Top Ten Pitfalls to Avoid in Chinese Outsourcing - #8 Not Being There

#8 Not Being There

If what you are outsourcing is important at all to your business, then you need to physically go to China to visit the factory. Relationships are more important in Chinese business than in the US, and building relationships is best done, at least initially, in person.

It's best to be there during vendor selection/qualification, negotiation stages, for quality assurance, and for relationship maintenance. A firm like OPSA can be your physical presence in most of these situations, but the best service firms are open to clients visiting the factories that are making their products.

Many "broker" firms (those that just find factories but do not offer other services like quality inspections) will not disclose the identity of their factories, will not let clients visit, or will allow a visit but make it appear they own the factory. Brokers can be useful if you are just importing commodities. If you have custom products, avoid brokers and go with a full-service firm like OPSA.

We welcome and encourage our clients to visit our offices in China and the factories we use for their products. Even though we do lots of in-person work with factories, we encourage our clients to visit at least once. If you work directly with factories in China it is even more important to visit.

After a physical visit, technology like Internet phone and video services, can help with relationship building, quality assurance, negotiation, etc. However, it starts with a visit.

Top Ten Pitfalls to Avoid in Chinese Outsourcing - #9 Communication Problems

Pitfall #9 - Communication Problems

Ok, this one is pretty obvious. Mandarin is a complex language far different from English. I've learned to speak and understand a bit and want to learn more. The biggest issue for me is the importance of the four tones. A change of tone in part of a word can completely change the word's meaning. Then there are all the different dialects and the fact that in Southern China many folks speak only Cantonese which seems to me to be a completely different language. Anyway, communication is an issue.

The picture here demonstrates how difficult translations can be between Mandarin and English.

Here are a few ideas for avoiding problems related to communication:

1 - Be as specific as possible. Never assume the words you used mean the same thing to the Chinese receiver of the message as they mean to you.

2 - Use simple language, and obviously, avoid slang and cliches.

3 - Put information in writing and use pictures, video and demonstrations as often as possible. However, keep e-mails and other written communications short. Long, wordy e-mails take a long time to translate. Use bullet points and number lists. Specifications and work instructions should have pictures.

4 - Be aware of the potential for communication problems. Review e-mails before sending for clarity.

5 - Make the effort to try and learn some of the Chinese language, especially when you travel to China. Learning just a few phrases goes a long way in building relationships and guanxi (relationship capital).

Top Ten Pitfalls to Avoid in Chinese Outsourcing - #10 Not Understanding Cultural Differences

I've done a presentation twice on the top ten pitfalls companies make when trying to outsource to China. I'll post this list over the next ten posts.

#10 - Not Understanding Cultural Differences

There are three key phrases to keep in mind when outsourcing to China. They are:

Sure, sure... - This is taken to mean by the US visitors as agreement or commitment that a product or process is available at the factory. In reality it means "I understand", as does a head nod.

No News is Good News... - This is relevant when your order will not ship until a few weeks later than planned and the factory does not let you know. It also is relevant when changes to raw materials are made but not communicated to the buyer.

Good enough... - Chinese companies have a reputation for shipping products that are "good enough" in their opinion, but not at all acceptable when they are received by their US buyers.

In all three cases, good relationships and clear specifications and requirements are key to avoiding this pitfall.

Also keep in mind that "face" is a huge issue in China. Losing and gaining "face" are a big deal. Essentially "face" is your standing in the eyes of others. Embarrassing situations result in loss of face.

Decisions are also made less by individuals and more by groups in China. This often results in slower decision making.

Finally, when negotiating, keep in mind these key phrases from The Art of War by Sun Tzu from 400 B.C.
­"All warfare is based on deception.“
­"Pretend inferiority and encourage his arrogance.“
­"Draw them in with prospect of gain, take them by confusion"

The best advice to avoid this pitfall is to educate yourself by reading as much as possible about Chinese culture and being sensitive to the differences. Also, be friendly, open, and cautious as you learn for yourself how to successfully work with the Chinese. The learning process is a great, fun adventure.

Visa Confusion Tied to Olympics

There are conflicting reports surfacing about the new limitations on visas to enter China. It has been reported, and experienced by our recent visitors, that the government has stopped issuing multiple entry visas until October 17th. It appears the best one can get right now is a double entry visa good for three days.

Other reports from the government say there is no restriction, but that approving applications is taking longer due to Olympics security concerns. It is true that obtaining visas in Hong Kong seems to be taking more than the traditional 24 hours.

Visitors to China this year should plan their trips so they only need a single entry visa. They should obtain the visa before leaving and plan well in advance.

Don't let these restrictions stop you from going to China to visit the factories you are working with, or our offices if you are working with OPSA. It is vital to visit at least once.

Perfect Storm of Cost Issues

Alexandra Harney has written an excellent article posted at Slate.com on the cost issues in China. The article titled "The Last Days of Cheap Chinese - Why American consumers are about to start paying more for clothes, electronics, toys, and just about everything else".

http://www.slate.com/id/2188409/

In the article Ms. Harney describes the "perfect storm" of cost issues for Chinese manufacturers. These are the same issues I've mentioned in previous posts - appreciation of the RMB, labor law changes, labor supply shortages, raw material costs, and oil prices. Actually she leaves out the actions the Chinese government has taken (like eliminating some VAT rebates) to slow economic growth and avoid further domestic inflation.

Ms. Harney ends the article by describing prospects in other low-cost countries like Mexico and Vietnam. She concludes that China is still the best option for most sourcing efforts.

I agree completely with the observations in the article and the conclusions - China is still the best option, but the era of very low prices is over for now.

Foreign Companies Confident in Southern China

According to an article in the China Daily (www.chinadaily.com.cn) about a survey conducted by AmCham South China, the great majority of foreign-owned companies in Southern China are not having problems with the recent VAT changes, new labor laws, or exchange rates. In fact, most claim to be considering substantial investments in Southern China rather than moves to other areas or countries.

Hmmmmmm. I'm not sure I believe it. I suspect most factories in Southern China are wishing they were further north or west right now. The trends, government incentives, and demographics sure seem to favor factories moving west and north. Some of the national trends like the VAT changes and the exchange rates may have some foreign-owned factories considering moves to other countries like Vietnam. That certainly is the conventional wisdom anyway.

Here is the link to the article: http://www.chinadaily.com.cn/china/2008-04/09/content_6600920.htm

If I had $1 to invest I sure would put it in northern or western China if I could figure out the infrastructure and skilled labor issues. It sure seems those will get solved soon.

Economy Offers Opportunity for OPSA

The time is right for OPSA to accelerate our growth. As the economy slows our target market firms are cutting back on staff and relying more and more on outsourcing of non-core functions.

Plus, despite the pricing issues mentioned previously, firms are looking more and more to reduce or maintain prices. We are viewing the current economic situation as more opportunity than threat and suggest other small firms that provide services to small and mid-size manufacturers do the same. The time is now for aggressive but smart growth.

Quality Problems - What Happens Now?

Quality problems can happen with all suppliers. Our customers reduce their risk of having quality problems by working with us. Since we are on-sight in factories and perform our own inspections, the chance of receiving products that are not correct or the way the customer wants them is greatly reduced.

It rarely makes sense to pay the high cost to return products for rework. In some cases it does, but that is the exception. It is very rare for a Chinese factory to agree to a refund. Even with our relationships and leverage, it just doesn't happen. What we can negotiate often are for free replacement of items that are somehow not up to expectations. The great majority of the time the problems are issues that were not clear or included at all in the specification, even though we do our best to identify all of the attributes that are important to the customer.

Bottom line - whether you work with OPSA or have another mechanism for working with Asian factories, don't a refund to be an option. Try to negotiate for rework or free replacement.