My 3 Cents: 6 Tips for Buying from China

For many distributors, the “micro OEM” craze going on now has been a modern day gold rush. And in our current economy pennies can mean the difference between living to fight another day and having the company that you have spent your blood sweat and tears building from the ground up sink, or at best sold to the highest bidder (Just ask any of the distributors going out of business or cashing out this year. I won’t name names). These tips are for businesses who are just starting to make the move to buying direct from the Chinese manufacturer. China is a different universe and many are dumbfounded when I explain that many manufactures are making around 30 points NET on their overseas orders. Chinese manufacturing is a bloodsport and the reality is you can never know the bottom price for what your buying, but you can take these steps to get as close to it as possible…

#1 Are you dealing with them in English? Rookie mistake #1

sucker

This targets you as someone new to the game and a rube ripe for the picking. Spend 50 bucks and get a translator to talk FOR you. These factories pay a premium for bilingual sales staff and, believe me, they pass that premium off to you and then some. The prevailing opinion of many Mainland Chinese businesses is “Foreigners don’t know how much it should really cost, so charge them what you think they will pay.” and to their credit they are sometimes right, though far less so now than in the good ol’ days of pre-2008. By working through a native speaker, businesses will be less inclined try for the big margins.

PRO TIP: Many trade shows will have these kinds of people lurking about. Alternatively, you can find these kinds of people on wholesale forum boards like HKTDC and Global Sources, under “Sourcing Agents”. Avoid “Sourcing Companies”, as these can carry their own margins, often costing you more than contacting them directly.

#2 Do they know you? Ouch, big mistake #2  

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When I have advised companies looking to go into mainland China, in most cases I suggest they take it a step farther than just a translator. If you are in Mainland China for the long haul, for 500 bucks a month you can buy eyes on the ground to represent your company, semi-anonymously. Working through an intermediary that gets paid directly out of your pocket can cut the opening price significantly and shows that you are a real player. This person can also appraise the size and conditions of the factory, the competency of it’s management as well as offer insights into the situation that would be otherwise lost in cultural and lingual translation. After the groundwork has been laid and some rough price-points established, you can make formal introductions and build the groundwork for a more personal long term relationship.

PRO TIP: Whenever possible get someone who has an eye for quality. Getting someone with high quality standards and an eye for detail allows them to double as the vanguard of your quality control and saves valuable time. There is no sense in haggling out the best price with someone who can’t consistently measure up to your standards. 

#3  Relying on their quality control? That’s mistake #3

So when you have finally whittled down the price to somewhere close to bottom, the factory your dealing with is going to do everything in its power to keep those pennies. The first way they are going to do this is by letting QC slide. If a batch of 5000 pieces comes back with a small defect, believe me they are going to do whatever they can to cover that up and stick you with a truckload of defective product to protect their bottom line. For around 1500 bucks a month you can get your own foreign QC team to make sure that your getting exactly what you ordered, the way you ordered it. In fact, with the increase of trade between Brazil and Mainland China, there is a whole industry of Brazilian staffed QC teams that specialize in doing just this. If you’re planning on doing long term, big volume deals, having your own eyes in the factory is a necessity.

PRO TIP: If a QC company of full time staff are too steep for the volume you are doing, you can usually get away with getting your sourcing agent or an independent 3rd party to take detailed pictures and video, as well some some basic stress testing on site. However, whenever able, use professionals. Caveat emptor!   

Now that we have covered the most common mistakes, let’s take it up a level and talk how to REALLY get the best bang for your buck.

#4 Understand what the factory is actually doing and pay accordingly.

It’s vital when dealing with factories that you understand exactly what they are actually manufacturing. It is surprising to a lot of people that many factories are advertising whole products that they themselves don’t even make. Their part in the manufacturing process is merely a point of contact for those less in the know to buy from. Do your due diligence and make sure that if you are buying a pre-made product OEM. Check that they have the correct patents in both engineering and design. If they lack those patents, chances are they are getting that product from someone else, or worse, stealing the design from the actual patent holder which could get you into a heap of trouble.

PRO TIP: When you are sent promotional pictures of a product you want to pick up, throw the image into a reverse image search like Tineye. This will not only show you if other “manufacturers” are selling this product, it will give you a good idea of the current global saturation of the product. Your “brand new” patented Super-Power 5000 might already be sold by hundreds or thousands of other distributors. Either way, knowing this is another bullet in your gun come negotiation time! 

#5 NEVER get the manufacturer to arrange shipping

Even if you manufacturer is not marking up the shipping costs, manufacturers have literally no reason to get you the best price on shipping. Typically they will ship TNT or DHL air the day after the products are ready. Now the day after that could be 20% cheaper, however this isn’t going to factor into their thinking. Product out is money in the bank. Wash, rinse, repeat. I find arranging shipping independently translates into 20-30% savings on average and, in the current sink or swim market, those pennies count.

PRO TIP: Instead of going direct with a shipping company, hire a Mainland China forwarding company. They collect orders from multiple sources and arrange them together, buying bulk space on the plane. Provided you can correspond in Mandarin and you can be a little flexible with the landing time, a forwarding company can shave an additional 20-30% above and beyond direct shipping’s best rate.  

#6 Whenever possible, pretend to be from Mainland Chinese company

This is an uncomfortable truth. I have tested this time and time again at trade shows, in wholesale negotiations, at virtually every level. I have my sourcing agent contact the seller (even though I speak Mandarin) to enquire about pricing. Then I contact them independently. In most cases the initial price they quote me is 50-150% higher than the initial price my agent was quoted. Now after negotiation I can usually bring this down to the same final price, but there are enough times where the seller would outright refuse to even give me the same price they quoted my sourcing agent. The uncomfortable truth is there are in many cases two, or even more, price lists; one for domestic and one or more for international. This applies to supply, production, even shipping to the exact same location through the exact same forwarder. With larger or newer manufacturers this is less of a problem, but it never hurts to be prepared and make doubly sure you are getting the real price.

PRO TIP:  I know many companies that set up a small office or even a mailbox just to have a Mainland China address. In this way they maintain the image of being a domestic business. I’ve employed import/export companies to act on my behalf in the past and had shipments sent to their warehouses then forwarded to Canada or the US. It sounds like a lot of rigmarole but depending on who you are dealing with, the savings can be shocking.  

 

China has always been, and quite possible will be for the foreseeable future, a double-edged sword. It’s really up to each business to weigh the pros and cons before making the leap across the pond. With crashing MOQs and rock bottom pricing,  even the smallest business can afford to do it. Just make sure the dullest side of the sword is facing you.

My 3 Cents: Guarantees in Marketing

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I’ve worked with a lot of marketing and “strategy” companies in my time. There are 31 flavors of businesses who swear they have the answer that will take your business to the next level. And to their credit, many of them do exactly as they say. Marketing and brand strategy are actually vital pieces to the successful business puzzle. If your business doesn’t have the funds for a dedicated internal department, hiring these companies are essential, especially in the early stages before launch.

What is at issue is with the fundamental lack of understanding about what marketing does and how it works. I’ve listened to and given innumerable variations of the “what we do” speech. They have run the full range from helpful to “WTF?”. Recently, I was tasked to defend why a company should invest a significant amount of money into various brand building actions for a line that was preparing to launch. Their point of view as a manufacture was “If I give you ‘x’ amount of money, what can you guarantee me?”

It was a fair question. We were talking hundreds of thousands of dollars. As a manufacturer, they were used to money for product. You put in a dollar, you get a rubber duck. You put in 10 dollars, you get 9 rubber ducks (quality control being a tenacious mistress). I needed a way I could help them understand how marketing works. So I sat in front of my trusty laptop, I figured I could pump this out in about an hour and go grab an early lunch.

Two hours and several scrapped drafts later, the text cursor blinked on my empty page, taunting me. The short of it is that marketing works, except when it doesn’t. It’s really helpful, unless it isn’t. The only absolute truth I could muster was “Marketing and branding doesn’t always work, but if you don’t do it, you’re doomed.” That isn’t much of an optimistic answer and more than a little short of making you want to throw a house worth of money at something.

It occurred to me that in all the time I had dealt in marketing, no one had ever given me a K.I.S.S. explanation to how and why branding and marketing were essential. It has always been one of those things that you take for granted. Brand awareness, marketing, advertising, these were all assumptive ‘must-haves’ for success. People need to know what your about. People need to feel trust in your product through the polish of your marketing. You have to justify your price point with brand value. This company had been told this a million times but those aren’t ‘dollars and cents’ answer. They weren’t biting. I was getting frustrated.

We all know why, I just couldn’t put it into the way that they wanted, a way that could convince a company that had never spent a penny on marketing in its life to get behind a six-figure plan. I let the whole thing sit on the queue for a few days. I busied myself we other projects. But it kept gnawing at the back of my brain, that little text cursor blinking behind my eyes. I finally sat down in front of the indignant text cursor and started cheekily asking myself questions and answering them;

If I spend that kind of money can you GUARANTEE I will be successful?”

“Of course not.”

“Well why not?”

If I could I wouldn’t be working on this, I would be a billionaire sipping cocktails on my own personal island because I could guarantee 100% success to anyone with the money to invest.” Touche, me. If I couldn’t come up with a decent explanation I could at least vent my anger on myself through a good tongue lashing. “Then why should I invest all this money?”

The text cursor began to blink at me again, defiantly. I was reminded of my son who has a talent for asking questions that can’t be answered to his satisfaction. And then it hit me.

“What do you do when your son starts asking questions and demanding specific answers?”

“I tell him a story to explain.”

“So tell them a story, stupid.”

Me had a good point. I began to write down a story about launching a brand, talking in percentages. What follows below is exactly what I wrote to them;

I launch a brand right now in my head. I have no product or logo or anything. I have a 0% chance of success.

Well that is useless, so I decide to get some product made. I still have no marketing, press, advertising and no way for people to know about my product other than me telling people one by one how awesome I am. I now have a 1% chance of success.

I don’t like those odds so I throw some money into packaging, design, throw together my cool ideas into a fancy name and slogan. But I have no idea what customers think of my ideas. Plus I still don’t have a way of letting people know about me and maybe those who do hear about me do not understand correctly. I now have a 3% chance of success.  

Well I love Vegas, so I invest in a few trade shows. Now people are seeing my product but maybe my ideas are still not being understood correctly or not attractive to the public. I’m still living in a vacuum. I now have a 10% chance of success.

Luckily, all of this was in my head and I haven’t started yet so I decide to test all my designs and ideas before they go to market. I hire focus groups to use my product and report their feelings. I find out that there are some changes that need to be made and I make them before launch. I now have a 25% chance of success.

But I don’t stop there. I hire a company to investigate the market and they find that there is this gap in the market for mid-range priced products in my category. Less competition means a better chance of being noticed! I now have a 40% chance of success at launch.

I’m still not liking my odds. I need to do some more to hedge my investment, so I put the whole model into focus testing. I find out that my name needs changing. It’s confusing and no one gets it. I throw out some alternatives and all the test groups agree on 1 name. I also tweak my logo, company colors and slogan. My message is tight and test customers are really liking what they see. I now have a 60% chance of success.

So now I’m ready for the trade show but I still would like better odds. I decide to send all of my target distributors a “Launch package” that has examples of all the marketing support and benefits they will receive by picking up my brand. I also include samples of my products, knowing that after all the focus testing, they are going to like what they see. I include a copy of our upcoming shows and our booth locations so they can find us when they come. Now I have a 75% chance of success.

So you see, marketing is a form of RISK MANAGEMENT. The more you invest in marketing, the greater chance that your product will be successful both at and after launch. At the time of writing this I’m still waiting to see how they respond. In any event, I am happy with the answer I came up with. And should my son ever ask me “Daddy, what is the value of marketing?” I’ll have another bedtime story in my pocket for him.

My 3 Cents: The House Brand Trap

 

There is a trend going on in the electronics industry that troubles me; the increasing  pervasiveness of big box house brands. It isn’t just that it works against what I do for a living, though I am sure that plays a part in it. House brands have spread into every aisle and shelf in your average big box store.

Acquiring product and slapping your name on it isn’t anything new. Department stores have been doing it for years. But house brands have always been firmly planted in bland categories like socks and pot noodles. Now virtually any product is up for grabs. Some retailers don’t hide this fact, labelling them after themselves or simply “No name”. Then trend now has been to choose a more “brand” sounding name in an attempt to blend in more naturally with surrounding products. Best Buy even has multiple house brands (which they cheekily refer to as “Exclusive Brands”) hiding under aliases like Rocketfish, Insignia and Dynex.

“So what’s the big deal?” You might ask. Retailers are just providing additional options at competitive prices. There is no harm in that right? Well if that was the whole of what they are doing then you would be correct. However, the reality of what they are doing is a little more complex and a lot more insidious, especially when viewed in the long term.

Let’s get right down to exactly how they are hurting not just the market and branded products, but even themselves;

OEM doesn’t Innovate, They Replicate

When you go down the road of OEM, you are essentially buying second-hand, what I call “Trickle Down”, tech. Many factories who do OEM exclusively grab anything and everything that isn’t nailed down with an iron clad patent. Indeed, much of the tech may even be patented, with the actual patent holders furiously playing Whack-a-mole with these copycats. Much like what is going on the entertainment industry with piracy, the support of these kinds of factories stifles the growth of companies who do the actual innovating.

Retailers are Stacking the Deck

Big box retail chains are already INFAMOUS for their one-sided contracts. Payment clauses such as “Pay per Scan”, where the manufacturer only gets paid for items that have been purchased, as high as 20%  back-end rebates on the purchase price and numerous other draconian clauses make it a superhuman feat for a brand to be profitable. Of course none of this applies to the house brands. Even large brands like Samsung and Sony are feeling the sting as house brands quality inches closer to leading products. While no one would argue that Insignia would stand up against Sony, with a price point around 2 times that of Insignia, the house brand is going to dig into the market share of every consumer tribe save the most hard core Prosumers or videophiles. Normally I would end it here but I want to point out one VERY key detail; Sony is one of the 500 ton gorillas of the electronics jungle. What about everyone else, the up-and-coming brands, the ones trying to innovate their way into the hearts of consumers? Too bad, says the retailer, so long as they get their massive margins the house brands are here to stay. Which brings us to the last point…

The Emperor has No Clothes

Purchasers will swear up and down about the margins on house brand products. They will spout margins of 70% or more like they are gospel. Well when everything works right, they are absolutely right. From experience, however, “everything works right” is a fantasy island off the coast of Lollipop land. Launching product is a very complicated game, especially so in the fast paced world of electronics. Let’s assume that the 70% is the actual margin. Now you manufacture 20,000 pieces of a product and you sell 10,000 at full price. Because you did OEM the whole lot is final sale, you’re stuck with them sink or swim. You have 10,000 left. So you discount them, of course, probably 50% of the total margin. Now your margin is 70% on the front end and 35% on the back end. But wait, what about that last 1,000 pieces you can barely even give away? Well you probably sell those at cost, or even a loss just to be rid of them. Let’s do some basic math; the average margin on the whole lot is 52.5% IF you can sell the whole lot without ANY left overs or further reducing the sale price (which rarely happens). Now if you had purchased branded products you can call up the manufacturer and squeeze a discount, swap leftovers for new stock or any use number of other tactics to maintain your bottom line. House brands look great on paper for the bean counters but once you put the product into the wild it’s an entirely different matter.

Ultimately, however, house brands are going to continue growing so long as the house thinks their a good bet, Truth be told there may be some intrinsic benefit I am missing. I believe when used as a cheap alternative to more expensive options, house brands serve a great function picking up stragglers that may have otherwise avoided the purchase. But if retail chains start treading on the true brands’ customer base, it’s going to hurt everyone, retail included.