Dr. Henry Kissinger (left) and Mr. De Clercq (right) in attendance at the luncheon in honor of Xi Jinping in Washington D.C.

On February 15th, 2012, Mr. Michael De Clercq, Founder and CEO of China Performance Group, a U.S. and China based company specializing in China sourcing advisory services since 1978, was among the nearly 600 persons invited to the luncheon in honor of the soon to be President of the PRC, Mr. Xi Jinping. This tour to the U.S. was historic in many ways as many old “China hands”, a term referring to foreigners with decades of experience living and working in China, as well as some of the world’s most important business and political representatives were in attendance. Hank Greenberg was among the business participants, as were prominent members of the department of commerce and veterans of China businesses ranging from food and consumer goods companies such as Coca Cola, Pepsico, Procter & Gamble, and Estee Lauder, large industrial groups like Caterpillar, Ford, GM and GE, as well as representatives from law firms and the global financial giants. Seated among them, were members of Xi Jinping’s large (approximately 200 person) delegation. John Huntsman and Henry Kissinger, notably, were there as well.

Mr. De Clercq has been doing business in China, participating in cross-border business exchange between the People’s Republic and the West, since the late 1970’s. As such, he was among the few in attendance at the luncheon on February 15, that had the unique opportunity of also being in attendance for Xi Jinping’s lesser-known first visit to the U.S. as part of the delegation from Hebei province that traveled to Iowa in 1985. Mr. De Clercq recounts:

To paraphrase Dr. Henry Kissinger, who was in attendance at the luncheon [on February 15th], the United States and China perceive that they need each other because both are too large to be dominated, too special to be transformed, and too necessary to each other to be able to afford isolation. As I was leaving the luncheon, it occurred to me that Xi Jinping is heralding a new chapter in the history of China, and this USA trip will be remembered as a milestone in his ascent.

The visit by Mr. Xi will be an important moment in the context of the future development of relations between the two major trading partners. The presence of individuals such as Michael De Clercq, a businessman and “China hand” with over 30 years involved in China manufacturing, emphasizes the long history of business and trade between the two countries. Observing the development of how the state of trade and business grows between the U.S. and China will be an important indicator for the future growth of the global economy.

Will the EU Carbon Tax affect trade from other areas?

On January 1, the EU extended its ETS (Emissions Trading Scheme) to the aviation sector. It requires all airlines transiting or operating from or to a European airport to buy pollution permits in accordance to their actual level of pollution. The ETS is a crucial tool for the EU to reach its 20% reduction target of CO2 emissions. While aviation only contributes to about 3% of global CO2 emissions, it is expected to grow considerably over the next decade (International Business Times).

The measure is heavily contested by 26 of the 36 members of the ICAO (International Civil Aviation Organization), including the US, Russia and China. After a lawsuit at the ECJ (European Court of Justice), which judged the measure legal, The US House of Representative adopted a draft law forbidding American airlines to actually pay the tax. A few months later, the Chinese government announced it too was forbidding any of its national companies to abide the European legislation. The Guardian reported that the CATA (China Air Transport Association), which represents the four major Chinese airlines fly millions of passengers to the EU each year, estimated that the cost of complying would neighbor 800 million yuan (US $127 million) in year one and would triple by 2020.

Watch the trade war

As the EU is not planning on backing down, the companies that do not respect the new law would be charged a 100-euro fine per pollution allowance excess (while a permit price is 8 euro) or could be banned from EU airports. Airbus CEO Enders has expressed his worries in the French paper Le Monde that the events could escalate into a trade war and that the consequences could be dramatic for the aircraft industry (Le Monde). China and other nations indeed claim the measure is anticompetitive and is a disguised trade barrier that does not conform to the Convention on International Civil Aviation (1944), which guarantees the freedom of the air. If they have to, non-EU countries could therefore impose restrictions on EU imports in response. Such tit-for-tat retaliation would threaten international trade and economic growths.

Nevertheless if Europe is to implement such a policy on aviation, it is unlikely that it will refrain on charging non-EU airlines too. Beyond the purposefulness of involving as many polluters as one could, it also prevents carbon leakage and carbon competitiveness. ‘Carbon leakage arises when a carbon price causes domestic businesses to relocate to countries not pricing carbon’, while carbon competitiveness diverts consumption away from domestically produced goods to cheaper imports from countries not pricing carbon (Meltzer, 2012). Thus if unjustified from an international law point of view, as the opponents affirm it is, the measure would stand as a protective measure.

To save trade

The issue could be resolved through the WTO and its provisions against so-said disguised trade barriers. However, the EU could play on the WTO exceptions for measures related to the conservation of natural resources that are necessary to protect human or animal or plant life and health (WTO). But against this point, many argue that to actually address climate change, measures to be implemented by the EU on non-EU and EU airlines alike, should be the result of a, preferably, global consensus.

The international community says the best way to resolve this would be through the ICAO although until now it is seen as unlikely that the parties would be able to come up with any solution before April 2013, when the taxes (and fines) are set to begin being levied on airlines. Spring 2013 nevertheless leaves more than a year for a solution to be found between the EU, China, the US and other contesters who will meet in Moscow later this month. The EU and the US are likely to favor a compromise rather than to put their struggling economies at further risk as should China, who would otherwise be undermining its relations with its two main trading partners and thus its growth by the very nature of the fact that it has been dominated by exports.

• Charles Van Tuyckom- CPG Marketing Intern

Altogether a very interesting mix of people.

At the center back of the large room, was the head table, cordoned off, surrounded by security guards and seating more than 40 of the leading participants. Xi Jinping in the middle, was seated next to Carla Hills on one side and Secretary John Bryson on the other.

The whole event was historical for me. Xi’s visit brought back memories of 27 years ago, in 1985, when I met in Shijiazhuang governor Zhang Shuguan of Hebei province. When he took a delegation to Iowa on a sister relationship visit that year, he also visited New York and I had the pleasure of hosting a lunch for him there. I recall we chatted about his impressions of America – and his appreciation for the Chinese food in New York. That fact that a junior cadre by the name of Xi Jinping was part of his delegation was never mentioned.

In this election year for both China and the USA, one cannot help but contrast the solid predictability of Xi Jinping’s future role with the uncertainty of who will be the next President of the USA in January 2013. The two most important countries of our age are run by different sets of rules, each stemming from their unique and special backgrounds – and they have to get along.

Xi Jinping presented himself with great aplomb and spoke very well at the luncheon. Confident, amiable, articulate, he delivered a well crafted message of friendship and optimism interlaced with steely resolve about China’s sovereign independence. His speech was broadcasted in China by CCTV.

The historical context of this meeting was provided to me by the timely publication last year of a book written by another important participant in the luncheon: Henry Kissinger. “On China” is one of the most intelligent and penetrating analyses of the complexities of US-China relations I have read, and it was a great pleasure to meet Dr. Kissinger at the luncheon and congratulate him on this achievement.

To paraphrase Dr. Kissinger, the United States and China perceive that they need each other because both are too large to be dominated, too special to be transformed, and too necessary to each other to be able to afford isolation. As I was leaving the luncheon, it occurred to me that Xi Jinping is heralding a new chapter in the history of China, and this USA trip will be remembered as a milestone in his ascent.

• Michael De Clercq- Founder and President of CPG

Now on the surface, this post about a foreign company buying a factory they had been working with reliably for many years may not seem to be related to China sourcing as it rather addresses issues related to market entry and M&A. However, what particularly caught our eyes here at CPG was this: “The potential deal was for a US manufacturer that had been receiving its product from the same China manufacturer for about fifteen years… the two companies had a “fantastic” relationship.”

Most experienced companies avoid setting up sourcing offices in China. This is typically because it is expensive and cumbersome from a management point of view, but they will have alternative approaches to create a reliable source of supply. One of these approaches is to set up a long-term relationship with one Chinese supplier, as with the US company in the post quoted above. It is only when that relationship is threatened that the vulnerabilities of this approach begin to become evident.

If you read between the lines, the “fantastic” relationship with the supplier tends to indicate two things: (1) the foreign customer is what we call a “captive buyer” and (2) they are paying too much for the product.

What does it mean to be a “captive buyer”? Generally, this can be defined as someone that does primarily most of their buying with one factory, and since their whole relationship is with one buyer, they have no Plan B with other vendors. This indicates that the vendor has acquired dominance in the relationship, and can afford to start taking advantage of the buyer (inflating pricing, etc.).

From the captive buyer’s point of view, this is usually an acceptable trade off, i.e. “Yes I am paying more, but it is worth it because I am getting peace of mind”. This is what happened to the US manufacturer in question: the changing circumstance of the factory owner wanting to retire, which would have compromised this reliable source, almost led the buyer into a situation which the Law Blog post calculates could have cost the customer as much as two times the price for the same product from the same factory. Fortunately the buyer was able to avoid paying these costs. Instead, ownership of the factory was passed onto the factory manager and the relationship continued on largely as before.

What does this mean in the context of the “captive buyer” storyline? Chinese factory owners have honed their skills to extract the most out of their business relationship with their buyers. It is the buyer’s responsibility to keep up-to-date with the factory’s situation and stay aware of any issues developing. Just because the current business relationship is a healthy one, do not expect the factory to give up the chance to increase their profits. Assess potential risks by conducting regular factory audits and having back up factories in place for emergencies. If this seems overwhelming, consult a sourcing company to represent your interests and professionally manage your program.

• Buck Perley- CPG Marketing Manager

Workers at a cast iron factory in China

Qualifying your supplier and maintaining steady and regular audits of factories that you cooperate with is essential for China sourcing. Often buyers will assume that once a relationship with a factory has been firmly established, the hard part of the China buying process is over. However, most will find that even with some of the more reliable suppliers, without diligent quality control, situations will arise that can have potentially damaging consequences to the overall quality of your shipment.

Factory qualification and due diligence is key in any sourcing program. I would recommend conducting your due diligence whenever you are looking for a new supplier, whether it is a new project or simply expanding your current production capabilities. Once you’ve started manufacturing and purchasing from a factory, continue to conduct regular onsite inspections and due diligence checks. You never know when an unexpected operational or management change can potentially harm your order.

Below are two of my personal experiences of potential sourcing disasters that help to illustrate the importance of qualifying factories:

1. The Importance of an In-depth Pre-Qualification

   

   Make sure to visit and prequalify your factories!

   There was one client we were managing that was sourcing products made of cast iron. This was a particularly big client and we eventually found the need to expand our options of factories in order to ensure continuous supply. We were able to eventually find a new factory that seemed especially promising. This supplier was offering very competitive pricing and meeting all of our client’s requirements. We then followed up with the factory by requesting samples. Though the sample took a while to be delivered, when we were able to examine them, the quality seemed exceptional and looked almost identical to what we were currently sourcing. However, the delay in delivery is one of those important warning flags that indicate the need to proceed with caution. When we followed up with an onsite inspection, it became very clear very quickly that this factory had not been totally honest about their capabilities. They did not have the production capabilities to create the cast iron products that they had sent us. Nor did did anything in their sample show room match the quality level of the samples.

   After being very persistent with our questioning, it was soon revealed that, not only had this factory not made the sample they sent, but they had actually gotten it from the factory that we were already working with!

2. Don’t Get Complacent

   The other example is from an experience in the pharmaceutical industry. We were sourcing the leaflets for the packaging and the factory we were working with had every indication of being reliable. They had passed our inspections, were one of our company’s qualified suppliers, and we had been ordering double-sided printed leaflets from them on a monthly basis for some time without any problems. One day during production, one of our production line workers stopped his machine because he had found a leaflet with a side left completely blank. When we first began to investigate the issue with the leaflet supplier, we were told that this was simply the result of carelessness and they would make sure to avoid the situation in the future. However, after digging deeper we found that what had actually happened was that the factory had reached capacity during the high season and outsourced our production to a small printing house rather than handling the order themselves. So despite our longstanding relationship with this supplier, they still failed to communicate this crucial change that ended up negatively affecting our order.

Imagine placing an order with a factory that intends to supply you with a product made by your current factory, or shipping incorrectly printed leaflets that you failed to notice because of relaxed quality control as the result of a comfortable relationship with your supplier. When it comes to China sourcing, you can never be too careful. Choosing a factory to cooperate with should involve more than a simple search on Alibaba. You have to make sure you do your due diligence, be aware of any early warning signs, and visit the factory before giving them your business. Finally, never get too comfortable with your current Chinese manufacturers, regardless of the relationship you think you have with them, which is a sure sign of “Captive Buyer’s Syndrome”. Be ready for the unexpected even from the most comfortable of working relationships.

• May Lee- CPG Sourcing Team Leader

One of the most important factors with international purchasing is how to reduce costs, specifically shipping costs. When an order is less than a full container, an effective and relatively easy way to accomplish this is through LCL consolidation, which is the consolidation of orders that are “Less-than Container Load”. In China, well-managed transportation and freight logistics can make a significant difference in the bottom line, allowing for a more profitable buying experience. One of the big advantages of having a representative sourcing company handling your shipping logistics is that shipments can actually be consolidated across clients to the same general destination. This means being able to ship at less expensive full container rates while splitting the cost savings among the clients.

Here are three advantages of proper LCL consolidation:

1. Save on Freight:

   Shipping agents will almost always charge a higher rate for the freight when shipping LCL, which means that the price is essentially rounded up. However, with a procurement specialist managing your shipping, in many cases you should be able to consolidate your goods with other clients’ shipments meaning that you get the discounted rate of a full container and pay the percentage of the volume of the container that your goods are occupying.

2. Save on Customs Fees:

   This mostly applies to shipments of closely related industries and similar materials. For example, at CPG we do a lot of business with construction equipment and metal accessories. By consolidating LCL shipments of construction equipment, the factories can combine the orders when notifying customs, only having to make one declaration and thus reducing the associated costs, which are split among the clients.

3. Save on Clearance and Port Fees at the Destination Port:

   When working with an LCL shipment, the port will charge the clearance port fees for each shipment, though sometimes you will be charged a percentage of the total dollar value of the goods. However, by internally consolidating among clients, these fees can be reduced by having the fee only paid once for that container and then splitting up the costs among all the clients or orders involved accordingly.

Some points to keep in mind:

1. Plan ahead: If you are interested in consolidating orders, make sure to schedule accordingly and give your sourcing team due notice to allow enough time to plan the shipments in line with the consolidation requirements.
2. Use Pallets: It is generally a good rule of thumb to pack your goods on pallets. This helps with loading and can avoid problems from occurring in transit.

Damaged goods after they weren't shipped on pallets

All major ports around the world are good candidates for consolidating shipments. If you have a product manufactured in China shipping to a major port and would like to save by having CPG consolidate your goods, send us an inquiry today to receive a quote for your goods!

• Iris Zhou – CPG Sourcing Associate

The 12 Animals of the Chinese Zodiac

Legends and mythology are a big part of Chinese culture, especially in relation to the Chinese Zodiac (生肖 in Chinese). The 12 animals that appear on the Chinese Zodiac calendar include the rat, buffalo, tiger, rabbit, dragon, snake, horse, goat, monkey, rooster, dog and pig. It’s an unusual combination of animals to be sure, and their appearance on the Chinese Zodiac is a topic of countless legends deeply embedded in Chinese mythology and culture.

Chinese Zodiac Origin Story

There are many versions of Chinese zodiac stories; the most well known of the Chinese zodiac legends states that Buddha invited all animals to participate in a race. The prize was a coveted position on the Chinese Zodiac calendar. The first 12 animals to cross a river would appear on the Chinese Zodiac calendar in the order in which they completed the race.

The first animal thus to make it across the finish line according to the legend was the rat. It seems unlikely that such a small animal could win such a strenuous race, especially when one considers the caliber of contestants. The story explains that the rat used his brain rather than his “brawn” and hitched a ride on what it perceived was the mightiest swimmer which was the buffalo. Just before the buffalo reached the opposite shore, the rat jumped off the buffalo’s back and crossed the finish line before the buffalo, putting the rat in first place and the buffalo, often depicted as an ox, second, the order they appear in the Chinese zodiac.

As for the other animals: The tiger, also being strong, came in third, followed by the rabbit that jumped his way was across, helped during the last stretch by the dragon. The snake hid in the hoof of the horse, which is how it managed to make it across the river. At the last minute the snake jumped out and scared the horse into seventh place. The sheep, monkey and rooster helped one another across and earned their spots on the calendar as well. The dog made it too, but felt a bath was more important than how he placed which is why the year of the dog is eleventh. The next and final position is occupied by the pig, who apparently decided to stop halfway through for a snack.

Traditions and Characteristics of the Zodiac Animals

Each year of the Chinese lunar calendar is associated with one of the 12 animals from the Chinese zodiac. Each sign has particular characteristics, reflected in the people born in that year, and each year will also have its own characteristics related to the zodiac sign.

The upcoming Chinese Spring Festival celebration will officially mark the end of the year of the rabbit and move into the 6th sign- the Year of the Dragon. According to Chinese tradition, those born in the year of the dragon, exhibit very strong characteristics. They are strong-willed and very independent, however this strength also means that dragons can have the tendency to be stubborn. Because of the mystique and legend behind the figure of the dragon, this is considered the greatest of the 12 signs given the reverence held for the mythical creature.

There is also a popular tradition in China associated with the Zodiac calendar, in that you should wear red throughout the year marked by your sign. Thus, starting with the year in which you were born, every 12 years you will find a (traditional) Chinese person wearing read in some form or another. This year of your birth is known as “Ben Ming Nian”(Chinese:本命年). Since it is considered a year of difficulties, people can improve their luck during this time by wearing red, as red is thought to be a powerful color for exorcising evil spirits and invite good luck. The custom of wearing red dates back to the primitive society when people simply thought red was the color of the sun, blood, and fire, however this association with red has continued into modern day. The day before the year begins, you will find many people wearing red, anything from red underwear or belts to socks, shirts, and shoes, thus inviting a carefree Ben Ming Nian. After this first day though, people’s whose Ben Ming Nian it currently is will be found wearing at least one item of red clothing at any given time.

There are many that also believe that you should not get married during your Ben Ming Nian. If you do happen to marry during this time, the bride should include a gift of Artemisia Argyi, also known as Wormwood leaf, with her dowry by putting it in a piece of furniture in order to insure wellness and good luck.

The 12 animals are also linked to the traditional Chinese agricultural calendar, which runs alongside the more well known lunar calendar. Instead of months, this calendar is divided into 24, two-week segments known as Solar Terms. Each animal is linked to two of these solar terms for a period similar in length to a Gregorian month. Unlike the 60-year lunar calendar though, which can vary by as much as a month in relation to the Gregorian calendar, the agricultural calendar varies by only one day, as it begins on either the 3rd or 4th of February every year. Also unlike the cycle of the lunar years, which begins with the Rat, the agricultural calendar begins with the Tiger as it is the first animal of spring.

Hopefully you were able to learn something new from this post on a very important and deep seeded Chinese tradition. From everyone here at CPG, we would like to wish all of our readers a happy and prosperous Year of the Dragon!

• Bella Bai- CPG Sourcing Associate