Here are some tips that I’ve learned for dealing with sudden price changes and how you can verify them.

The Answer Is In The Details

China sourcing is all about the details (see my earlier post on getting accurate quotations from suppliers or Iris’ post on shipment oversight resolution). A very common reason for price increases is higher material costs as a result of inflating commodity prices. This is a legitimate reason for prices going up, however this doesn’t mean it happens to be the case in each situation. Make sure you’re not just being fed a story.

Compare Against The Market

To verify, you should first ask the supplier which material or component is the source of the increase. Take this information to the market and survey current conditions. Are other products made with this material similarly going up in price? Check commodity prices on exchanges like the LME or secondary market exchanges. This is a good way to initially test the validity of their quote.

Ask For The Formula

After checking the market price, if the quote seems valid, you could also ask for the formula of how they calculated the quote. This way you can directly calculate the costs and get a clearer picture of your overall cost structure. This has two benefits: first it gives you more control over resolving the problem and bringing down costs on your own, and second you can extract more information by gauging the supplier’s reaction. You may think that the supplier would not want to give up this information, however in most cases they will want to keep your business and should be willing to divulge the “recipe”. Conversely, if they are trying to deflect from answering, it could be that they are simply arbitrarily raising prices rather than carefully calculating appropriate increases based on real market conditions.

Gaining Control Over Your Production

I was working with a supplier once that produced aluminum products. He was a relatively small factory and his prices fluctuated every few days. I would often follow up asking the reason, to which he would always retort by blaming it on aluminum prices (which indeed can be relatively volatile). In reality there was nothing unscrupulous about his price changes, but when we eventually got the formula for his inputs we had a much clearer picture of where our price increases were coming from. This also allowed for a system to be put in place where we could regularly verify his price changes with the officially reported commodity price increases that correlated to his input materials.

A Fixed Validity Period

One other tactic to try is to establish a fixed price for a pre-determined amount of time. Naturally, a supplier is unlikely to lower prices when input costs go down but are happy to increase when they go up. If properly negotiated, it can be mutually beneficial to lock in a long term pricing agreement. This ensures a steady stream of business for the factory because they get a returning customer and both parties get to enjoy the benefits of stable prices. Also, whenever the opportunity comes up, you should try and extend/continue expiring agreements.

Fluctuating prices are a natural part of the procurement process no matter what country you are buying from. The situation in China can often seem opaque at times, however if you remain diligent about details and remember that the factory usually wants to do what is necessary to keep you happy, it can help make China sourcing a little less stressful.

Furthermore, how well you prepare for your inspections can play a large part in how much utility you actually get from the inspection and how successful it ultimately is. Below are some tips I recommend that can help make sure that you or your contracted inspector are fully prepared before heading to your factory.

1. Follow Up With Your Supplier

   Contact your supplier and their on-site quality department if they have one. Emphasize the key quality problems that you are concerned with and make sure that they are clear on your QC process requirements. The purpose of this is to make sure that you and your supplier are both on the same page and to save time for when you actually arrive.

2. Background Check

   Look into similar products that the factory has made and check for quality problems so that you can get an idea of what you’re looking for when you arrive to inspect your order.

3. Review Your Original Order Sheet

   Make sure you are completely familiar with what your original order, requirements, and specifications were by reviewing your original order sheet that was agreed to and signed by both parties. This will make it much easier to make your case against the supplier in the event that there are any quality issues. Make sure you review everything including materials to be used, packaging requirements, and delivery date.

4. Collaborate with the Purchasing Manager

   Make sure that all arrangements and scheduling for the inspection are in order. Confirm all important dates related to the inspection to avoid any delays.

5. Get Your Tools Ready

   Make sure that you have all the tools you will need for this inspection and that all are in good condition, reporting accurate data. It is important to note that not every inspection is the same and thus your tools will vary depending on the job. If you are using a 3rd party inspector, make sure that he/she understands all the technical requirements for the inspection and is equipped with the proper tools. If special measurement instruments are required for different parts of your product, you should make sure your inspector knows ahead of time which are needed and where these can be secured (e.g. which research institution or testing facility is equipped for that specific testing). Often times, several different specialized testing methods and tools will be needed for a single project.

The inspection process should be the one part of your China sourcing process that is fully in your control. In the words of former U.S. President Jimmy Carter, “By failing to prepare, you are preparing to fail,” a reality that anyone with experience in China purchasing can likely attest to. Make sure that you and your QC inspectors are fully prepared to avoid any delays that can ultimately be in your control.

How do you prepare for a QC inspection? What is the most important thing you have your inspector do before leaving for a factory?

• Bob Zhang- CPG Quality Control Inspector

A client of ours once had an experience that highlighted this kind of vulnerability. This client had placed a rather large order with a factory, many containers worth of product, but since they had been working with this factory for a long enough stretch of time, they felt comfortable enough to skip the pre-shipment inspection. As you may have guessed, this eventually back-fired on them as, upon receiving the shipment, they noticed that nearly 10% of the ordered products was missing from the containers they had ordered.

They then contacted us and asked us to go visit the factory and find out the details of what had happened. We learned that the containers had been loaded at night and that the missing product had most likely been loaded with a different shipment. This wasn’t the end of the story though as the factory only claimed about half of the missing product had been misplaced. The factory claimed not to believe the buyer’s claim of 10% of the order because they had not reported the problem immediately upon receiving the containers. So they explained that they would only compensate for half of what our client says they misplaced.

When you face a problem like this you want to make sure you have as much evidence as possible to support your claim. This includes shipping forms, clearance documents, and photo evidence of what you are claiming is a problem. When you can provide all of these, you add a lot more strength to your argument. In general, factory owners are going to prefer to resolve things directly with their customers, as their top concern is to keep good customers coming back.

In this particular story the factory even claimed that they had lost the camera from that night and thus could not provide any photos. This gave us the upper hand in negotiations, which ultimately led to the supplier agreeing to provide compensation for all the misplaced goods under the condition that the buyer would continue to place orders with the factory. This client has been continuing to place orders with the factory and has made sure to conduct pre-shipment inspections for every order.

What lessons can you learn from this experience?

• Inspections are too important to ignore. Even if you feel relatively comfortable with the relationship you have with a factory, don’t underestimate the importance of diligent inspections. There are a wide range of QC inspections you can engage in at all points of your production process.
• Insist that your supplier or on-site QC inspector takes photos of the loading process. This way if something does come up you can verify the legitimacy of any claims either party is making.
• Finally, when you receive the goods, examine the quantity and quality of the product immediately. If there are any problems, you should report them to your on the ground representative or directly to the factory. The less of a delay there is, the less grounds the supplier will have to repudiate your claim. Also, take pictures that show where the problem is so that you can compare these against your suppliers’.

Now we turn it over to you. Have you ever received an incomplete shipment? How did you deal with it and what strategies do you use to avoid similar problems from coming up with your order?

• Iris Zhou- CPG Sourcing Associate

A package of chocolate "Ao Li Ao"'s

Walking into a Chinese supermarket is a little bit of a culture shock in and of itself: crammed frames, crowded narrow corridors and no apparent organization at all! Just as an example, you can find the loaves of bread above the freezer filled with fish or the laundry detergent which is sitting next to the shampoo bottles (something that can be very dangerous when you can’t read the Chinese characters!). The most unnerving thing I found however as a young, European traveller on my first trip to Asia was that there were hardly any products I recognized. In contrast, when you travel around Europe for example, almost all countries have essentially the same products. In China, however, this is far from the reality.

Upon my arrival in China, a new and unfamiliar country, I was of course eager to test as much as I could, but nonetheless it was still comforting to stumble upon a Coca Cola bottle or Wrigley’s Extra, making me feel just that little bit closer to home. It can also be fun to play a bit of a guessing game with yourself- trying to guess the brand from the background and packaging despite the unfamiliar writing.

奥利奥= Ào lì ào = Oreo

This brought me to another dilemma though- even if you manage to find certain brands that you recognize, you cannot really be sure that it is really the same product as the one you grew up with. Take Oreos for example. Who doesn’t know this iconic, black and white, “twist, lick, dunk” cookie with its bitter chocolate outside and its creamy, sweet inside – and more importantly, who doesn’t enjoy it!

However, I found myself at the super market staring at a shelf that was stacked not with the familiar black, white, and blue boxes but instead with these:

What happened to 'black and white'?

I began considering the possible reasons for this rainbow colored change. The first idea that came to mind was: the Oreo brand has lost its way! How could you possibly twist, lick or dunk this neon looking cookie??

After some thorough investigation though I came upon an article from NPR that shed some light on this issue of localization of the “Ao li ao”.

As it turns out, the Chinese were not keen on the bittersweet flavour for which the Oreo is so famous in the western part of the world. For Chinese tastes, it was a little bit too bitter and a little bit too sweet at the same time. So Kraft went about some in-depth market research on the issue eventually leading to a change in the recipe, where the cookie itself became more chocolaty and the cream less sweet.

This developed and evolved to the point where now you find Oreos in all kinds of flavours- green tea, mango, and raspberry just to list some examples. Afterwards it wasn’t long until the the Chinese began to adopt the American style of eating Oreos – twist, lick and dunk. This was thanks in part to much “emotional” advertisement, such as the kind where children show their parents how to eat an Oreo in the correct way. Such tactics helped the American cookie to conquer the Chinese market, making Kraft the No. 1 biscuit maker in China.

And so what can one learn from this story? First of all, it’s important to remember that “there’s no accounting for taste.” Lorna Davis, head of the global biscuit division at Kraft puts this idea in very elegant business terms for us: “Any foreign company that comes to China and says, ‘There’s 1 1/2 billion people here, goody goody, and I only need 1 percent of that’ … [is] going to get into trouble. You have to understand how the consumer operates at a really detailed level.”

It is interesting too to watch as while the Chinese did not like the American Oreo, the Australian and Canadian consumers, as it turns out also have started to lean towards its new, Chinese counterpart. Robert Smith from NPR summed it up quite succinctly as he points out that “by the time the Oreo finishes its world travels and come back home, Americans might not recognize it.”

• Christina Grohmann- CPG Marketing Intern

These days it is not unusual to have been working with a supplier for a long time only to find that one day your contact at the company never came back from a holiday. This can leave you in a situation where you are now working with a factory at which no one is familiar with your company or your current project. Even worse is when this happens after you have made payments for your order.

Unfortunately, beyond making multiple contacts at a factory, which in-and-of-itself is not foolproof, there is not much you can do to avoid this situation from happening. However, there are strategies you can execute for your China sourcing project to help avoid losses or delays.

Protect Yourself From The Start

To avoid any financial losses, make sure to have the sales manager’s signature as well as the company’s stamp from the very beginning when you are signing the contract. No matter how familiar you are with the factory, the salesperson’s signature on the contract is not enough. Furthermore, the bank account provided on the contract should come from the company and the name on the bank account should be the same as the one associated with the company’s account. You absolutely do not want to assume the risk of dealing with a personal bank account which legally ties you to the individual rather than the legally registered business entity. It’s much more difficult for a factory to disappear than for an individual to (though not unheard of).

Get In Touch With Management

There is a saying in Chinese: 擒贼先擒王, (qin zei xian qin wang), or “To catch a thief, you first have to catch his leader”. Not that we are accusing anyone of being a thief here, but the idea is that when your contact disappears, you should locate the supervisor of that person immediately. Identify the sales manager or any other relevant senior management staff and communicate directly with him/her regarding your project. Make sure they fully understand your project and status to allow for a more seamless transition.

Identify Your Team

Find out immediately who else had been involved in your project(s) from all possible departments including sourcing, quality control, engineering and accounting. Make sure to get the contact info of those in the departments still working on your project. We suggest having your sourcing agent or at the very least a bilingual Chinese local to help you communicate with these staff members to avoid language barriers and improve response times.

The key with the above suggestions is to make sure that your only connection with your supplier is not through a single individual, both with regards to communication and to legal and financial liabilities. Even if you feel relatively confident about the relationship you have with your supplier and your contact at the factory, beware captive buyer’s syndrome and make sure you have all your bases covered.

Have you ever experienced a disappearing factory contact? How did you deal with it and were you sufficiently protected to avoid losses?

• Jane Feng- CPG Sourcing Team Leader

Over the past decade, China has begun making its mark in the global economy and, increasingly, beyond the world of manufacturing the world’s consumer goods. As of April 2012, this now includes publishing as China is a major sponsor of this year’s London Book Fair, one of the world’s largest international publishing events. Among one of the participants in the fair this year is one of CPG’s sister companies, ACA Publishing Limited, which will be showcasing much of its work including its popular “Thirty Years in China”, in which Old China Hands, such as CPG President Michael De Clercq, relate the changes they have experienced over their time in China.

In addition, ACA will be announcing the arrival of over 20 translations of new, unpublished Chinese books, which will be launched at a special event in London, and then made available to the British reading public in the period 12 April – 2nd May at WH Smith book stores, as well as during the London Book Fair at Earl’s Court 16th –18th April.

The titles, which include a brand new six volume set covering the Beijing Olympic Games, as well as a series of children’s books on Chinese Pandas, have all been newly translated into English. There are also business books, a superb guide to the Great Wall using photos from 1871 and again this century, as well as more traditional books on Chinese culture, arts and cuisine (including a clear guide to cooking Chinese classic vegetarian dishes –a crispy bean curd to live for!).

Chinese aficionados will want to own a new version of the classic 18th century Dream of the Red Chamber (think: Marcel Proust rewrites the characters of Charles Dickens). This heavily color-illustrated and boxed version has over 400 pages, in traditional Chinese binding – a lovingly produced collector’s item.

The books will be on sale to the public in a number venues, including Harrods WH Smith Bookstore, Brompton Road, Knightsbridge (2nd floor), WH Smiths at Victoria Mainline Station, and also Heathrow Airport Terminals 3 and 5.

Feel free to contact us or ACA for more information on the fair.

CPG’s first ever infographic. We hope you enjoy it!

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White Paper and Buyer’s Checklist on The Canton Fair

Check out our comprehensive white paper and companion “Buyer’s Checklist”. This is the ultimate resource to help prepare you for the fair. Some of the topics include:

• Overview of the over 50 year history
• Examination of the fair’s impressive growth
• Description of the fair’s organization
• Strategies for both buyer’s and supplier’s to help prepare for a successful trip to the fair

Click to get access to The Canton Fair Overview today!

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The Canton Fair: A Buyer’s Checklist

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Don’t forget to check out our Infographic, “How Big Is The Canton Fair“, to get some interesting insight on the scope and scale of the over 50 year old fair.

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The Canton Fair at the New Pazhou Complex in Guangzhou, Guangdong

Do you plan on attending the China Import & Export Fair (more commonly known as The Canton Fair) this year? China Performance Group will soon be publishing a comprehensive overview of the fair including a history, how-to guide, and best practices from some of the biggest experts in the world of China sourcing. We will be also publish an infographic on the fair to give you quick facts and figures on the fair’s growth and size. Finally, for those who want a quick guide on how to prepare, included with the white paper we will be providing an easy checklist to make sure you are fully prepared when you attend this April!

To find out when the white paper and infographic are available, sign up for our newsletter by filling out the quick form below!

Too many new-to-China buyers focus only on product price and then get an ugly surprise when they learn there are applicable taxes which they didn’t plan for in the budget. Another mistake is to ask the supplier in China to confirm the taxes and duties in the destination market. Suppliers may not be knowledgeable about how your government would classify the given product and what taxes apply.

Taxes On Goods For Export

It is important to be aware of 2 separate facets of the Chinese taxing system related to the export of goods. China’s Value Added Tax System (or VAT), in place since 1984, is structured with 3 different tiers that decide the general VAT rates of a given manufactured item. As a starting point, this rate is set at 17% for most goods and services. The second feature is the export rebate system enjoyed by many Chinese manufacturers of products intended to be sold overseas. At one extreme, some Chinese suppliers can receive a full government rebate for the VAT paid, equivalent to a subsidy by the government of 17% on the product value. Others might enjoy lesser rebates and rebate values including 11% and 3% or even no rebate at all depending on the industry and the government’s current priorities. The government sets and gradually adjusts these rates depending on a variety of factors such as: favoring the development of key industries helping to boost the exports in that industry, implementing tailored environmental policies, or even responding to growing international concerns about the country’s trade surplus.

To learn more about these systems and how they works, read our White Paper on China’s VAT and Export Tax Rebates.

Import Duties

In order to avoid mistakes when buying from China, importers of Chinese goods should also have a clear mind of the type of product that they are purchasing. Most overseas countries impose import duties on goods that are categorized according to the specific Harmonized System Code, or HS Code, which associates an imported product category with a specific import duty. Knowing the right code of your product is of central importance to your order as being without it may not only delay customs clearance but could also incur unexpected costs. Prior to any purchase, a good strategy would then be to check the right code of your product and the duty to be paid with your procurement specialist who should be familiar with the type of product you want to import and your home country’s customs regulations. Alternatively, you can look through various HS Code databases procured by your national government.

How To Calculate The Total Cost Of Your Order

The following examples are intended to help you understand the price components related to your purchase from China. Where not indicated, prices and costs include liable VAT rates from both China and the importer’s country. These examples abstract from the peculiarities of the Chinese tax rebate system.

Example 1

The fictive product is produced in Beijing and is to be delivered at your factory a few hundred miles north of the Port of Los Angeles.

Example 2

The fictive product is produced in Beijing and is to be delivered at the importer’s location in Anvers, Belgium.

*The sourcing agent’s fee is a one-off variable fee and is composed of costs related to for e.g. the process of selecting qualified Chinese manufacturers, inspections and quality controls. The fee quoted here is purely hypothetical and will be variable depending on the order and the specific agent.

**Transportation costs are based on the current shipping rates used by the shipping service provider. In the examples above, all prices, costs and rates are fictitious, although the ratio between the different costs and the price EXW are fairly realistic.

Source: Aussenhandel, Klaus Olfert (Publisher: Kiehl).

As these examples above show, the final gross price that the importer would end up paying could easily range from 40% to 60% of the quoted price in China. The use of an agent in some form should mitigate the risk that deliveries do not live up to the general terms agreed to between the Chinese supplier and the importer.

These examples are meant to present, in a simplified way, the different costs and fees that are likely to be associated with buying from China. The businessman with an innovative idea and a viable business plan looking to buy from China should nonetheless keep the above mentioned precautions in mind when evaluating the cost effectiveness of importing from abroad.

Do you have any experience with complications involving VAT, the tax rebates system, or your destination port’s customs regulations? How do you deal with these future costs when choosing suppliers?

• Samir Benjelloun- CPG Marketing Intern