Up and up and up!

Some of you may not have heard about the GRI from 1^st March 2012 from almost all shipping carriers yet. But you will likely feel the pinch when you notice shipping prices for containers almost doubling after 1^st of March.

Here is what is happening and what we’re being told:

Where & What?

The increases will be applied as follows:

Origin Range: From All Asian ports (including Japan, South East Asia, Colombo and Bangladesh)

Destination Range: To all Northern European ports (including UK & Ireland and the full range from Portugal to Russia) to West Med, Adriatic, East Med, Black Sea and North Africa.

Cargo: Dry cargo, OOG’s, Paying empties, Break-bulk and Reefer cargo.

Why?

While some carriers aren’t even offering an explanation for this price hike, others are using a variety of differing excuses. The most common the reasons being offered are:

1. A fuel surcharge - Increasing fuel prices which truthfully account for between 30-50% of this rate increase in most cases.
2. 2011 adverse weather conditions causing extended periods of port closures and therefore the carriers loss of revenue.
3. A shift in the balance of the rate of containers heading westward and eastward, storage and canal charge changes.
4. 2011 saw an unprecedented decrease in container shipping rates that has been reported as unsustainable for these carriers coming into 2012.

It’s terrible to think that these carriers can switch and change rates so significantly in such a turbulent and sensitive time for European and Asian trade. Most companies have already made their 2012 projections based on last year’s shipping rates and for the most part make concessions for minor rate changes.

However, as you will see below, the rate change is huge and will ultimately be passed on to the consumer or final buyer. This is not ideal for imports to Europe at all, and this will be even more damaging for SME’s who haven’t recognized this change yet!

Mine is fourth row, third from the left, please!

How Much?

We’ve summarised the rate increases from the following companies below. These figures are the increase on top of the existing rates which lie at about USD 700/teu. All told, it is about double the current rate level!

• K Line – USD 725/teu
• Hapag – USD 750/teu
• Maersk – USD 775/teu
• MOL – USD 750/teu
• CMA – USD 750 teu

Note: TEU is short for Twenty-Foot Equivalent Unit which means a 20ft container. A 40ft container is 2TEU or FEU (Forty-Foot Equivalent Unit). As the above rate increases are based on a 20ft container, if you are preparing to ship a 40ft container after 1^st March, prepare also to double that increase!

Toying with the careful balance of shipping rates

Be Prepared!

It goes without saying that these rate hikes affect LCL shipping too, causing potential strife for all the SMEs and young companies looking East for their goods. Shop around and make sure you are getting the best competitive prices!

Please be aware the rates will be changing from month to month as usual, but this significant rate hike takes the new base line up a big step. These rates will apply for all freight on board from 1^st March.

If you have any questions or need extra information please let us know.

(Thanks to Ciaran McCann for providing supporting information)

The world's biggest annual migration

If Europe and US demand decreases further there will be steep competition between these factories. With this competition comes reduced price margins and this will likely mean compromise on quality as these factories fight to survive. When your products become secondary to the factory’s survival, it is time to spend extra attention to make sure you are still getting the quality you expect.

When the bottom line is threatened, this is when quality problems arise. Instead of focussing their energies on maintaining the standards of your product, factories will be trying to get as many of your products completed as fast as possible so the next order can go through. Factories will likely also attempt to bolster their profits by blaming wage increases and raw material costs. Short-sightedness being a regular player in Chinese business, many factories will let all this happen at the detriment of your relationship with them as a customer.

Chinese New Year, following the lunar calendar, this year falls on the 23^rd of January 2012 and many workers will leave their jobs to return to their hometowns from the beginning of January onwards. Some (read: many!) workers will not come back to their jobs and go elsewhere. This happens for a myriad of reasons from family commitments to finding better pay elsewhere. Needless to say, because of this, January and February production capacity in China for many markets will be greatly diminished. With the economic outlook for exports to Europe and US from China the way it is, I expect this to have a profound impact on many manufacturing industries.

The buzz word recently attributed for China’s manufacturing scenario has been, ‘Stagflation’. Stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment begins to increase.

I speak to many factory owners each week and the most common complaint and fear surrounds finding enough workers both qualified and unskilled. They all dread the “mafan” (麻烦) of Chinese National Holiday time as it is a period of real uncertainty. Their fears are not unfounded.

This year Guangdong increased the minimum wage for factory workers by 18.6% and more recently Sichuan increased the minimum wage for factory workers by 23%. The reason given by both provincial governments was to combat inflation. The wage hike will be a significant reason for many workers to go to these regions to look for jobs after Chinese New Year. Clearly this was the intention of the wage hike and only serves to pressure other provinces to increase their minimum wage.

In the short term, it will lead to massive employee shortages in other provinces and manufacturing industries. In fact, the migration period that follows every national holiday may be extended this year to facilitate the boost in an already titanic national moving of the masses. In the long term, you can expect other provinces to increase their minimum wage over the coming months to balance the worker shortage and this will lead to your products increasing in price.

Despite all of these hurdles it is not time to panic! It is still possible to maintain your price and quality in 2012. As with several companies and SMEs we represent, we’re now locking in purchase prices for a 12 month period and visiting factories over the production periods to maintain and improve quality levels at all stages. Working with factories we know and trust (and who know and trust us) allows us to provide purchasers with the best options for doing business in China during this uncertain climate.

If you would like some help or advice on dealing with your 2012 orders, get in touch anytime.

A series of three-letter trade terms related to common sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs and risks associated with the transportation and delivery of goods.

The Incoterms rules are accepted by governments, legal authorities and practitioners worldwide for the interpretation of most commonly used terms in international trade. They are intended to reduce or remove altogether uncertainties arising from different interpretation of the rules in different countries.

As an overview, we’ve taken the incoterms and simplified them. Call it a cheat sheet for anyone less familiar with international trade!

Rules for Any Mode(s) of Transport

EXW – Ex Works: Goods are made available at the seller’s premises, with no additional costs/delivery included. This places maximum obligation on buyer and minimum obligation on the seller.

FCA – Free Carrier: The seller carries the goods to named point of delivery and then passes all risk to the first carrier named by buyer.

CPT – Carriage Paid To: The seller pays for carriage. Risk transfers to the buyer upon handing goods over to the first carrier.

CIP – Carriage and Insurance Paid to: The seller pays carriage & insurance to a named destination point. Risk  then passes when the goods are handed to the first carrier.

DAT – Delivered at Terminal: The seller pays for carriage to the terminal, except import clearance fees and assumes all risks up to the goods being unloaded at terminal.

DAP – Delivered at Place: The seller pays for carriage to named place, except import clearance fees and assumes all risks up to goods being made ready for unloading.

DDP – Delivered Duty Paid: The seller is responsible for all costs, duties and taxes to deliver goods to the country of the buyer. This places maximum obligation on seller.

Rules for Sea and Inland Waterway Transport

FAS – Free Alongside Ship: The seller places the goods alongside the ship at a named port and clears them for export. This typically applies to heavy-lift & bulk cargo.

FOB – Free On Board: The seller loads the goods onto a vessel nominated by the buyer and clears them for export. The buyer instructs which vessel and port where goods are loaded.

CFR – Cost and Freight: The seller pays all costs and freight to bring goods to port of destination. Risk is transferred to buyer once the goods are loaded.

CIF – Cost, Insurance and Freight: Exactly the same as CFR except that the seller must in addition procure and pay for the insurance.

I hope this information helps. If you are unsure about the obligations, risks and costs involved in importing your goods, feel free to contact us for clarification.

References:
International Chamber of Commerce
Institute of the International Trade of Ireland

Give an inch...

(Have you read Part 1 of this article?)

By this point, the overseas purchaser has been let down dreadfully by the supplier and had to compromise their margins in order to have their goods released. But it got worse. When the CI (Original Paper Commercial Invoice) and COO (Certificate of Origin) were requested from the supplier, they refused to do even this stating that it would cost yet more money to produce these documents and therefore not worth it.

We explained that in order to export the products these documents were required from the manufacturer. This was met this time with abuse and a refusal to have anything else to do with the matter. The aggression showed by the supplier at this point was typical to a kneejerk reaction by a lot of suppliers when their back is at a wall and they have gone so far that even though they are wrong, they don’t want to lose face by admitting it or even compromising.

Luckily my time in China has allowed me to meet some influential individuals in the export and customs world here and we were able to get some documentation to push the order through customs and onto the ship for our client. This documentation was also enough to comply with import, customs and duty purposes when it arrived at its destination port. Doing it this way should of course always be a last resort.

This is a particularly cold example of how some manufacturers feel they can behave to an overseas purchaser who has little power to resolve the situation. It is, of course, incredibly short sighted of the supplier and in the long run will be sure to hurt their business. However it’s a clear sign that purchasers need to be careful and make sure all documentation is understood and in place to avoid this kind of behaviour. Unfortunately, having supporting documentation in China is not always enough, as once a manufacturer has lost interest in a client, they will rely on the fact that very few overseas purchasers would be willing to attempt legal action. Local representation and strategically applied pressure often makes the difference in these cases.

I would recommend even a brief audit of the company you intend on purchasing from for the first time (and one annually if you have large yearly supply contracts) but for some companies this isn’t financially possible. Luckily there are agencies and consultancies like Enter the Panda that utilise their existing trusted networks. Through them you can  purchase your goods, knowing that quality and integrity will be a normal part of business. If suppliers acted anything like the one above, you can be assured that this is not found with the companies we work with. In my experience this is a rare and particularly unreasonable situation, but this type of short sighted thinking and action does exist in a percentage of Chinese suppliers especially when a cheap product  or low order quantity is involved. You need to have all your bases covered to always be in a secure position.

Because we have worked extensively in China in all areas and with all types of suppliers and factories, we feel very confident in what to look out for when finding a trusted, durable and versatile supplier. There are key elements and red flags to look out for in the facility and the people that work there in order to find something sustainable and reliable for your needs. Don’t let your company get into bad situations with Chinese factories. Use an advised and trusted supplier and understand all your agreements in advance.

Somewhere between ordering and before loading onto the vessel at the port, the supplier decided to change their mind and claim that this was no longer FOB and were only prepared to pay a small courier fee to the shipping agent. Not only did they do that but they also refused to offer a Commercial Invoice and Certificate of Origin – two documents that are critical when exporting from China and importing into your own country.

The purchaser had found this supplier on Alibaba.com and had been delivered samples before deciding to order with them. They had performed the minimum amount of work required in order to make sure this supplier could at least deliver a product they were willing to pay for. As you can see, in this case it wasn’t enough.

When we got involved the shipping agent had custody of the goods and was awaiting payment for export and freight loading charges in order to release the shipment. This part is normally covered in the FOB terms. The supplier had insisted that they needed 100% of the payment before they would release the goods to send to the shipping agent. The purchaser, not seeing anything untoward, obliged by paying the remaining 70% after the initial deposit amount. The fact that final payment terms were not confirmed beforehand enabled the supplier to be able to take advantage of the situation.

On initial contact with the supplier on behalf of the purchaser, they claimed that the quote did not include the FOB terms. This was very quickly proven wrong through existing emails and the original quote. After this fabrication was unveiled the supplier changed their story to the new fact (and probably closer to the truth) that they quoted too cheaply and were making no profit on the whole order. Of course, this is where a Purchase Order and Purchase Invoice should be enough to show the agreed terms of delivery and that they need to be adhered to. Even after this was shown to the supplier, they still refused to pay. Because of time sensitivity issues and an unwillingness to deal with legal action in China by the purchaser, they found themselves in a situation whereby if they wanted their goods on schedule, then they would have to succumb to paying this part themselves despite the principally agreed terms. It should be noted that the shipping agent was impartial and willing to take payment from anyone to release the goods.

On the whole, it was a relatively small order and the FOB fees due were under 2000RMB (~EUR235) so the purchaser decided to cut their losses and pay this. I am sure the supplier had this in mind all along and had decided to cut his losses with the order and the chance of repeat business a lot earlier. This was not the end of the matter, however. Worse behaviour was to follow!

For Part 2 of this article, click here.

Taking on the dragon?

Sourcing from China for the first time can be a daunting experience.

There are many cultural and language differences as well as huge differences in business mindsets. These combined issues can put you on the back foot from the start and put the supplier at a much more advantageous position.

This can easily negatively affect the result of your negotiations, both in terms of price and product quality.

Consider appointing an agent for you in China, who has local knowledge, experience and connections that can put you at an advantage over your new suppliers and your competition.

For a more detailed look at sourcing from China, take a look at some of our earlier articles, including:

Developing your products with existing Chinese manufacturers

How to control your China production more: Part 1

How to control your China production more: Part 2

How to increase your influence over China manufacturers: Part 1

How to increase your influence over China manufacturers: Part 2

Dealing with Small Factories in China: Pros and Cons

Dealing with Chinese Factories – Can they produce your entire order in-house?

Chinese Factories: Is your factory outsourcing your order?

Sourcing and Manufacturing Agents in China

The supplier basically takes responsibility for the product from manufacturing, freight, customs and duty for the buyer. It normally works out a little more expensive for the buyer than if they were doing it themselves or FOB but it is an option many prefer as they don’t have to worry about the costs and hassle of the whole process.

If the buyer prefers this delivery method they should be sure to state it at the very beginning to the supplier. What normally happens is that the supplier will nominate their own shipping agent and deal with the process themselves.

The purchaser can do this whole procedure themselves but it is highly advisable and both economically and time efficient to enact a shipping agent or freight forwarder to take care of this for them.

The product will then be shipped to the destination port. At this point the B/L (Bill of Lading) is exchanged for the remainder of the order value. Once this has been exchanged, the product is in the custody of the purchaser or the shipping agent/freight forwarder that has been enacted.

Depending on the agreement the buyer has with the shipping agent/freight forwarder the product can be managed all the way to the buyer’s door from when the shipping agent takes custody.

At this point the B/L (Bill of Lading) is exchanged for the remainder of the order value. Once this has been exchanged, the product is in the custody of the purchaser or the shipping agent/freight forwarder that has been enacted.

Depending on the agreement the buyer has with the shipping agent/freight forwarder the product can be managed all the way to the buyer’s door from that point onward.