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.

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.

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.

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.

If it is FOB destination port, then the purchaser has to pay for:

1. Shipping Fee.
2. Customs fee at the destination port.
3. Duty on the product if it requires any (Your will have to research this or shipping agent should be able to classify the product.
4. Once released, delivery to the final destination as listed on the shipping documents.

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.

If it is FOB port of loading, then the purchaser has to pay for points 2-4 as above.

The term FOB can be used to clarify which part of the shipment is being paid for by the supplier and which part is to be paid for by the purchaser.

For instance FOB, (port of loading) indicates that the seller will pay for the goods to be loaded onto a vehicle of transport (usually a container ship) at the initial port only. Shipping, Duty, Customs clearance and delivery to final location will be paid by the purchaser. Usually this is a shipping agent as nominated by the purchaser.

FOB, destination port indicates that the shipping fee will be paid by the seller/supplier. Duty, customs clearance and delivery to final location will be paid by the purchaser.

For a more in depth understanding of the term FOB, contact your shipping agent or get in touch with us with an explanation of the shipping situation.