Everything You Need to Know About Sourcing Products From China

International Manufacturing Lawyers

David Dayton over at the Silk Road International Blog has a great post on sourcing from China, entitled, “Smart Steps for Effective Sourcing in Tough Economic Times.” It is an outline of a presentation he gives at global sourcing shows.

The highlights:

1. Chinese factories have been stiffed for payments. “Don’t go into China with the attitude that ‘hey, they should trust me, I’m from the developed country, I’m the one that doesn’t trust you.’ The roles have been reversed. Dramatically.”

2. China’s economy has led to consolidation. “Lots of smaller, borderline quality factories have gone out of business.” I would add that lots of smaller, borderline factories are still in business and you have to be very careful not to do hook up with one of these.

3. “Money from the banks is mostly pushed through local governments and their connections. The money is targeted to specific industries/areas (e.g. Western China and green and higher tech products).” This is so true. Greentech and hightech in China is going great guns right now and there are all kinds of subsidies offered in these industries, both for domestic and foreign companies

David sees the following opportunities (as do I):

1. Factories that are still in business have employees and need to pay for them so they will be aggressively looking for new orders.”

2. Well-connected factories have access to cash.

3. Factories and equipment are for sale/rent at rock bottom prices.

4. There are lots of opportunities for joint ventures.

5. Factories are willing to do projects with creative terms—so long as they have some financial guarantees.

6. Factories are willing to do smaller production runs than in the past.

I have seen all of the above and I have also seen something else David does not mention and that is declining prices both for new  product purchases and even on existing contracts. Our international manufacturing lawyers  just worked on a renegotiated contract that had another eight months to run on it. Our client signed up for another year and by doing so received a double digit price reduction on the products it was buying.

Oh, and on more thing. My only complaint is that David leaves his most important comment for last: “Get your lawyers involved early (just to be safe).” Amen.

What are you seeing out there?

4 responses to “Everything You Need to Know About Sourcing Products From China”

  1. All very true. I’d like to amplify one point made here, that “well connected factories have access to cash”.
    Very true, but in addition many of these factories (basically SOE’s by any other name) have accepted very optimistic revenue targets as quid-pro-quo for this cash. The preferred way of pumping up revenue quickly, I’m told, is not chasing orders, however, but acquisition of existing companies.

  2. I saved the best for last so that people were more likely to remember it!
    I’m seeing cash spent in three ways. First, it’s being wasted (stocks, cars, personal items). This, I think is the majority.
    Second, it’s being used to buy up other equipment. This is not a bad investment if the sales department can fill up the new capacity later when the economy recovers. I know the economy will return, but not sure it’ll be to the point that orders will fill significantly larger capacity. We’ll see. At the very least it’s years out.
    Third, used to lure orders in with terms and really grow business by adding new customers. The third is the least likely, but I think most profitable of the three options.
    Also, this outline will be an article on China Success Stories later this month.

  3. It will be interesting what comes out of factories being more willing to do smaller production runs.
    I suspect it might bring fresh players into the mix.
    Interesting times.

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