Finding Manufacturers in China: Building a Network the Wrong Way

On a trip to China last year, I was sitting in the airport and got into a conversation with a businessman who was heading to China for the first time.  He was the CEO of a small company here in the US that had a very unique product line and niche, and he proudly told me of his plans to show up in Shenzhen and find suppliers to make his product.  He had no trip schedule.  He had no real idea of how he was going to link up with the right supplier, let alone tour multiple suppliers to begin getting an idea of what the right supplier is.  He was just headed there.  It was as if I could hear his spurs quietly "clink" on the soft airport carpet as he swaggered by, John Wayne style.

I also often have conversations with inventors taking products to market, who refuse the idea of working through anyone--be it a middleman, trade company, service provider, consultant, to find and partner with manufacturers in China.  Why?  They have found contacts via Alibaba or some other internet trading portal.  They are already connected.  Why would they want to pay someone to be in the middle to get connected when the internet circumvented all of that. 

My esteemed colleague Dan Harris at ChinaLawBlog has raised another relevant scenario through which people get connected with Chinese suppliers in How Not to do Business in China, Part I:  Traveling With the Government.  The inspiration for the post came from Andrew Hupert on the DiligenceChina blog in Matchmaker, Matchmaker, Make Me a Profit.  Hupert explains his exasperation that government led (US government) trade missions to China with the purpose of connecting small-to-medium sized businesses with partners in China through Chinese government contacts are still occurring. 

I have lived in China for 5 years, speak reasonable Chinese and have achieved a certain familiarity with the Chinese operating environment. There’s NO WAY I would advice a client to start his China business by entering into a JV with a local Zibo company that was arranged by the local government. This is a very advanced move, and I doubt that I could pull it off. From what I understand from extremely knowledgeable associates, management teams from those smaller NE towns make Shanghai Sharks look like harmless guppies.

Harris of ChinaLawBlog adds to this with a story of his own, in which a seasoned offshore manufacturing veteran spent months narrowing down possible locations to one city.

My client met with government officials in both cities to explain its plans.  Both cities strongly urged my client to partner with a particular company in their respective city that they touted as by far the best in the field.  My client met with both touted companies.  In conducting its due diligence on the various potential partners in both cities, it concluded these were by far the worst candidates.  Both of these companies were at least five years behind the other companies in terms of technology and the buyers know it.

Hupert, a seasoned China businessman, and Harris, a lawyer with considerable China experience, give it to us pretty straight: going through chinese government officials to find partners in China is going to be trouble.  There are going to be some times which working with the government is a good move, particularly if you are entering the market there.  But I found out that even this is dubious at a recent seminar on entrepreneurship and China  at Stanford University.  A panel of chinese entrepreneurs were asked to give one piece of advice to the audience in terms of conducting affairs in China.  Out of the five, two men were Chinese nationals and had been doing business there for at least a decade.  One said "go through the government".  The other said, "stay away from the government".  How's that for consistency?

My own two cents..?  One of the biggest factors in my own success in doing business in China has been getting connected through the right network of people.  As Hupert and Harris point out, local US government is not really equipped to provide this and going through the Chinese government, well... 

Trading portals on the internet are even more sketchy.  The bottomline is, you have no idea who you're talking to and they probably have no idea what you're really trying to say.  One of the first sourcing companies I worked with was another example of this--not the greatest network of suppliers and people.  If birds of a feather flock together, so do suppliers and people with similar business styles.  My own advice?  Find a China connection here, who does the kind of business you want to be dealing with in general.  Work on getting connected to the correct individual on this side--whoever they are and however you can find them.  If they are upstanding individuals and have been doing business successfully in China for years, chances are they are going to have found the right kind of network there.  You'll be starting out over there at a point where, if you used one of the aforementioned methods instead, it might take you 2 years of time, mistakes, bad partners, and searching to get to.  Even John Wayne could tip his hat to that.

 

 

Comments

[China Law Blog]

My law firm gets calls nearly every week from someone who paid a supplier $10,000 to $200,000 and then got nothing. Nine out of ten times, they have found the supplier on Alibaba. They nearly always say they thought being on Alibaba was some sort of guarantee. I always ask why they thought that and they always answer with silence.

[Audall]

ChinaLawBlog,
Thanks for the anecdote. Alibaba is amazing that it connects people in two different countries. But the connection part is only the first tiny step in the game. I wonder if these same people who call your law firm would be willing to send the same amounts of money to someone in Canada, or another state on the other side of the US for that matter, simply by finding them on a website, talking to them through email, and hearing titillating stories of low costs and high quality? It's not just about networking, it's about the quality of the network as well. If you think of Alibaba in terms of a business/trade social networking site, and compare it to other social networking sites out there such as LinkedIn, MySpace, or others, it's easy to see that just like other online networks that aren't regulated and protected, they can lose quality easily. If I contact someone on LinkedIn and they have 500+ connections, how well can they really know all 500 people? Alibaba gives you access to over a million? Alibaba's ability to provide access will always be checked by the degrading quality of the network.

[Ken Tolbert]

Some good comments from a panel discussion on China at a Kellogg manufacturing conference last weekend.

http://www.evolvingexcellence.com/blog/2007/05/littered_with_t.html

[Etienne C.]

It always amazes me to see how some people are becoming very naive when it comes to doing business with China. With all the media coverage and all those seminars and conferences, you would thing people would know better. It seems that because the Chinese suppliers or partners are difficult to communicate with, it is suddenly no longer needed to exercise common sense, without mentioning due dilligence.

Regarding online supplier databases like alibaba, my company uses them very often for supplier identification, but even for that they have clear limitation. On this, see http://www.procurasia.com/?sty=102.

[audall]

Etienne,
Interesting thoughts and story on using websites like Alibaba. As I mentioned in a comment on ChinaLawBlog's site, online networking sites are a catalyst only. They provide the connection but do nothing or very little to provide for the quality of the connection. As the network grows, the quality will naturally diminish. Making that initial connection with a supplier is only the first step in a process that has numerous more. I do think it's pretty amazing that we have technology that can allow for people across borders and oceans to connect like this, but it doesn't supplant all the other things in the way of general business due diligence that need to be done.

[lisoosh]

So here is a newbie question - where does one start finding a China connection here?
I am starting a company which deals in items made of basketware in various materials. I have connections in the UK who currently source from China and are happy to sell me their product - but they are adding on a hefty markup that will seriously hamper my business before it gets off the ground.
How can I make the right connections in China in order to source directly from the manufacturers and cut out the middleman? Or even how do I find an agent who can work for me on that end for a reasonable commision?
Thanks.

[audall]

Lisoosh,
That is the mother of all questions because it is a good one, but people rarely explore it thoroughly. It is a matter of tradeoffs--risk and reward. There is much more to sourcing and supply chains than a price. That is the mistake so many companies make. They don't factor in the risk aspect. Why? There are several reasons. They don't know what the risks are. They don't know how to measure them. And, it's more fun to think about how much money you'll save rather than everything that could go wrong. The markup those companies are adding on to the product cost--a good portion of that money you will spend anyways. You will need to spend money to possibly go there to meet the vendor. You will need to spend money for quality control. You may need to spend money on packaging and shipping. And you may need to spend a lot of money on the mistakes you might make such as getting scammed, getting bad quality product, spending more time on the process. Those mistakes could be severe and sink your business entirely. Big companies can go direct and eat those mistakes with deep pockets. Small business...whole different question.

And the rest of the margin, that's what you are paying for their expertise so the crippling mistakes don't happen. And think of the opportunity cost of your time. Instead of trying to learn and fumble through the offshore manufacturing and supply chain question, you could be spending that time on driving your sales, marketing, and other aspects of your business. Maybe if you get product from China through a middleman successfully for a few years, you can think about asking them to add more value or trying to source some things on your own. But truthfully, we've had so many clients try to go off on their own and go direct, and come back to us because they learned very fast how challenging it can be.

At this stage in the game, I think your best bet is trying to find someone you can trust, who can get you going over there, and can do it for a price that you can handle. And you can focus on the other aspect of your business that is typically also very challenging: selling your product. Hope that helps. Thanks for the question and feel free to ask more.

[lisoosh]

audall - Thanks for the advice. All very good points.
As my expertise is in the sales and marketing aspect, I have already lined up customers and orders. I had initially planned on merely buying from the UK companies, at least early on and using them to springboard a separate product line. Unfortunately many wanted to tie me in with complex contracts so I have had to come to a much looser and flexible agreement with them. As a result, while it is a good solution in the short term, it would mean my promoting their products and building a customer base for them with little upside outside of immediate profits (they are not particularly big companies and don't have the means to break into this market on their own) so there is some urgency in reducing my reliance on them.

I think I will start with their products - as a means to solidifying my customer base and having a company income to use on R&D. However I would like to keep ahead of the game and already have an eye on outsourcing more US focused designs.

I know that there are companies which focus on sourcing for US companies - however these are not expensive items or ones which require excessive engineering. They are based on hand crafted basketware - samples are simple to produce and initial orders can be kept very small - so these are not multi million dollar deals or even the tens of thousands which would justify such a large expense. Of course, if I am wildly successful and need to ensure a high volume of quality products that is another issue, but one further down the line.
I should note that I am also working with mentors at SCORE (retired executives) and am looking through them for someone with the right kind of expertise who can point me in the right direction. So I might get the help I need from that arena.

So here is another question. It is fairly straightforward to find companies who say they can provide what I need, be it buying assistance or production. I already had an interesting experience with one toe-in-the-water contact in China who said that he can provide me with product - he even sent pictures of product samples which my UK sources had ordered and not yet received - but of course I have no idea if I am communicating with a warehouse worker or janitor with a digital camera so I am not about to send any money.

Outside of asking companies and contacts for references in the US, how can I verify that they are who they say they are?
I know I am asking for tools of the trade information for free, but hiring a US company makes no sense at this stage.

[lisoosh]

I should point out that it was not my initial intention to source myself - but in checking out the basics in sourcing to ensure the UK prices were fair it seems that they are attaching a 4-600% markup. A bit painful for wholesale. Even assuming the Chinese companies are lowballing significantly, something is off.

[audall]

Lisoosh,
There might be a few other superficial clues you can look at to see if someone overseas is legit. Do they have a website? If they send you product samples, do they have letterhead with a company logo and address which matches what they have displayed elsewhere. But still, none of those things will give you a real indication of whether they are capable of doing what you need if you send money over. The bottomline is, you have to either have someone on the ground there you trust check them out, or go visit the vendor yourself. I don't think there is any magic formula around that. Otherwise, you have to calculate your risks and perhaps take a chance. In terms of the markups that others are putting on the goods, it's tough to say what is appropriate without knowing more about the industry, product, etc. If you are interested in more specific input on those things, feel free to contact me at my email address with more questions.