In This Episode...

What is so useful about free trade zones in China?

Why should importers with Chinese suppliers consider utilizing them?

Sofeast has recently opened an RMA and fulfillment facility in Shenzhen's Pingshan Free Trade Zone, so, based on our experience there, we're going to explain the benefits.

 

Hopefully, after listening to this episode, so you will understand if using warehousing, RMA, and fulfillment in the FTZ is better for your business in terms of costs, time, and effort than in China-proper.

Show Notes

Start to 6:27 Introduction into what Free Trade Zones are.

6:27 to 9:01 - FTZ RMA facility is better than local ones (such as in the USA) due to far lower costs and proximity to your suppliers. 

9:01 to 10:42 What does the inspection, sorting, and repair/rework process that the FTZ is perfect for look like?

10:42 to 11:52 Rather than using a local rework company, sending defective pieces back to the FTZ means your supplier can take responsibility and send their own staff to do the repair/rework. How does this work?

11:52 to 12:08 There was a lack of repair services in China, until now..!

12:08 to 15:01 Suppliers deliver finished products/components to the FTZ and they have 'exported' - can apply for VAT rebate and request payment by customer - they like this and it can help you to have a better relationship with the supplier. Our FTZ facility can store your goods (it's cheaper than locally or even other places in China) and fulfill them as per your needs, so you rely less on the supplier to get things right or safely store your products (the supplier's warehouse may be damp, may not be insured against fire, etc). It's suitable for batches of products of a certain size, but not dropshipping piece by piece (we handle this from our Dongguan contract manufacturing facility)

15:01 to 17:00 If importers have the need to bring together orders components/products and ship them out from China in batches, using a FTZ fulfillment center can improve relationships and results from suppliers.

17:00 to 19:49 If you use a 3rd party (such as our company) to act on your behalf from the FTZ to deal with your supplier Chinese-company to Chinese-company - this allows easier payments, invoicing, and builds more trust with the supplier who knows that they can take legal action against us if we, say, do not pay them (much harder for them to do against foreign companies), therefore they are more likely to offer preferential credit terms and other benefits to you. Therefore using a dedicated 3rd party China buying office in conjunction with the FTZ location is helpful.

19:49 to 21:15 An FTZ location allows you to receive components and goods from different suppliers without letting them know important information such as your IP, product type, other suppliers, costs, your retailers, etc. Overall, this helps protect you against suppliers using your designs or undercutting you in your market by selling cheaper.

21:15 to 22:15 If some parts come in from suppliers in a foreign country, let's say somewhere like Vietnam, to be assembled with other from China, is it worth paying fees to import them to China and spending the time to go through Chinese customs? By utilising a Free Trade Zone facility, this cost can be avoided.

22:15 to 23:29 Customs clearance - are there tangible reductions to delivery times due to the FTZ's reduced bureaucracy in regards to customs clearance?

23:29 to 26:24 Do the Chinese FTZs eat into Hong Kong's status as a free port where there are also lower import/export duties and processes? Hong Kong still has benefits, but labor costs there are high.

26:24 to END Summarising the benefits of the FTZ - where is the Pingshan FTZ in Shenzhen located? Take a look at this map for a rough idea (you can see how close it is to Yantian port).

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In this episode...

This is the fourth part of our series on vetting Chinese suppliers which loosely follows the blog posts in this series that Renaud wrote before.

In this episode, we’re discussing your subjective impressions when you finally go out to a supplier and visit them (or the questions your factory auditor should be answering if you have sent them in your stead, which is perhaps more likely during the coronavirus pandemic when travel to China isn't possible).

So you'll want to use this opportunity to check the facts with your own eyes, and Renaud is going to give you a number of tips about this which are split into three categories:

  1. Factory fit 
  2. Factory management
  3. Factory setup and condition

Show notes

Introduction - This episode covers a fairly loose list of topics that you need to pay attention to when visiting a supplier. (START to 3:30)

Factory fit (3:30 to 15:40)

Factory size - Huge suppliers may have a good reputation, but if your orders only make up a fraction of their sales they may not provide you with the best service as you are not a priority, therefore finding a balance is needed. Size is the most important factor to consider when assessing a supplier's fit. (4:25 to 6:16)

Seasonality - If your supplier has many customers with the same seasonality (requiring products to be made at the same time), this could lead to delays and for your order being bumped in favour of larger customers. (6:16 to 7:07)

Focus - Who is the supplier usually dealing with? Their requirements have an impact on their focus - for example if their number 1 customer generally requires fairly low-quality goods, but you need them to produce goods at a very high quality, then their focus isn't a good fit for your needs. (7:07 to 8:36)

Keeping key processes in-house - if one production process is very critical to your products, choose a manufacturer who keeps this in-house instead of subcontracting it. (8:36 to 9:03)

The contact person - who will you be working with? If they're not experienced it could cause you trouble later. Don't base buying decisions alone on how effectively the representative communicates, as great suppliers may not always have staff who speak good English. (9:03 to 11:38)

Respect for IP - Does the supplier show you a showroom full of different designs? Did they develop all of these products, or are they 'touting' the designs of their current or former clients? If this is the case, how can you be sure that your product design and IP won't be next? (11:38 to 12:25)

The pros & cons of working with large or small suppliers - this is related to finding a supplier whose size is a good fit. Large = good resources and facilities, but a possible lack of attention. Small = good access to management, your order will be valued, but they may have poor structure and a lower level of experience, a poorer network for sourcing materials and components, etc. (12: 25 to 15:40)

Factory Management (15:40 to 23:00)

Are the managers/production supervisors/team leaders present on the factory floor? - why this is important in terms of how well the supplier has control over its production and can make improvements. Do they email instead of verbally communicating with the team? This affects productivity and shows poor leadership. (15:40 to 17:30)

Are any metrics displayed? - this demonstrates an overall understanding of the present performance and grasp of where the supplier is at right now. (17:30 to 18:20)

Are operators paid the piece or by the hour? - by the piece is a red flag as this pay scheme causes a lot of problems such as operators hurrying to produce quantity without being so concerned about quality. (18:20 to 18:52)

Hands-on management who look to improve things are positive - they're likely to be a sustainable supplier over a longer period. (18:52 to 19:45)

Management who show an interest in and understanding of finances and profit point to being a sustainable supplier - suppliers who try to make a sensible profit and understand their costs will have a more secure business and be more sustainable over time (19:45 to 23:00)

Factory Setup & Condition (23:00 to END)

This is what you should be looking for when in the factory:

Cleanliness - this reflects on how well the operation is run. (23:00 to 23:51)

Are products in contact with the ground? - shows how well your products may be respected, or not. Are electronic parts in contact with non-ESD surfaces or packaging. This demonstrates their culture of quality and how well they'll pay attention to your quality standard. (23:51 to 24:42)

How are the operator's toilets? Clean, have soap? - seems strange, but this speaks to the culture of the supplier and whether they're concerned with improving conditions for workers and are a forward-thinking supplier. (24:42 to 25:37)

How is the condition of the equipment? - again, this shows how concerned they are with the upkeep and maintenance, as newer or well-cared-for equipment will affect your product quality. (25:37 to 27:50)

Is the testing equipment maintained properly? - if the supplier truly pays attention to quality their testing equipment should be well-maintained. If not, are they capable of producing products which reach your expectations on quality? (27:50 to 28:28)

Is the owner's car very expensive? - it's normal to see fancy cars in China, but if the factory is relatively shabby and the owner is driving a Rolls Royce this could show that he is trying to suck the maximum cash out of the business and is therefore not necessarily in it for the long run. (28:28 to 29:20)

Organized factory layout & operator PPE - the management is serious about organization and safety which is a good sign. Safety goes hand-in-hand with quality and staff improvement. (29:20 to 32:15)

Safety and Social Compliance - personal safety is a bigger problem than child labour in countries like China and Vietnam. If your suppliers don't take it seriously, can this reflect badly on your brand were something to happen? (32:15 to 33:12)

Management style - how operators are treated and whether they're in fear of management, if they have younger staff who will be faster and more adaptable tells you how dynamic the company is, and is the work broken into very short cycles? If so, it's lazy management with little process-engineering and low efficiency. (33:12 to 35:16)

Their in-house capabilities - do they do a lot of the work in-house, or they're just packing boxes? If the latter they may a trading company! (35:16 to 35:45)

Check for shipping marks on packages - this will give you an idea of the kinds of customers they work with which can give you an indication of the level of price and quality they usually work with (35:45 to 37:20)

Summary - also mentioning how factory auditors can help answer these questions for you and take additional pictures should you choose to send them in instead of visiting yourself (37:20 to END)

*****

You will also find this long list of questions to ask useful, as well: 24 questions to ask during a Chinese factory visit.

 

In parts 1-3 of this series, we’ve covered what bad suppliers look like, how to verify their legitimacy & suitability with numerous tips and questions, and how and why to assess their engineering capabilities. 

Catch up with them here:

  1. 7 Ways Suppliers Can Cheat Importers Or Cause Problems
  2. Initial Vetting Process & Approaches To Weed Out ‘Bad’ Suppliers
  3. How To Evaluate Your Supplier’s Engineering Capability

All these steps take place before the factory visit, which we've covered in this episode. 

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In this episode...

This is the third part of our series on vetting Chinese suppliers which loosely follows the blog posts in this series that Renaud wrote before.

In this episode, Adrian & Renaud discuss the importance of evaluating your potential Chinese supplier's product engineering capabilities which are especially important if you're working on new product development with the supplier.

We mainly concentrate on the 5 key engineering attributes you need to check:

  1. CAD Compatibility
  2. In-house Design Capability
  3. R&D Facilities and Capability
  4. Prototyping Capability
  5. Initial Prototype Test Capability

These give you a roadmap you can use to assess whether your supplier has the engineering experience, knowledge, and capability to create your new products before you start working with them.

Show Notes

Introduction - WHY to evaluate engineering capability in order to choose the right supplier. Tightly linked with many importers relying on their supplier's expertise and competencies to fill in gaps in their product development (design & engineering) that they do not have (for instance, implementing a camera module into products). If you choose the wrong supplier, you open yourself up to risks. Not just competency either, it may be that you choose a supplier that is the wrong size for you to be a priority.  (START to 7:16)

What are the attributes you should be checking? - size, incentives, time-scales, and business model. Work with a lawyer to address the greatest risks. (7:16 to 9:47)

What to do if your potential supplier won't sign a manufacturing contract? - some suppliers know that you need their expertise and will, therefore, refuse to sign a contract that puts too much responsibility on their shoulders. Instead of caving to their demands, you can find a new supplier, or redevelop or simplify your product to avoid the issue. This would typically happen with an ODM factory, whereas an OEM or CM + design house are other options where you will have more control (also more expense) (9:47 to 12:50) - read more about supplier choice and their pros & cons.

Does your supplier have CAD compatibility? - can files be sent back and forth and worked on with no issues? This is important if you are both working on product designs (12:50 to 13:25)

Do they have good engineers internally? - what you should look out for when assessing the capabilities of the supplier's mechanical, electrical, electronic, and/or software engineers (13:25 to 17:10)

Questions to ask and evidence to request to see engineering capability - Renaud shares some of the key questions you need to ask the supplier, such as about past projects which are similar to yours, in order to see that the supplier can truly reach your expectations (17:10 to 20:10)

Some more attributes that engineers need to display in order to assist on the R&D side and with certifications - electrical engineers need to be able to calculate motor torque, understand control systems, etc. Electronic engineers should have an in-depth understanding of PCBAs, but can they also design them in such a way that the products can pass FCC scrutiny for example? Do they know how to test the PCBAs? Software engineers - what environment are they used to? Can they work with your team on it seamlessly? Do they have examples of sensors etc that they have worked on before? Do they have experience of speeding up early prototyping for proof of concept? They may also have to help you with tooling, which is expensive. Do they have experience of reviewing tooling or do they just trust that the mold fabricator does a great job? (20:10 to 25:30)

How well can the supplier help if things go wrong? - if there are technical issues with custom-made parts (such as poor surface-finishing), can someone from the supplier's team go on-site and check why it's happening? Do they have experience with reliability testing? If the supplier is unaware of effective testing, that's a major red flag. (25:30 to 29:12)

The importance of asking questions and getting examples if you're unable to go on-site - until you can visit your supplier, quizzing them on past experience in R&D, testing, etc is a good option. Do they have experience in your materials, products, packaging, etc? If they test in-house, question their testing capabilities, too. Do they understand your quality standard? (29:12 to END) - Sofeast can also assist you to find suitable suppliers.

The advice you've been listening to draws on this blog post:

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This is the second part of our series on vetting Chinese suppliers which loosely follows the blog posts in this series that Renaud wrote before.

In Episode 10 we explored the bad behaviours or trouble that the wrong supplier can cause, such as scamming you, raising prices dishonestly when they know you have little choice but to pay, or just not being competent enough to be able to produce your products correctly.

Now that you know what you don't want from a supplier, what are some of the first steps you can take to weed out suppliers who aren't suitable? Adrian and Renaud discuss this initial vetting process, approaches, and some actionable tips here...
 

Show Notes

Introduction - we'll be discussing questions to ask and actions to take that can help avoid red flags when sourcing new Chinese suppliers (START to 2:40)

The following tips are fairly unstructured, but can all be helpful as a part of your preliminary supplier vetting process...

Test the water with a factory audit - a supplier should be secure enough to accept a factory audit. If not, then what are they hiding? Either way, conducting an audit teaches you a lot about your potential supplier's ability to do the job you need them to, and audits are affordable (2:40 to 6:20) - learn more about factory audits.

Do a search engine search for the supplier - if they have behaved badly in the past, it's likely that there might be some articles or news about them online, so search their company name and see what you can find (6:20 to 8:45)

Is the supplier's online information consistent? - a red flag is where the supplier has different information on Alibaba, Global Sources, etc. If they don't match, why not? You can also see verified information about the supplier on these platforms, so it's a good place to see what they're offering very quickly (8:45 to 13:07) - For anyone thinking of sourcing suppliers based on Alibaba's recommendations alone, Renaud wrote about 'Why An Alibaba Gold Supplier Status Doesn’t Mean Anything' here.

Has the supplier consistently participated in trade shows? - if they have it is evidence that they are a legitimate supplier as trading companies, very small, or unprofessional businesses may not do this (13:07 to 13:45)

Try purchasing a sample and insist on paying to their company account and collecting the sample from their address - by doing so you can confirm 2 things: 1. That they are who they say they are because you collect from their address (is it a factory, apartment building, office downtown? If it's the latter two you could have an issue). If they do request you to pay to a personal bank account, or maybe one in Hong Kong, this is a red flag, too - as a legitimate company should be able to provide a real business bank account (13:45 to 17:30)

Check the business in the Chinese government database - you will need the company's Chinese name and address, but with this (and the ability to read Chinese) you can learn a lot about the supplier, such as their company size, the scope of work they do, the investment capital (a low amount suggests they aren't a manufacturer), and any past or present court cases and decisions against them and the reasons, too (17:30 to 20:02) - performing a legal records check on the supplier is a fast and inexpensive way to check for this helpful information.

Check if the company holds any trademarks or patents in their own name - if it doesn't look like they do a lot of R&D but they have trademarks, patents, etc, this is a possible red flag. Have they been taking IP from past customers and registering it in China under their own name without their knowledge? (20:02 to 21:34)

Request the supplier's business license - it will be in Chinese, but it contains a lot of the useful information listed above if you can read Chinese. If not, get someone knowledgeable to analyze it (there should be a QR code on them which shows the registered info online). A good point is to check if they have an export license, too. If they do not, they'd have to deal with an intermediary which can add some risk of IP-leakage, etc (21:34 to 23:48)

Check their ISO 9001 certificate - this is common in China now, but you should ask for the certificate which you can verify with the issuing body and also the manual which should list the quality objectives and scope of the Quality Management System is - this is not suitable for people with no understanding of it, but at least be aware of this certificate's veracity if the supplier claims to hold it (23:48 to 25:53)

Question them about how they protect your IP - do you have a standard agreement for customers like us? How do you protect my IP? Many importers do NOT ask these questions! If they do provide an agreement, get you lawyer (familiar with Chinese law) to check it and assure that it's enforceable (25:53 to 27:56)

Ask for reference customers - who do they work with? You can learn a lot from this, although it's not always practical for suppliers to give too much of this information away (27:56 to 31:00)

What is the typical order quantity and quality standard? - if they deal with huge companies who place much larger orders than you will, you may have to expect a lower standard of quality than you're expecting. So the supplier's 'level' should be appropriate to where you're at as a business (31:00 to 32:30)

Familiarity with export standards - if they are unaware or lack understanding of the standards surrounding the products they make (such as UL standard for batteries), this is a red flag (32:30 to 33:19)

How is their communication? - real manufacturers may not have the best communication. If they do, you may be dealing with a trading company. However, don't discount a manufacturer where their English isn't perfect, as it is fairly normal (33:19 to 34:50)

Conclusion - Buying in China for the first can be confusing, so talk to other importers or find someone with experience who can provide some advice - keep eyes open, do due diligence, gather intelligence - these are three key takeaways (34:50 to END) - We also mentioned the book, 'Poorly Made In China' - this is a modern classic that gives great insight into the (many) things that can go wrong when you start manufacturing in China!

The advice you've been listening to draws on these 2 blog posts:


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