Smart Sourcing from China

1
Smart Sourcing from China

• Presenter Tony Tao
• HM Associates

2
Clothing Textiles Industry Global Prospective

• Clothing and textiles represent about seven per
  cent of world exports.
• China represents the largest share of world trade
  in this industry.
• Character of Industry growing in volume,
  dropping in unit price
• Growth in volumes of polyester, volumes of
  natural fibre remain stable.

3
Key Products of Sourcing from China

• Major Category of China Export Products
• Clothing
• Fabrics
• Household textiles
• Fashion accessories
• Garment accessories
• Footwear

4
Connection with China Manufacturing Company

• Pre-sourcing Sourcing Agent
• You can engage sourcing agent in Australia or in
  China.
• Services including
• consulting
• Matchmaking
• ordering
• Logistics
• Quality control
• Settlement services
• Fees commission based, 2-10 of purchasing
  price

5
Connection with China Manufacturing Company

• Pros Cons of using sourcing agent
• Pros
• (i) easy to engage
• (ii) one stop solution
• (iii) certain degree of reliability
• Cons
• (i) Commission could be too high reduce profit
  margin, increase business risk
• (ii) limited supplier options as sourcing agents
  will have their own preferred suppliers
• (iii) little awareness of Chinese market.

6
Connection with China Manufacturing Company

• Selective Sourcing
• Networking talk to knowledgeable people who
  have successfully imported from China.
• China Clothing and Textiles Expo
• Pre-selected by CCCT
• Reputable companies
• Products ready for export
• Willing to explore Australian market, have the
  HR capacities to do so.
• Face to face meeting understand the products
  without trip to China
• Research - use public sources to identify the
  China exporter and preselect based on years in
  business, public reporting of revenue and
  employee sizes to create a prospect supplier's
  list.  
• CCCT China Chamber of Commerce for Import and
  Export of Textiles.

7
Connection with China Manufacturing Company

• Non-selective Sourcing Method
• develop a list based on the yellow pages,
  association directories, government sources etc.
• Canton Fair (China Import Export Fair)
  www.cantonfair.org.cn
• East China Fair www.ecf.gov.au
• www.Alibaba.com

8
Selecting the Suppliers

• What you want
• Ability to produce the quantity
• On time delivery
• Pricing
• Quality
• What you dont want
• Loss your time, money, and the reputation with
  your customers
• Go down the path in a complex international legal
  dispute.
• HOW ?

9
Selecting the Suppliers

• Reference from past trades
• Ask suppliers to provide you with most recent
  trading documents, for reference check.
• Build up strong personal relationship with
  suppliers
• Utilise the services from CCCT
• no profit organisation
• leading organization representing
  exporters and importers of textiles and clothing
  in China
• membership of more than 12,000 companies
  across China
• CCCT s member representing more than
  70 of China's import and export trade in
  textile and clothing.
• Bridge between Chinese textile and
  clothing exporters and their counterparts in
  the rest of the world.

10
Selecting the Suppliers

• Terms of Contract
• Specify the following in your contract
• specifications
• quantity
• quality
• (i) Australia does not have its own quality
  standard, industry standard is applicable
• (ii) some buyers (Target) require ISO
  standard, such as ISO 9001 Certificate or
  specific ISO certificate
• (iii) Some buyers (Aldi) use OKTEX 100
  standard, tested for harmful substances
• price
• delivery port and payment term
• liability for breach of contract, and
• dispute settlement.

11
Selecting the Suppliers

• Terms of Contract
• Check the business licence, the name of legal
  representative on the contract
• Specify the arbitration clause and make sure to
  select at least one foreign arbitrator
• The most popular business arbitration entity in
  China is the China International Economic and
  Trade Arbitration Commission (CIETAC in English)
• contract to be prepared in both English and
  Chinese and English language version governs in
  the event of a dispute.
• Governing Law Australian Jurisdiction
  preferred

12
Selecting the Suppliers

• Pricing Method
• CIF Cost, Insurance Freight, suitable for
  small start up business.
• FOB Free On Board, suitable for large and
  experienced importers.
• CNF Cost Freight, become very popular
• Payment Terms
• TT
• Less cost
• Fast
• Suitable for repeated business

13
Selecting the Suppliers

• Payment Terms
• LC (Letter of Credit)
• Relatively expensive
• safe
• For low margin supplier, they may be not willing
  to accept LC
• Suitable for initial business engagement.,
  followed by TT transactions.

14
Selecting the Suppliers

• Risk Management
• Build up strong personal relationship with
  suppliers
• Guan Xi (Relationship) the most important
  Chinese business culture
• Getting the Right GuanXi makes all the
  difference in ensuring that business will be
  successful
• Written commercial contract is secondary to
  GuanXi
• Westerners build transactions and if
  successful, a relationship will ensure.
• Chinese build a relationship and if
  successful, commercial transactions will follow.
• GuanXi hard to form, but long lasting
• Think Guan Xi in terms of bank deposit,
  more money you have, the more money the bank
  is prepared to lend you. Once you get your Guan
  Xi bank balance to a high level, your risk
  is reduced.
• For if you are new to china, you can borrow
  GuanXi to make GuanXi.

15
Selecting the Suppliers

• Risk Management
• Build up strong personal relationship with
  suppliers
• How to develop Guan Xi (Relationship) in
  China
• a network of relationships to support one
  another, if you scratch my back, I will scratch
  yours
• need time to make friends and establish close
  relationship with others, such as suppliers,
  salesmen, shippers, officials, bankers) and
  people dear to their hearts.
• this can be achieved by
• (i) constant social interaction
• (ii) doing small or large favours
• (iii) small gifts
• (iv) fulfilling your early promises
• (v) building up a good, reliable reputation
• Your goal is to build a network of people
  close to you, a phone call away that can help you
  when in need.

16
Selecting the Suppliers

• Risk Management
• QC (Quality Control)
• Engage a trusted local person to oversee
  the productions, the estimated cost RMB
  5,000/m or commission based.
• Make inspection by yourself at least 1-2 times
  during the production stages and the final
  inspection before shipment.
• Engage QC agent, such as SGS and CCIC.
• Initial Deposit
• Small initial deposit 10 - 30.
• Refundable as per contract, but hard to
  enforce.
• The final payment before shipment, after
  the final inspection .

17
Case Study

• Case Study - Quality
• In 2006, our client engaged a suppliers in
  Henan province to supply premier quality beach
  towels.
• the first inspection of packaging found that
  the supplier mixed premier quality with standard
  quality. As per contract, the supplier replaced
  it with all premier quality beach towels and
  agreed that our client can randomly unpack up to
  10 of stock for 2nd inspection.
• Our client did 2nd inspection 5 days before
  discharge of goods to the port, all ok.
• On arrival, our client found the goods had
  been filled with standard quality beach towels.
  The supplier refused to accept the responsibility
  and cause a huge loss to our client.

18
Case Study

• Lessons from Case Study
• Engage the supplier without background
  checking
• Should be alerted when the quality issue
  was detected in the first inspection.
• Engage a trusted person to supervise the
  packaging process.
• The final inspection should be conducted
  right before the goods leave the factory.