Trend Watch - China Exports: Risky Business

April 15, 2008
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U.S. retailers and manufacturers need to weigh the pros and cons carefully before doing business with China.

Many retailers and manufacturers have turned to China in search of a bargain on private label merchandise and/or ingredients for such products. But doing so can be risky business.

In 2007, Chinese exporters of animal ingredients deliberately laced their products with melamine. The result? Scores of U.S. pets became ill or even died after ingesting tainted food products. The ingredient turned up in both private label and national brand offerings across the country.

That same year, millions of toys exported from China were recalled because they were contaminated with lead-based paint or fraught with other safety problems. Moreover, China consistently tops the FDA’s list of food imports rejected at U.S. ports.

Of course, China manufacturers also bring to the table significant cost savings on ingredients, materials and finished products - an attractive proposition for bargain-seeking U.S. private label retailers and manufacturers.

Go or No-Go?

Before you hop that plane to China - or close the door permanently to a Chinese manufacturing partnership - it’s important to understand the real challenges related to today’s U.S.-China trade relationships. U.S. companies need to be able to separate the hype from reality to make the most appropriate decision for their particular needs.

“The media coverage of various Chinese product recalls has cast a dark shadow on companies outsourcing overseas,” says Momo Bi, a sourcing specialist for US China Business Solutions Inc., Washington, D.C. “The recalled products are actually a very small percentage of Chinese exports because China exports such an enormous amount of goods.”

The riskiest element companies do face when outsourcing manufacturing to China, Bi says, is the fact that some Chinese manufacturers are not aware of the international standards of safety. Another potential hurdle can be found in the cultural differences between the United States and China.

“The Chinese culture is more reserved and less straightforward than Western culture,” Bi maintains.

Locating the right partner and supply connection in China is hard to do, notes Gavin Kahn, president of China Sourcing Ltd., Philadelphia, but companies that manage to achieve such a match can find the relationship rewarding.

“Maybe five out of 100 [will be] a good situation,” he says. “So it’s very easy to end up in the wrong situation.”

Although cost savings often draw U.S. companies to China, the historically monstrous savings are beginning to drop, Kahn adds, thanks to the country’s rising energy, transportation and raw material costs, as well as its increasing labor rates.

“In the past six months, costs in China have increased more than they have probably in the [previous] 20 years,” he maintains. “I feel that trend is going to continue. One has to work out the base point as the reference point ... but I think the days when China products are 50 percent lower than the world market price are going to be fewer and fewer.”

The Chinese also have begun to address a major pollution problem, Kahn says, probably in preparation to host the Olympic Games. Although necessary, the effort also is adding to manufacturing costs in terms of compliance measures.

China's size is yet another issue.

“It’s a huge country, and there are so many factories,” says Nancy Chang, vice president for Torrance, Calif.-based Golden Beach Inc. “As an importer, we have to be very selective in how we qualify a factory to begin with.”

Still, China is making progress in the product safety and quality control arena, Chang notes. On the food side, the country has the CIQ (formally, the Entry-Exit Inspection and Quarantine of the People’s Republic of China), which takes an active role in enforcing the quality standards for food manufacturers. Each regional CIQ office has complete authority to inspect factories and release shipments for export.

“These were loosely controlled in the past,” Chang admits. “This is a very specific measure. We’ve actually seen this [enforced] because some of our shipment would be delayed for inspection.”

But despite the stepped-up efforts of the Chinese government, sub-par - and even dangerous - products still can slip through the cracks.

“If anyone thinks that they can visit China from the U.S. a few, four times a year and buy a million widgets in a good supply-chain situation, they’re bluffing themselves,” Kahn stresses. “I think that what one has to keep in mind is that 10 years ago, 90 percent of the businesses in China were government-owned. They were run by people who were put there by political appointment and knew nothing about making tires or candy or whatever, yet they were put in charge of the factory.

“So there’s a very big learning curve for them, and they tend to be opportunistic,” he adds. “Loyalties, long-term business relationships - they pay lip-service to that, but if they can earn an extra buck today, that’s really their driving force.”

Be Prepared

U.S. companies looking to do business with China, therefore, would be wise to adopt the famous Boy Scout motto: “Be Prepared.” Armed with the right information and resources, they will be able to reap financial and other rewards from relationships with respectable Chinese manufacturers.

Even though the Chinese currency is growing and the profit margin for certain products has shrunk, Chinese manufacturers still provide a wide range of low-cost products made by highly skilled laborers, Bi says. The best bargains to be found are for labor-intensive products that are mass-produced.

To ensure the highest quality and safety of the private label end products, Bi recommends that companies thoroughly research the industry to identify highly qualified manufacturers. An expert who’s bilingual in English and Chinese is critical to this effort and should be involved from the very beginning.

After the deal is authorized, the U.S. buyer should put someone in place to monitor the production on a continuous basis, Bi adds.

“Buyers should not be less involved after the purchase order has been issued,” she stresses. “Strict quality control is required throughout the production phase in order to ensure quality.”

Chang agrees. At the very least, she says, the company’s prep work should begin with the establishment of a team or an office in China. Golden Beach set up such an office long before all the safety and quality issues became headline news.

“The main purpose is quality control [with] a focus on quality inspections,” she emphasizes. “We have specially trained and qualified our QC staff going around to the factory to validate the factory.”

Golden Beach requires its Chinese manufacturers to be HACCP-compliant, Chang adds, and its QC staff checks quality assurance reports, performs pre-shipment inspections and requires all the shipments to apply for a CIQ-issued quality certificate.

“They have to submit a sample before shipment to CIQ to do physical tests and chemical analysis,” she says.

Companies without the resources or knowledge to set up operations in China should probably consider contracting a sourcing agent. Such operations are well-versed in Chinese manufacturing’s shortcomings and quirks - and are able to weed out the disreputable and hone in on the respectable, quality-focused partners.

“We go to factories,” says Kahn, a chemical engineer who’s also able to provide product-related technical backup and support. “We act as a sourcing agent for a U.S. country rather than a sales agent.”

As a company, China Sourcing covers 75 to 80 percent of all products that can be manufactured in China, Kahn stresses, from household to food to high-tech.

US China Business Solutions also acts as a sourcing agent, Bi says, bringing buyers more than 200 years of combined experience in international business, including factory identification and qualification, contract negotiation and quality assurance management.

“Our employees in both the United States and China understand U.S. international trade standards and laws, culture differences and outsource risk management,” she stresses.

Saving Face

Even those U.S. buyers who manage to contract with reputable Chinese manufacturers that produce safe, high-quality products are not home free. Appearances count, too.

These days, U.S. consumers are not exactly clamoring for goods bearing the “Made in China” banner, and some retailers - including Monrovia, Calif.-based Trader Joe’s - have even taken steps to phase out certain China-made products.

Ultimately, the decision to outsource any aspect to China is a complicated one - and one that should not be based on cost savings alone.

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