How to Out Maneuver Alibaba Sourcing Challenges
August 11, 2017
Many eTailers are drawn to the low prices and amazing selection of Alibaba only to find they are faced with Alibaba sourcing challenges. Lower labor and production standards, no intellectual property protection, communication barriers, and the challenge of making global payments are among them.
Alibaba sourcing challenge 1: Low labor and production standards
While products sourced through Alibaba (bulk, white-label or custom) will not meet the same quality standards as, say products built on Mercedes Benz’s manufacturing floor in Stuttgart, the lower production quality trade-off comes at a substantial cost savings (again, roughly 1/6th of a domestically produced widget).
In some cases, lower production quality will continue to meet or exceed those of a business’s closest competitor (whose products are also offshored to a country with low(er) production standards).
As well, even if a small business sources the best supplier with the best quality standards imaginable, lower production quality can often boil down to consumer perception at seeing the “Made in China” label.
Overcoming the challenge of lower labor and production standards begins with completing a cost-benefit analysis on the product in question. While most small businesses want the highest quality standards deployed, the fiscal reality is that the product’s higher costs strip away profit margin. A balance between cost-of-goods and quality must be sought.
Working with reputable suppliers on Alibaba can help with ensuring a balance in cost-versus-quality. All suppliers are rated by their customers, and many of them will even send samples for inspection before taking a larger order.
As for consumer perception, there are so many large, name-brand domestic companies owned by or sourcing through China that the consumer’s shock factor is virtually non-existent today. Focusing, rather, on building a brand that caters to the consumer rather than a brand that caters to the product, also helps consumers overlook shortfalls in production quality to a certain degree.
Alibaba sourcing challenge 2: No/low intellectual property protection
Companies that rely on self-designed goods or other patented systems or intellectual property will be leery of sharing their greatest asset with a supplier sourced on Alibaba. All types of well-known companies seem to be suing Chinese companies and individuals for stealing their coveted intellectual property (this Financial Times article talks about Land Rover suing a Chinese company for stealing the design of its Evoque; this news article talks about GE accusing a Chinese engineer of stealing its trade secrets).
Luckily, sourcing products through Alibaba affords some form of intellectual property protection through its Intellectual Property Rights (IPR) Protection Policy. The problem is that repeat offenders are simply delisted and penalized; actual recourse may require legal action, which can offset any initial cost savings to the point where the venture is lost.
Depending on the scope of the project, companies can also outsource various components of a project and assemble the finished product domestically or by a third-party.
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Alibaba sourcing challenge 3: Communication barriers
Dealing with a company abroad typically means dealing with a language barrier. While English is not an official language in China, the language is taught in schools. There are an estimated 200 million English speaking Chinese according to Wikipedia.
Addressing communication barriers begins in the procurement stage. Most Alibaba suppliers will welcome contact from potential clients. Explaining your needs and ordering samples will help determine whether a communication barrier indeed exists. This is particularly important for companies with larger projects where more dollars are involved.
Alibaba sourcing challenge 4: Making global payments
Despite the benefits of cost savings as well as overcoming any or all of the challenges listed here, US businesses will need to pay their Alibaba suppliers to maintain a good working relationship. Like any company, those working through Alibaba require payments to meet their own cash flow demands. Likewise, these companies are equally apprehensive and wary of dealing with companies on the other side of the world.
How Veem can help
US small businesses have several options when making payments to suppliers abroad, including Veem. The Veem global payment platform that helps small businesses to simplify their global payment process and save. Here’s how Veem stacks up from a risk-reward perspective against the three other main options:
Wire/Bank Transfer – Low Convenience/Medium Risk
With bank-to-bank wire transfers , the sending bank requires a tremendous amount of information, such as SWIFT codes, routing numbers, as well as a host of other information about the receiver’s address, banking information, and so on. Banks typically do not allow wire transfers to happen online or via the telephone; as part of their process, they must have the initiating party in front of them. Given the complexity of a wire transfer, bank employees in smaller branches (e.g. anything outside of a big city like New York, San Francisco, or Chicago) typically will not understand the process and once the funds are sent, they cannot be recalled. In addition to the fees and foreign exchange rates associated with wire transfers, the time between when funds are sent and when they are received cannot be ascertained.
Western Union – High Convenience/High Risk
Western Union can see whether the funds have been claimed, which affords the service a higher level of convenience compared to a bank. But once money is sent via Western Union, a sender is unable to recall the funds unless a fraudulent party at the other end has not accepted them.
PayPal – Medium Convenience/Medium Risk
As one of the pioneers in the electronic funds transfers, PayPal has enabled low-cost payments through an email address. As well, PayPal offers recourse on some products up to a limit, reducing the risk of funds being lost to fraud. With PayPal, verified accounts without a credit card or balance will be restricted by how much they can send. However, with PayPal, senders do not know when payments have been received. PayPal’s foreign exchange rates are not competitive either.
Veem – High Convenience/Low Risk
Like PayPal, Veem allows low-cost global payments by way of an email address. As an intuitive, online option, senders can make payments with Veem without being inconvenienced with hidden fees and costs. Unlike many other services, Veem offers a tracking service so that senders can see if and when their funds have been claimed, eliminating the risk of sending multiple payments. Regarding fraud prevention, Veem verifies a sender’s business partners by confirming their bank details and making sure that they have passed all regulatory compliance requirements. This eliminates the risk to a small business before a dollar has ever been sent.