipment. If the issue cannot be resolved, then you can at least move on to a different manufacturer early enough to obtain acceptable product in time to meet your business needs.
- Delivery date? What delivery date?
Expect delays in your manufacturing schedule. You should take AT LEAST 2 weeks of safety in their schedule. Don’t get caught off guard with manufacturing setbacks during Chinese New Year because China will shut down for a week or two. Plan ahead and increase inventory over the months preceding the holiday season, just so you can avert the risk of delayed production and delivery.
WHEN YOUR ORDER IS READY
- Don’t fly blind and skip QC
Before you take that leap of faith and pay the balance, arrange a pre-shipment inspection with a third party QA agent to check the goods before paying the 40% (under a 30-40-30 system). These days there are a whole list of professional firms in China (see AsiaInspection, China Sourcing Service Center and Asia Quality Focus) whom have the ability to mobilize feet on the ground overseas for a quality control inspection for a surprisingly reasonable expense. Be prepare to budget around $300 for this. If your supplier refuses an inspection for any reason, that would ring alarm bells.
- Kickbacks are not uncommon
Sourcing in China is a dirty business. For sure, there are honest suppliers out there, keep in mind that so many moving parts can go wrong and it’s arduous to keep track of them. Bribes are not uncommon. Third party inspection agencies (both big multinationals and smaller agencies) are not immune to this.
I know that giant brand names like Walmart do not follow some of this tips, and it works very well for them. But, unless you purchase Walmart-like volumes, don’t try to follow their example. Remember, there is no replacement for common sense. If something feels weird, walk away. If a deal seems too good to be true, it probably is.
Do you have any tips when it comes to sourcing in China? Share your wisdom in the comment section below.
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