Global Warming, DWM 2004

June-July 2004

Global Warning
Finding the Right Supplier in China is not an Easy Task
by Mike Bellamy

Faced with global competition, more buyers are looking to China to source products.

China’s preferential pricing combined with its level of manufacturing maturity clearly emphasizes that the need to understand this market has never been greater. However, with opportunity comes risk.

There are three overriding concerns faced by both the first-time buyer as well as the experienced China sourcing specialist.
• Finding the right supplier;
• Ability to control quality; and
• Ensuring that blueprints, design specs, tooling and brand names are protected. In other words, preventing suppliers from becoming competitors.

Finding the Right Supply Partner
The single biggest determinate that makes or breaks a sourcing program in the People’s Republic of China is finding the right partner. It seems that everything these days is “Made in China” and one would think that it would be easy to find a supplier. In reality, finding the right supplier can be a daunting task. China is a massive country (more than 700 cities making up one-quarter of the world’s population spread over an area of 4 million square miles) with extreme variation in price, quality and production ability.

Probably the biggest headache for American buyers when conducting supplier research is that there are no comprehensive industry guides (or even a decent yellow pages for that matter). Furthermore, ISO certification does not carry the same weight as it does in the West, and websites do not always realistically portray the supplier’s ability. The fact of the matter is that only through physical inspection of the facilities and review of actual production samples will you gain a true understanding of your supplier’s ability. It is a daunting task, but the time, energy and funds spent on a trip to China during the initial supplier identification phase will pay dividends in the long-run. If you are unable to make the trip yourself, there are independent agents that can assist with this due diligence.

Quality Control
China quality control doesn’t have to be an oxymoron. In an ideal world, the manufacturer could handle this internally and defective goods would never leave China. In reality, there is often a lot of “hand-holding” required to ensure the suppliers fully understand your specs and quality concerns—especially during initial production runs. Setting up your own sourcing center in China is not a realistic option for most U.S. buyers. However, there are some simple rules to keep in mind which can limit your risk.

• Always see an actual production sample from the actual supplier before issuing payment or placing the purchase order. There are far too many middlemen claiming to be factories. This lack of transparency complicates service, price and communication. Worst of all, if things go wrong, these intermediaries can disappear;
• Ask the supplier to provide their internal quality control documentation as part of the buying process; and
• Employ local auditors and
independent laboratories if you cannot conduct final quality control on your own in China. Their service fees are minuscule compared with cost of faulty products in your supply chain.
Security
Ensuring that blueprints, design specs, tooling and brand names are protected is a concern shared by most international purchasers doing business in China. Some suggestions:
• If possible, do not disclose the product’s final use or branding and remove confidential information from prints and samples. Consider dividing your product into individual components or focusing on only key components to conceal “the big picture” during the request for quotation stage; and
• Let the supplier quote based on the product and order size, not based on how much money he thinks may be in your pockets. This may involve employing a sourcing agent to conduct the initial research on your behalf
without disclosing your vital information.

Once you have moved toward the sampling stage, it is a good idea to sign a letter of confidentiality. However, even with a signed document in place, confirmation of wrong doing and enforcement are both difficult. Therefore, don’t rely solely on a legal document. There are additional precautions that you should follow. For one, own the tooling outright. Any funny business and tooling is extracted from the vendor.

Trademark your brand in China, even if you have no plans to sell your products there. Having done this, the court system is on your side should you face infringement by a supplier. Believe it or not, the Chinese court system generally favors the foreign party in these cases as China wants to show the world it is living up to World Trade Organization commitments. But you have to play by the Chinese trademark system and that means having your brand registered in advance in China is a “first to register” rather than “first to market” system. Luckily, registration is inexpensive and straightforward. Costs are under $2,000 (U.S. dollars) in most cases.

PassageMaker’s Solution to Safe Sourcing
Having found a qualified supplier in China, the U.S. buyer often is still hesitant to place the order as sensitive information such as branding, retail price markings, bar coding, shipping destination, order sizes and even end-buyer information could be exposed.

A few years ago our company opened the doors on its sourcing center/warehouse to other U.S. buyers in order to provide them a centralized, secure, reliable environment for in-bound quality control, assembly, packaging and freight consolidation under U.S. management in China. As buyers ourselves, we understand that information must be kept confidential and products should be looked after in a professional manner. What makes this system special is that PassageMaker is not a middleman, the process is completely transparent. We work with the buyer to find a supplier that meets their specific needs. Goods are then shipped to our Sourcing Center where we perform assembly and final packaging. This prevents local suppliers from turning into future competitors and shipping costs are reduced through freight consolidation. Also, quality control issues are dealt with before goods are shipped. Compensation for this service is based on a set percentage of purchase value or cubic meters of product under management.

Conclusion
In a foreign country or at home, there are inherent dangers associated with developing suppliers. While the situation in China is complicated by language, distance and cultural differences, we hope that the rules of thumb introduced in this article can help mitigate many of the risks. As a result more buyers will be on the road to reduced costs, assured quality and secure sourcing in China.

China—Poised for Growth
How It Will Affect U.S Window and Door Manufacturing

“Historians tell us that China before 1980 and China since 1980 are two entirely different countries. Forget everything you learned about it in high school.” Thus began Carlos Moore, trade specialist for AM & S Trade Center LLC of Chicago, Il., at the recent WDMA conference held in Phoenix, Ariz., in February.

“If you are a manufacturer, then China IS in your future,” he said.

“Most economists believe China deliberately underestimates its growth,” he explained. Instead of believing the figures the government puts out, experts like to look at the electrical usage there. Those numbers put growth at 75-90 percent a year.”

Consider all the manufacturing there. China produces an immense amount of product (see chart above) for worldwide consumption.

Imports of both wood windows and doors and metal windows and doors into the United States are still low, said Moore, but poised for growth to take off (see charts at right). He used kitchen cabinets to plot a similar growth curve.

“Two years ago, only 2 percent of all kitchen cabinets were imported into the United States from China. Last year, it was 8 percent,” he said. This year, that number is expected to reach double digits.”

Moore says China has a number of key advantages and disadvantages, most stemming from its land and topography. They include an abundant and easily trained labor force—13 million seek to enter the workforce annually; reasonable work ethic and lower wages; and access to substantial available raw materials and water.
The disadvantages include problems with its workforce, legal system and banks; a lack of efficiency in state-owned companies; its distance from major markets; a dearth of reliable data; and an infrastructure in desperate need of modernization.

Moore feels the biggest disadvantage for U.S. manufacturers are the advantages that the Chinese government creates for itself. Specifically:
• An undervalued exchange rate to promote export industries. Most experts say the yuan is undervalued by 30-40 percent;
• Export subsidies as needed;
• Non-commercial treatment of imports;
• Low environmental, worker health costs;
• Unchecked piracy of intellectual property;
• Expedited permitting, and nebulous rules; and
• Customs violations used as needed.

As a result, it is exceedingly difficult to sell into China. The United States government has taken some actions, with mixed results. According to Moore, “the thing the U.S. government needs to do to have the biggest political and meaningful payout is to get China to float its currency. The question becomes—is the U.S. government prepared to get China to play by the rules?” he asked rhetorically.

Moore said there are more anti-dumping petitions filed by U.S.

companies against China than by any other country, but that “playing defense is not enough. Manufacturers have to get the government to do more.”

“China will be the number one or two economy in the world in the next 10-15 years,” Moore concluded. “I am reminded of the verse in Tolkien’s The Lord of the Rings:
It doesn’t pay to leave a dragon out of your calculations if you happen to live near one.” 1999-2003

1999-2003
Imports of Chinese Wood
Windows and Doors Over
The Past Five Years.