China Business....Should You or Shouldn't You?

Author(s):

Linn E. Nelson
Linn E. Nelson, President Barnel International, Inc., Portland, OR 97229, 503/291-1500

81st Annual International Conference Proceedings - 1996 - Chicago, IL

Overview.
From poor regions where travel is largely by foot or pony to affluent coastal cities, China is in the midst of an economic boom. Like it or not, the nightmare of Tianamen has given way to the daydream of an Asian gold rush. For the past ten years our company (Barnel International) has plowed new ground in developing sources of supply for a variety of technologies. This session will focus on those experiences which have resulted in a mixed review of successes.

Getting Started.
Barnel attended a number of Canton Fair exhibitions in order to gain greater insight of the sourcing and manufacturing (turnkey) possibilities which existed in China. The fair is offered twice per year in October and April.

Our first impressions led us to a false sense of great things that could be accomplished in China. Many of the exhibitors were well versed in English and could quickly and efficiently present their factories and even provide us with quotations within 24 hours. Quality of goods were at their best at the Canton fair which further endorsed our decision to move forward. It was clear given we had the volume the opportunity to reduce prices without compromise to product quality was available.

Key Learning's From Our First Look At China Sourcing. The Canton fair is a good reference point and acquaints you with a quick overview without extensive travel. It provides sourcing leads and offers a general idea of what possibilities might be available. We continue to recommend this is one of the best starting points.

What we didn't clearly understand in the beginning was 95% of the exhibitors are Trading Companies from their respective provinces. Each exhibit leaves you with a strong impression that the representative is the factory when actually they in many cases they are not.

Most business discussions reflected on a "YES" to the majority of our questions until it came to price discussion. Even with the price discussion the subject always centered around quantity and the exhibitor's desire to meet your target prices in many cases without frankly knowing if the factory could manufacture to the specifications Barnel required or not.

Getting to The Bottom Line At The Canton Fair.

1. Walk the show and pay particular attention to the actual location of the providence. This will provide clues into pricing, labor availability, potential logistic issues later, etc.
2. Request specific information about the factory actually doing the manufacturing including their fax, factory director name, etc. If this information is easily obtained, it is worth your while to continue the evaluation.
3. Try to find the same item in other booths at the show. Our experience has been that there is probably only one or two factories producing the goods however several trading companies are showing the goods and claiming title.
4. Immediately follow-up and inquire whether or not you can visit the factory. This process is quite similar to number 3 above however if you encounter resistance, it is an indicator something may be wrong with the whole arrangement.

Use Of Trading Companies.
It is our strong opinion the future of China trading companies who had the only export license is quickly fading into the sunset. Chinese government policy has relaxed this requirement transferring this responsibility to the actual factory given they qualify. Typical trading companies add as much as 50% to tooling charges and upwards of 25-30% to the actual purchase price. Their contribution to the actual quality management, on time delivery remains in question with our experiences.

On a positive note...some of the government trading companies offer attractive packaging customized to your own personal needs in 4-color if you so desired. This was a definite plus.

While in past Hong Kong was the gate to China business, we found while the HK trading company to be expensive. Logistics was a major stumbling block given the entire business transaction was being managed from HK. Further unless the HK trading company actually had their own people working day to day in China with the factories, we were faced with added expenses as it applied to travel and delays waiting for the HK trading company go visit the factory. Visiting the factory is crucial. The fax or phone can allows you to hear what you want to hear. Our motto is "seeing is believing".

For the first timer to China we recommend you work with a Chinese trading company since business is made simpler than venturing off to the factory yourself. However we encourage you to follow the Canton fair rules and summarize for yourself whether or not the response is credible.

Language and Cultivating the Best Scenario. Barnel was fortunate enough to have staff members who spoke both Mandarin (No. China) and Cantonese (So. China). Running the creditability tests were quite effective in China negotiations given this resource was available.

Barnel has been able to catch a number of key points in an negotiation for example when a supplier changed to a different dialect when speaking to other factory members. Again Barnel was sorting out capabilities with commitment, truth with realities.

Some of our experiences even resulted in actual factory tours of a "school" rather than the real factory. The school provided a professional image of what we were looking for while if the order was placed, someone completely different would probably be making the part. Had we not been able to speak and read Chinese our decisions would could have been devastating.

Quality Management. Basic rules of thumb:

1. Get to know well who you are hiring. Seek out references and if possible restrict your employee to work on your requirements only.
2. Pay them well and offer bonuses for excellent performance in accordance to your own criteria. The best method is using a commission base system.
3. Visit frequently at first. Focus on developing a "trust" relationship. If you make a commitment, keep it.
4. Establish quality management criteria for inspection and go over it with your source inspector, factory director and trading company (if applicable).
5. Use "clean" specifications that are well documented preferably in millimeter.

COMMENTS: Barnel's number one priority was to select a person whom we could trust 100%. Our requirement of developing a good relationship founded on "truth", a person with good reasoning, a person who is reliable, was far more important than having a technical background. Of course this varies from company to company. In the case of manufacturing semiconductors where the technical expertise is a must, you need to alter your strategy.

Pitfalls of Overseas Employees in China. Having a keen interest to understand the culture, accepting it and knowing how to respond was a challenge for us. While Barnel has been fortunate in this area, we are told the culture promotes and accepts side money compensation. In the West we take great exception to this kind of practice. However in the East it is the norm. We are also aware that some factories will offer extra money to your employee in China to approve the shipment. This is where the selection criteria of "trust" ranked at the top of our list in terms of employee selection.

Political Issues. Our policy is to steer clear of any topics having to do with internal affairs of the government which includes voicing opinions, etc. Our experiences have taught us this lesson the hard way.

The Future "Barnel Predictions".

1. 1997 Hong Kong returns to China. Hong Kong will remain the mouth of the dragon (China Business) and two separate economic systems will continue as usual.
2. Trading Companies will fade from the overall business picture as customers will demand direct access to the factories for new product development.
3. Consistent quality management at the factory level remains a challenge. Western customers must invest in additional education of the factory worker for long term projects. The message must be repetitive.
4. China will push to expand 40 additional airports by 2000 and bolster shaky air traffic controls as a broad program to improve the transport system in particular areas where the economy needs a boast. To improve airport safety, heavily populated areas in east China will have a completed radar system in place by 1998 and by 2000 a satellite based navigation system will be widely used.
5. Ten years ago only 60 people owned a car in Beijing and 7 million people had a bicycle registered. In a New York Times survey: By the year 2010 the number of automobiles will increase to 1.5 million.

Summing It All Up: Our experience is most factories will work hard to please you, the customer. Do not source high technology products in China unless you can validate their experience.

Tying up front tooling cost or set-up cost to "first article" samples is the safest method prior to releasing payment. After receiving the "first articles" a visit to the factory to check the tooling and "production" capability is important. What you are looking for is whether or not the factory can produce production quantities which match the "first articles". In a couple Barnel cases we learned this the hard way.

Get a commitment as to the overall timeline of the project and document the entire program in both English and Chinese and approved by both parties. In the future this will be referred to as "The Agreement". Allow extra start up time. China...the last economic frontier. It can be worth it! Select a doable project, ask questions, good luck.

References:

MR. CHEN LIKAI, Director of China Operations, BARNEL China

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