Chinese Supplier Background Check: how useful is it?

I wrote before about ways to run a background check on a Chinese company. We recently had an interesting experience and it serves as an interesting example for those buyers who are afraid of lies and trickeries so common in this part of the world.

One of our regular clients was planning to buy for $50,000 of motorized vehicles. They asked us to run a quick check on the supplier’s company as a safety measure.

Apparently, all was in order. The supplier has a well-designed website, an Alibaba Gold status, and an “onsite check” label by Alibaba that includes a business registration number and an ISO 9001 certification.

One of our analysts checked the supplier in a bit more depth. Here is what we found:

  • The business license information was in fact that of another factory. Same thing for the ISO 9001 certificate. These documents are all in Chinese so most oversea purchasers don’t verify anything.
  • The supplier was operating without a company!
  • We asked the factory whose name was on the documents for information. It appears the “supplier” is simply a couple of people working in an apartment.
  • A Google search revealed one complaint on the Internet.

To confirm our findings, we called the supplier directly. Their reaction confirmed our suspicions. The supplier hung off after 3 simple questions.

This story begs a few questions:

Is it unsafe to work with a trading company? Not much more than working directly with a factory.

How about a small trading company that consists of 2 guys in an apartment and that pretends to own a factory? Yes it is definitely something to avoid!!

How about a supplier that discloses nothing about their Chinese company name and shows another company’s legal documents? Prepare for the worst.

How do suppliers with a poor reputation keep their Alibaba Gold status for years and keep fooling foreign buyers? Very easy. They keep the same Chinese company name and they change the English translation. In China, the English name of a company is not official and can be changed at will. (Same thing for people’s names, by the way.) That’s why foreign buyers should check the reputation of the Chinese company name.

When should importers proceed with a background check on their suppliers? Usually it is done before issuing a first order. In case you have confidential documents (e.g. about your cool new product) to share with a new supplier, doing a background check first will also ensure you don’t send the information to a broker that will then send it to 15 manufacturers… while signing your NDA that is probably not enforceable in China.

What do you think?

Comparing Wages Across Asia to Make Sourcing Decisions

When choosing whether or not to source from a given country, many factors should be considered: proximity of materials & components suppliers, network of processing and assembly factories, infrastructure, wage levels, labor productivity, access to skilled workers, and so on.

Naturally, most companies that want to compare Asian countries tend to do so on the basis of easy-to-find numbers: minimum wage levels.

The conclusion is usually “China is not competitive; the future is in Vietnam, Bangladesh, India…”. However, they often neglect two factors:

  • The trend of those wages
  • The stability of exchange rates against the US dollar

Once you include these two parameters in the analysis, it is not clear at all why factories should leave China.

First, since China announced their 5-year plan to increase wages, other Asian countries adopted similar plans.

Minimum wage comparison

Vietnam has low wages, but for how long?

Second, not all currencies offer as little variation against the US dollar as the RMB:

Foreign Exchange Rates in Asia

Indonesia, the Philippines, and Thailand are particularly worrisome.

My conclusion is simple. Even easy-to-gather numbers don’t paint the picture of an uncompetitive China. Importers in most product categories are not going to leave China entirely anytime soon.

(Note: the numbers we used for these graphs are not perfect. For example, for China we took minimum wages in developed cities of Guangdong. But the trends shown on the graphs are correct.)

What do you think?

How to Fire Bad Managers in a Chinese Factory

In our consulting work, clients often ask us about the most frequent reason why improvement projects fail. The response is always the same: “A few managers will resist any form of change and will block any improvement initiative. If the boss doesn’t support us and help us push through the resistance, we will fail.”

All the training in the world will not convince people who are afraid to take risks. And that’s really the reason for resistance — fear of change. Fear of losing some power in the organization. Fear of no longer being indispensable.

In most cases, if the boss pushes hard and shows strong commitment to the new direction, most managers will follow. But a few will resist — either actively or passively, with the same result.

In those cases, the boss needs to prove his commitment to the improvement project by firing one or two managers. It serves as example for other less-than-enthusiastic members of staff. In China this is called “strangling the chicken in order to frighten the monkey”…

But many factory owners are reluctant to fire bad managers, even if they dislike them on a personal level. Their thought process is as follows: “If I fire him, I’ll have to pay him X months of salary and he will be happy. He will win this game.”

However, this is really not the right perspective. Here are the 2 options (I will assume the manager in question has been working for the factory for 3 years):

  • Firing him/her. Cost to the factory: 3 months of salary. Positive impact: removing an obstacle to companywide improvement (i.e. often millions of USD in extra net margin).
  • Keeping him/her. Cost to the factory: full salary on an ongoing basis, for an output of only 10-30% (since that manager is not contributing in a very positive manner).

So, how to fire those “bad apples”?

The solution is to set specific and measurable objectives, to put pressure for reaching those objectives, and to give warnings to embarrass low performers. Some of them will leave on their own. And yes, some will wait for the severance pay. It is better to push them out.

At the same time, pick open minded people among the operators, team leaders, and supervisors. Train them and coach them. Have them lead improvement projects and “grow into the role”. These will be your best managers in the long run.

What do you think?

Trends in the Furniture Industry: Away from China

Recently I had a good discussion with a buyer of a wide range of furniture (metal products, sofas, wood products…).

Ten years ago, they were sourcing 90% of their goods from China. (Maybe the fact that they had an office only in China helped, but they had trouble finding competitive prices in other countries.)

Now China’s share in their business has dropped to 50%.

For the European market they source more and more from Portugal and Eastern Europe, as well as Turkey. This “near sourcing” strategy allows them to cut lead times and to be more reactive.

It creates some new challenges for purchasers used to China sourcing. For example, European factories are not used to lab tests. They insist there is no need for those tests. But what to say when getting Reach compliance certificates (among others) is part of the big retailers’ procedure and it applies to products from all over the world?

This problem is not likely to go away. End customers in Europe can ask a store for certain certificates, so retail chains will always need these pieces of paper.

As I noted previously on this blog, one big advantage of China suppliers is their ability to make the buyers’ lives easier…

Tempered Glass Protections: the Hot New Product in China

Over the last few months, tempered glass protections for phones and tablets have become very popular. Many Chinese manufacturers are starting to make this product, which is fast replacing regular plastic protections.

There are several reasons for that:

  • Better protection for the phone screen in case of chock
  • Perfect transparency
  • Glass feeling (not plastic)
  • Oleophobic coating (avoid fingerprint, and water cannot stick to the screen), dirt protection
  • Scratch proofing with hardness of 8-9H (on the Mohs scale it means it’s not far from a diamond’s hardness)

With an average manufacturing price in China of 1 USD a piece, this is becoming the best protection for mobile phone and tablet screens.

However, like any product made in China, the quality can vary significantly. Buyers should know what to look out for.

Low cost manufacturers tend to make glass protections that are too thin (and fragile), that have no coating (finger print are visible), with a lower hardness level, or even using regular glass!

The manufacturing process

Regular tempered glass is made of 3 or 4 layers:

  • Coating
  • Tempered glass
  • Silicon layer
  • Glue layer for assembly on the phone

Applying the glue is the final step. After that, the glass cannot be stored for long. So most suppliers purchase the glass from subcontractors and only take care of the glue assembly and the packaging.

The tempered glass manufacturing process is the most important step. It requires very high temperature (650˚C) for about 3 hours, followed by very fast cooling. The time spent in the oven has an impact on the glass strength (making it scratch proof) and reduces flexibility (making the glass more fragile during assembly on the screen). Therefore process control is very important.

What to test during inspections

Three tests are extremely important.

Hardness test – If a pencil can scratch the screen, this test is failed. In fact tempered glass should also be able to pass this test with sand or a knife.

Hardness test

Breaking test – the glass is bent around a half circle. It should break and remain as one single piece. Glass that breaks down in many parts is quite dangerous for users.

Broken Tempered Glass

Dimensions — each phone model has a different dimension. A manufacturer might mix up the SKUs during packing by mistake… or in order to get rid of stock that corresponds to an old phone model!

Supplier selection

Most suppliers come from the tablet industry (they were already buying a lot of glass) and are located in Guangdong province.

Feeling the opportunity, many traders are offering this product on the internet and on trade shows. There are wide discrepancies in prices and quality levels.

It can be difficult to find a manufacturer. But, from what clients tell us, working with a manufacturer makes sense for quantities as low as 1,000 pieces.