At the start of the year the Chinese Yuan came under increasing pressure against other currencies as businesses and investors began to move money out of the country in response to a worsening economic environment and significant falls in the stock market. This set off global moves in stocks and foreign exchange markets that have resulted in a stronger US Dollar, a much lower oil price and global shipping rates as low as they have ever been. Perfect conditions for a manufacturing business to outsource to China!
With that in mind we wanted to take a look at what you need to know before outsourcing there:
Understand the culture: One of the biggest differences between Western Business people and Chinese is the concept of a “done deal”. Westerners understand this to be an agreement on the commercial terms such as price, materials and delivery dates for example. To the Chinese, agreeing to these terms can be considered the start of a negotiation.
Control processes: How do you put quality control processes in place when your engineers and designers are so far removed from the point of manufacture?
Firstly, it is essential to submit detailed requirements and specifications with your purchase order to detail exactly what you want manufactured. Secondly, it is wise to start with a small sample order to enable you to check the product matches your requirements. Lastly, when you do put in a bulk order it is possible to contract with a third party company to inspect the products against your specifications documentation before they are shipped (another reason to have detailed specs!) This way you can uncover a problem they have arrived in your warehouse and it is too late.
Shipping logistics: Your first decision is whether to ship by air, which is expensive but fast, or by sea, which is slower but cheaper. The exception is if you have a shipment that’s less than 2 cubic meters in size. In that case, the minimum fixed costs for ocean shipping are so high that it almost universally makes sense to air ship, unless your shipment is extremely heavy.
The next question is, should you take legal possession of your products at the factory, or at the port, or not until the goods get to your warehouse? If it is your supplier’s responsibility to get your product to the port, the cost is higher than if you take possession at the factory and arrange transportation to the port yourself. Of course, if you request “delivered duty paid,” where the supplier manufactures the goods and gets them all the way to your warehouse for you, that’s even less hassle for you, but the cost will be even higher. Often, many people find that China suppliers know the best way to get the goods to the ports. Then importers use third-party firms called “logistics service providers” to get the goods from the port, through customs, and eventually to their warehouses.
Payment and money transfer options: There are several payment options, each with their own cost, speed and risk profile. The classic bank transfer (Telegraphic Transfers / TT – all the same thing) can be one of the most expensive payment methods if foreign exchange costs are taken into account. Bank transfers also generally incur a fee of around 40 USD. Remember that if a deposit / balance payment arrangement is being used (which is advisable), then two transfers will be made, doubling the transfer fees.
Paypal: Some buyers mistakenly assume that PayPal will always enable them to get their money back if things go wrong. The advantage of PayPal is that it provides an interface for credit cards to be used to make payment, and credit cards usually do allow payment to be reclaimed. However it is relatively expensive with Paypal foreign exchange fees of around 3% standard.
Align Commerce: A relative newcomer to the cross border payments world. With transparent fees and a simple user experience, Align are a Silicon Valley startup using a new technology called the blockchain to move money internationally from bank to bank – they even have an offer on at the moment to celebrate Chinese New Year.
Intellectual-property considerations: Many businesses place great value in their intellectual property and we’ve all read about the giant corporations suing each other around patent infringements. Bear in mind that separate protection will be needed outside the US, but not all IP that can be registered in your domestic market is registerable overseas.