RSS FeedRSS Feed Follow us on TwitterFollow on Twitter

China’s rising prices – behind the headlines

Wednesday, August 25th, 2010

There has been much coverage in the press around the impact China’s prices will have on its competitive position within global markets. The Daily Telegraph reports that “China’s manufacturing wages have vaulted from around $1,000 annually 10 years ago, to $3,900 last year”. This would imply China is set to lose its position as the workshop of the world, with manufacturing switching to new low cost markets or back to the West.

However if you look behind the headlines the issue is far from black and white.

Everything’s relative – wages don’t just rise in China: Wages are increasing all over the Asian region, not only in China, and they are increasing in Europe too. Vietnam, for example, announced a 12.5% rise in their minimum wage in March. In the UK annual factory gate inflation is running at 5.1%.

Rising prices bring other benefits – improved workplace conditions, quality levels and environmental practices: China doesn’t only want to create a better life for their workers by offering higher salaries and other social benefits, but also is attempting to clean up its environment. This means shutting down unhealthy factories who use outdated and dangerous production methods, just to be competitive. For example around 2,000 companies in the cement, steel and paper industries have been shut down in the past two years due to outdated working practices.

Shutting down ‘cost driven’ factories also has a positive side effect in the form of rising quality levels, with the factories left more focussed on producing ‘quality for a price’

So in summary it is true that prices are rising, but the debate needs to be widened to factor in inflation in other countries, improving workplace conditions, improved environmental standards and rising quality levels.

The top five China sourcing mistakes: Number 3 – Completing your product development in China

Wednesday, August 25th, 2010

In the next of our series on common sourcing mistakes we look at Western companies who choose to complete their product development in China.

For many inventors and manufacturers it can be tempting to ask factories to support their product development process through design suggestions, prototyping and engineering drawing support. This has the benefit of a) being cheap, and b) involving the factory in your new product from the start to help them shape the end outcome.

In short this should be avoided at all costs! Over the years we have seen many projects get stuck in ‘sampling limbo’, with some projects taking up to two years to move to production, owing to constant design tweaks and changes. Factories don’t make any money from the sampling process, so over time this will erode goodwill in your project and the factory will find other priorities.

Ensure you approach your factory with finished drawings, completed prototypes and are in situation where you’re ready to start full production. This will ensure the factory treats you seriously and gives your project precedence over the many other new product development projects they are approached with every day.

(A small plug for our business – China Works have a UK based design and prototyping team, which we set-up in response to the above issue. If we can help with your project please get in touch!)

China shipping terms – what do they mean?

Wednesday, August 11th, 2010

We’re often asked by customers what the different shipping terms mean, so here is a quick guide to the main terms you might come across:

Bill of Lading: Bill of lading are contracts between the owner of goods and the carrier. The customer needs an original or a copy as proof of ownership to take possession of the goods

Cost and freight: Cost & Freight to a named overseas port of import. Under this term, the seller quotes a price for the goods that include the cost of transportation to the named point of debarkation. The cost of insurance is left to the buyers account.

Cost, insurance and freight: Cost, Insurance and freight to a named overseas port of import.. Under this term the seller quotes a price ofor the goods (including insurance)

Ex-works: A term of sale in which for the quoted price, the seller mearly makes the goods available to the buyer at the sellers “named place”of business. This places the greatest responsibility on the buyer abd minimum obligations on the seller. The Ex Works term is often used when making an initial quotation for the sale of goods without any costs included

Free on Board (FOB): Common price term used in international trade. The seller is responsible for the cost of goods is to the point of loading it onto the ship or aircraft. The risk of loss of or damage to the goods is transferred from the seller to the buyer when the goods have been so delivered

Freight forwarder: An independent business which handles export shipments for compensation. At the request of the shipper, the forwarder makes the actual arrangements and provides the necessary services for expediting the shipment to its overseas destination.

The forwarder takes care of all documentation needed to move the shipment from origin to destination, making up and assembling the necessary documentation for submission to the bank in the exporter’s name. The forwarder arranges for cargo insurance, makes the necessary overseas communications, and advises the shipper on overseas requirements of marking and labelling

Packing list: A shipping document issued by shipper to carrier, Customs and consignee serving the purposes of identifying detail information of package count, products count, measurement of each package, weight of each package, etc

Made in the UK or Made in China? The answer is both….

Wednesday, August 11th, 2010

The big question for many manufacturers and inventors is whether to make your new product home or abroad. The UK offers shorter lead times, smaller stockholding requirements and greater control, while China offers obvious benefits around lower tooling costs and unit prices.

In the short term you’ll need to choose between countries to get your project going, but in the long term the answer is to establish relationships with factories in both countries.

Our most experienced customers maintain a global sourcing strategy, where they move production back to the UK when conditions allow (e.g. a weak pound, and capacity in UK manufacturing sector), and back to the Far East when conditions in this country become unfavourable (such as when factories start offering lengthy lead times, or prices jump 25% overnight)

We are currently seeing a trend back to China which is being driven by many UK manufacturers have full order books due to their export led growth. In the last fortnight we’ve had a number of new customers contact us to complain how manufacturing in the UK has suddenly become a challenge for their business.  Last year however the opposite was true with many customers looking to source locally due to the collapse of the pound.

The picture is also blurred further as over 70% of our customers are manufacturers themselves – looking to bring down the cost of components to make themselves more attractive abroad. These factories rely on Chinese prices for tooling and resource intensive parts to bring down their own production costs.

In summary we don’t condone customers moving their production to China at the expense of UK industry. We believe customers should develop a balanced approach to sourcing, with different manufacturing options to support different economic conditions. If a customer moves their production to the China we expect at some stage they will move their production back to UK, and at some stage it will also come back to China.

The top five China sourcing mistakes: Number 2 – Completing your product development in China

Wednesday, July 28th, 2010

In the next of our series on common sourcing mistakes we look at customers who look to complete their product development process in China. This can be defined as approaching a factory with incomplete (or even no) drawings, which are not signed off and expecting the factory to advise on product design and specification and complete prototypes.

Worse still we’ve seen a number of projects get stuck in the sample development process for years – with some projects stuck in an endless cycle of mould tweaks, materials changes, packaging changes, and so on.

The above is to be avoided at all times – you risk eroding any goodwill you’ve built up with your factory, who may move onto other higher priority projects. Get all your designs complete at home, and only approach the factory when you’re in a position to place an order. It is essential to ask the factory to complete pre-production samples for approval, but avoid getting them to develop ‘prototypes’, which may be subject to continuous change.

For a comprehensive guide on how to get things right, check out our ‘Ultimate checklist on China sourcing’

The top five China sourcing mistakes: Number 1 – Asking your factory to shorten lead times

Wednesday, July 21st, 2010

In the first of a short series we’ll look at the top five sourcing mistakes that we commonly encounter, and recommend approaches you can take to avoid these traps.

The first mistake is the biggest ‘no no’ of them all – asking the factory to condense your lead times.  In theory most customers want to avoid this, but in practice your project may be running behind schedule resulting in your own customers putting pressure on you.

In our experience shortening production times is the primary cause of project failure, potentially resulting in corners cut and worse still giving the factory a comeback if the goods aren’t up to scratch – “you asked us to get these done in 2 weeks, instead of the 4 weeks we originally asked for….”

To avoid getting into this situation make sure you complete your product development at home to avoid unnecessary delays, build contingency into your timelines (particularly for first orders with a new factory), and ensure your timelines are clearly communicated to the factory. Ultimately it’s important to be patient – it’s better to deal with a 2 week delay, than a three month delay when you have to return a container load of faulty product.

For a comprehensive guide on how to get things right, check out our  ‘Ultimate China Sourcing checklist’

The ultimate China sourcing checklist – a beginner’s guide to manufacturing in China

Thursday, January 7th, 2010

When you’re sourcing from China for the first time it can be difficult to know where to start, so the team at China Works have put together this comprehensive list of things to look for from the start to the end of your manufacturing project. Follow these steps to ensure your China sourcing project has the best possible chance of success:

A) Before you start

1. Determine if sourcing from China is right for your product or service – sourcing from the Far East can deliver significant costs benefits, but before you start you need to ask yourself many questions – such as can you afford to carry more inventory, are you willing to give up some control to achieve your cost savings, what is your ROI? Determine if it is better to manufacture your product locally or in China before you start

2. Determine your outsourcing model – are you looking to simply buy from a specific factory, or are you looking to set-up a strategic partnership or joint venture with that factory

3. Finish your product development at home and prepare proper CAD/engineering drawings – do not expect the factory to quote based on changing, incomplete or no drawings

B) Finding and selecting a factory

4. Prepare a comprehensive information pack for the factory – many factories receive multiple RFQs (request for quote) every day.  Ensure they take your RFQ seriously by providing drawings, specifications, realistic purchase volumes and target prices

5. Find a quality factory using a China sourcing agent or a manufacturing directory – companies such as China Works can help you find quality factories from their existing pool of factory contacts. Alternatively you can use sites such as www.china-quotes.com, or www.alibaba.com to find factories yourself. Visiting international trade fairs is also a good way to meet potential factories face-to-face

6. Send your information pack to factories with the right capabilities for your project – ensure you pick the right factory for your project – for example don’t send an RFQ for a $5,000 project to a factory normally used to dealing with $100,000 projects. You will find your project is quickly put to the back of the priority list if a big order comes in

7. Understand each factory’s payment terms – Some factories may ask for 100% upfront, while others will be prepared to get going for a 30% downpayment. Likewise some may require a telegraphic transfer of funds (TT), while others will be prepared to accept a Letter of Credit (LOC)

8. Determine your import duties – Import duty is based on the HS code of the products you’re importing, the country you import from, and destination you import to. For example metal components sent to the UK from China are typically have a duty rate of 3.7% (of the ex-works price)

9. Work out your landed costs with the help of a freight forwarder – Many factories will only quote on an ex-works or FOB basis (i.e. the price from the factory gates or at the port) meaning you will have to determine shipping costs, VAT and duty for delivery to your warehouse. This article features a good summary of the different quotation terms – Shipping Terms Summary

10. Select your factory based on service, pricing, lead times and terms and conditions – choosing a factory based on price alone is a recipe for disaster. If one factory comes back 30% cheaper than all the others it will likely be too good to be true

C) Placing your order

11. Agree clear terms and conditions with the factory that clearly specify what will happen if things go wrong – if you’re worried about losing control of your intellectual property ask the factory to sign an NDA. These are beginning to carry more weight in China and a reputable factory will be worried about their reputation if they are accused of stealing IP. Also remember to confirm the legal arrangements for disputes, and terms of payment 

12. Work out who you’re actually buying from – typically you may be buying from an export agent or ‘trading company’ rather than the factory itself. Ask the company you’re dealing with to clarify their role and their relationship with your factory 

13. Ask the factory to prepare pre-production samples before an order is started – ensure the samples conform to your drawings, and samples are kept by both you and the factory. If there is a problem with your order these samples are vital to illustrate what was promised versus what was delivered 

14. Specify everything to the factory, and ensure they understand the end use of a product – for example if the parts you’re ordering need to fit with another set of parts, send these to the factory so they can test at their end. Respond to your factory’s questions in a timely fashion, and expect your factory to do the same 

15. Factor Chinese holidays into your lead times – Chinese factories take two significant holidays each year – the Chinese New Year in February, and China Week in October. Over Chinese New Year many factories can take up to 6 weeks off, while it is normal to take 2 weeks off in China Week. The good news is most factories work over Xmas and the Western New Year.

16. Authorise production to start when you’re satisfied with the above – production will typically start when the factory has received your downpayment.

17. Stick to your lead times - Never put pressure on factories to shorten lead times – in our experience this is the number one cause of project failure

18. Plan for the unexpected and prepare for a learning curve – we have never seen a new project that hasn’t had some sort of learning curve to start with. Plan these into your delivery timeframes, and work closely with your factory to get past any issues

D) When your order is ready

19. Arrange for your order to be quality checked before it is sent – ensure you have no surprises when your order arrives. Either send someone to sign-off the order yourself or arrange for a 3rd quality inspection company (such as China Works!) to inspect the order

20. Specify clearly how you want your goods to be packaged – packaging is an extremely important, but often overlooked part of the process. Poor packaging can result in your products being damaged on the way to your warehouse making your careful efforts around production a waste of time – 1 month at sea is long enough for metal goods to start rusting!

21. Arrange for shipping to your warehouse – a freight forwarder will be able to organise for shipping, duty and VAT to be paid. You can find many large and small freight forwarders who specialise in dealing with China through the web and at sites such as www.fiata.com

E) Receiving your order

22. Inspect the goods as soon as they arrive – many factory terms and conditions stipulate that the customer must report any issues within a given time period so be sure to check your goods quickly

23. Give the factory comprehensive feedback and continue to grow the relationship – tell the factory what was good and bad about the end to end process so the relationship develops between you and the process improves for the next shipment. If everything was to your satisfaction be sure to thank the factory.

We hope the above advice is useful to those reading, and that your China outsourcing project is a success! If anyone has any other thoughts or comments please feel free to share them below in the comments

Getting your outsourcing project right from the start – critical success factors

Wednesday, June 10th, 2009

Outsourcing production to China can offer real benefits to Western companies - improving the international competitiveness of manufacturers, and enabling new product development projects to get off the ground. Yet we estimate up to 50% of China outsourcing projects fail to get going, due to basic principles not being followed by the factory and customer.

To get your project right from the start a number of critical success factors should be considered, including:

  • - Never select a factory because they are the cheapest – you get what you pay for and China is no different. Of course price is important, but don’t forget about service, capability and overall commitment to quality
  • - Assume nothing and define your requirements in detail – provide detailed drawings and all your requirements at the earliest practical stage
  • - Finish your product development at home – send over complete engineering drawings to your factory to prevent delays later in the process
  • - Use a third party to inspect product quality before orders are sent over – prepare your own quality check lists and unless you can afford the time to go to China for every order be prepared to use a local QA agency
  • - Never pressurise a factory to speed up production times – this always leads to problems. Instead find ways to build new lead times into your own delivery schedules
  • - Agree terms and conditions that clearly specify the issue resolution process
  • - Prepare for a learning curve – and take time to build up your confidence in the factory. Expect the unexpected, deal with it proactively and work closely with your factory to ensure it doesn’t happen again

In summary select the right factory to start with, build the relationship through regular visits or an agent, work with your factory as a partner, and most of all be prepared for a learning curve along the way