A Better Route to China for Small Business

You may need Chinese sourcing to cut costs or to serve your customers—here’s how

Many small business owners dream about moving some of their manufacturing to China. Imagine paying toolmakers $4 an hour instead of $25. Imagine how competitively you could price your product.

Then consider the hurdles. How are you going to locate the right supplier from among hundreds of Chinese manufacturers? How will you avoid getting ripped off by unscrupulous ones? Will you be able to tell which potential manufacturing partners are independent enterprises and which are government-owned (and usually not capable of the highest-quality output)? How will you grapple with the language and cultural differences that make doing business in China so challenging?

Given this laundry list, many small business owners give up. Others, however, turn to consultants who specialize in Chinese outsourcing and offer one-stop shopping.

Warning: Whether you are trying to make your own connections or looking for a consultant to handle the heavy lifting, be on your guard: These woods are full of charlatans. You may have been on the receiving end of email campaigns from hustlers claiming to have Chinese goods or manufacturing capacity. Beware. Siva Yam, president  of the U.S. China Chamber of Commerce (www.uscc.org or 312-368-9911), says the Chamber has received numerous reports of scams against U.S. businesses, mostly via the Internet. The chamber does not track consultants, because there are so many of them. But it helps identify legitimate factories and serves as an intermediary, Yam says.
 
 Finding a good China consultant can be a challenge in itself—the major consulting companies advise major multinationals on these issues and charge huge fees. They are not set up to help smaller players. The best way to find a reliable consultant is to ask other business owners for references. Also, talk to customers who are doing business in China.
 
Parallel Systems Corp., a Georgetown, Mass.-based manufacturer of patient data printers is one company that has had success using a China consultant. In 2005, when Parallel decided that it could undercut its competition by building some of its models in China, it went looking for help, says Gordon Lassar, vice president of marketing.  Lassar knew of Nengli Manufacturing Logistics (Nengli means "ability" in Chinese), based in Beverly, Mass., a consultant specializing in overseas outsourcing, because Lassar had worked with its president, Mark Lewis, when Lewis was in charge of overseas manufacturing at Sensitech Inc., which produces temperature-data monitors.

Lewis, who speaks Chinese and visits factories in China four times a year, agreed to identify a suitable factory, negotiate the contract, handle the logistics, oversee the account, and deal with the Chinese executives. Nine months later, printers from JDI in Dongquan, China began arriving at Parallel’s plant.  Lassar says he’s pleased with the outcome: “The people at the factory will do anything to help you make your product successful.  They don’t care what the volume is; they aim to please.”

Before committing to a China manufacturing strategy, Lewis says the entrepreneur should ask several questions:  Are my volumes large enough to warrant taking manufacturing overseas?  What is my likely return on investment?  Will confidentiality agreements protect my intellectual property and patents? Will producing overseas still make sense when adding $3,500 ($2,500 for shipping and $1,000 in customs fees) for a 200-unit order—or $18 to the cost of each unit?  

Also, can you afford to invest more in inventory to accommodate your longer supply lines? Since your product is now arriving by container ship from the other side of the world, count on lead times of a month. (Air freight can cut the time to three days—but at four times the price.)  Also, if  your container is held up by U.S. Customs, it can add a month.  “If your company has a spike in sales, and your shipments are delayed and you’re not prepared, you can have serious inventory issues,” Lewis points out.

Business owners must also consider the consultant’s fee. Lewis charges a minimum of $2,000 for a very small job—something very straightforward, not very technical, and where he can easily identify a factory--and upwards of $15,000 to $20,000 for higher-volume and more complex work. In addition, he collects $1,000 to $2,000 monthly to oversee manufacturing. In some deals, Nengli has also invested in client companies; Lewis negotiates for a 5% to 20% stake, in exchange for reduced fees.

What a reputable consultant may tell you is that you’re not really a candidate for Chinese manufacturing. Products that are custom built or require sophisticated knowledge may be better off in the U.S. because of the highly skilled labor pool.  A reputable consultant may also tell you (tactfully, perhaps) that offshoring is not the solution to your problem: If you have an aging product that’s losing market share, a lower price may not save you. "Pricing is only the tip of the iceberg,” says Andy Birol who runs Birol Growth Consulting in Solon, Ohio. Briol says he has dissuaded several OK? potential clients from betting on outsourcing to turn a losing product into a winner.

 It is important to remember that hiring a consultant will not eliminate snags. When Parallel saw its first  first shipment from China, Lassar noticed cosmetic blemishes. When he communicated with his liaison at JDI factory in Dongquan, China, the liaison downplayed the faulty work.

“In the U.S. these issues would have been caught early on,” Lassar says.  But he also adds that Chinese factories are extremely accommodating, flexible and work long hours to rectify problems once they understand them. To limit quality control problems, Lassar recommends that the Chinese factory produce a prototype to ensure quality control before the actual production start.

 Before production began, Lassar visited the JDI factory in Dongquan, a two-hour train ride from Hong Kong, with Lewis. And during preproduction, Lassar reviewed the manufacturing plans and made recommendations. He says that the personal visit and the relationship-building helped smooth over communications issues later.  

For many U.S.-based businesses, finding a Chinese supplier is not about cutting costs. Increasingly, it is a strategic necessity, because so many other U.S.-based businesses are there.

Take, for example, Ashtabula Rubber Co. Nick Jammal, president of Ashtabula, based in Ashtabula, Ohio, decided that his company needed to manufacture some product lines in China because several of his customers in automotive, heating and other industries had closed factories in the U.S. and moved manufacturing to China. Having production capacity in China would help him land more sales, he figured.

Jammal, who turned to Birol Growth Consulting for advice, considered three approaches: Start a factory in China, acquire one, or form a joint venture with an existing factory. Jammal made several trips to China, visited 30 factories, and decided on a joint venture in 2005 with a factory (for competitive reasons he won’t name it) that had a solid track record. Jammal says the venture will open new markets and enable Ashtabula to sell its product to Chinese companies and European ones as well.

As more manufacturing moves to China, many small businesses will follow Ashtabula’s route. Being in China, says Briol, is a “strategic” business decision that transcends dollar and cents.