Chinese Suppliers: Search & Reliability Analysis

By Biao Wang (MBA)

Camellia Universal Limited8 April 2011

Lomonosov Moscow State University, Moscow, Russia

Camellia Universal Limited 2011

Introduction

China overtook the US as world's biggest manufacturing nation in March 2011.

In 2010, the average yearly income in Russia was $8,640 US dollars and in China it was $3,700 US dollars.

Russian companies can still take advantage of these lower costs in China for the next 10 years or so.

The recommended approach strategy for foreign companies to find suitable Chinese suppliers is ‘go direct’ or ‘go through partners or agencies’.

What is Go Direct

‘Go Direct’ means that you indentify, communicate and do business directly with your Chinese suppliers.

Before ‘Go Direct’

Do your own homework and investigate the supplier’s background and situation.

Learn some Chinese business culture.

Research the right target price.

Maybe you need to visit China to see for yourself.

During ‘Go Direct’

Make sure everything is covered in the sales contract, including the price, lead time and the quality that you are looking for. It is also important to sign the confidential agreement in order to protect your concept, design and intellectual property rights.

In order to receive good quality goods, the quality control is vital.

After ‘Go Direct’

If the supplier is identified, it is essential to contact and visit the supplier regularly in order to facilitate the business relationship. It is also important to visit and see the supplier in China before placing big orders.

The advantage of ‘Go Direct’ Direct control.

Lower cost.

Monitor the supplier all the time.

Keep track the production.

The Disadvantage of ‘Go Direct’ A lot of risks are involved.

It takes time to build a relationship with the suppliers and learn business culture.

The communication difficulty because of the different languages, the distance.

It is difficult to negotiate a deal with a supplier in China several thousands miles away without legal representation.

Sometimes the operation and transaction is slower.

What is ‘Go Through Partners or Agencies’

‘Go Through Partners or Agencies’ means that you use and go through intermediaries to indentify, communicate and do business indirectly with your Chinese suppliers.

Before ‘Go Through Partners or Agencies’

You need to be sure that you have selected the right Chinese partner or agency.

The Chinese business consultancy can be identified through the Russian embassy in China, Russia-China Friendship Association and Chinese embassy in Russia.

You also may contact reputable China business consultancy organisations in the EU through internet and write and ask them any questions that you concern about the issue of Chinese suppliers.

During ‘Go Through Partners or Agencies’ It is important to go and meet them to start to build the

business relationship.

You will need to discuss and make sure the service charge or commission.

You will also need to make sure that your partner or agency will track the product and report everything to you.

It is still a good idea to sign a confidential agreement if necessary.

The partner or agency shall be capable to provide a feasibility study for you.

After ‘Go Through Partners or Agencies’

It is essential to contact and visit the partner or agency regularly in order to facilitate the business relationship.

The Advantage of ‘Go Through Partners or Agencies’

Reduce the risk and misunderstanding.

Normally the speed is faster.

Many of the cultural difficulty can be overcome with minimum frustration.

The Disadvantage of ‘Go Through Partners or Agencies’

Lose some direct control.

The cost maybe a little bit higher.

A lot of research need to be done in order to find the right partner or agency to work with.

Reply on the partner and agent too much.

The Reliability & Quality Control There is a Chinese saying that ‘上有政策，下有对策’ .

It means for every policy up there, there is a way around it. There is a healthy disrespect for rules that is becoming common in the culture.

It is important to make clear to your supplier or agency what is important and what is key.

Make sure that they will understand that if they take short cuts, they will lose the business.

It is important to make it clear about the quality that you are looking for in both a verbal and written contract.

It is also advisable to track the production and monitor the factory.

Business Scams in China

Scammers exist all over the world, and China is no exception.

The fake companies in China normally have very attractive websites and all the products look real, with high quality and very low prices.

Some fake companies in China go further.

Case study - An Australian furniture company.

What Lesson Can Be Learnt? The Australian company should check the company with

China Business Consultancy organisations, Embassy or local government in China.

Someone form the Australian company should go to China to visit the supplier’s office and factory.

The Australian furniture company should find a suitable Chinese partner or agency in order to minimise the risk and avoid such scams.

The Australian company should know that payment term should be 30% initial deposit of the sales received, 70% goods on delivery.

Ethical Issues

In order to make your business stable and protect the welfare of workers in China, it is vital to make sure there are no ethical problems in the Chinese factories that you work with.

Most foreign companies are looking for low labour costs in order to be competitive, but are keen to avoid unethical use of workers in China.

You must take these issues very seriously, and take great care to recommend only organisations with high ethical standards.

Conclusion & Recommendation

We have identified two strategies about searching and identifying ideal Chinese suppliers. They are ‘Go Direct’ and ‘Go Through Partners or Agencies’.

Whichever strategy you are going to use, it is essential to build relationship with your Chinese business partners, agencies or suppliers.

In order to identity a long term stable supplier, it is recommended to check the ethical standard of the suppliers.

Different companies have different situations and plans. You can decide which strategy or combined strategy is suitable for you to adopt in your business.

Questions & Answer Time