Legal

China: The wild (business) frontier

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China has been touted as the world’s new business powerhouse, but “world’s best practice” has yet to make its way there. Here’s what to watch out for. By SIMON LLOYD.

By Simon Lloyd

We’ve all heard the horror stories about goods imported from China. In the past couple of years, worldwide recalls of Chinese-made toothpaste, tools and furniture have made for numerous headlines about faulty (and usually unsafe) manufacture.

This year, global toy marketer and owner of the Barbie brand, Mattel, was forced to recall no less than 18 million toys around the world – about half a million of them in Australia – in what has possibly been the highest-profile incident of its sort to date.

But the nightmare scenarios for business are not just confined to those making the news. Nobody knows that better than Mike O’Hagan, owner and founder of Queensland removalists MiniMovers.

O’Hagan’s company employs more than 300 staff and last year posted revenue of more than $23 million. It’s a thriving business, but narrowly avoided being damaged by what might have been a disastrous promotional exercise three years ago.

“We came up with the idea of having those stress balls that you squeeze and they bounce back into shape, but we’d have them made into the shape of little MiniMovers trucks, and thought they’d make great giveaways for kids, and a way of marketing our brand,” O’Hagan says.

The company then followed a process that O’Hagan describes as “what anyone would consider normal” — getting quotes from various possible Chinese suppliers, choosing one, then placing the order for several thousand items (O’Hagan doesn’t even like to try and remember exactly how many).

“Then the horror ride started,” he says. Having been promised his order within three months, and having received a printed sample of the “stress truck” which appeared perfect, the company was still without its order fully 12 months later.

“We got quite short [with the suppliers] and, as time went on, maybe I could even say abusive,” O’Hagan says.

When the stress trucks finally landed, well over a year after they were ordered, O’Hagan was appalled to discover that the printing on them literally smudged off on to the hands of anyone touching them.

“We had to throw the entire shipment away because we couldn’t give them to anyone to play with, let alone kids — we thought maybe there was lead in the ink,” O’Hagan says.

And perhaps the worst twist in the saga was that the way the deal was structured meant MiniMovers still had to pay for the products, with its only recourse an attempt to take legal action in China against the supplier.

O’Hagan was at least under no misconceptions about the Byzantine nature of Chinese trade practices and the law. “Of course there was no way we could do that,” O’Hagan says. “It would have taken years and cost us even more.”

O’Hagan’s tale is a parable of how not to do business when importing from China, and he made what he himself now laughingly concedes as classic mistakes.

First, he assumed he could source from China with no previous knowledge of how to do it by relying on the internet to facilitate the process. After all, e-commerce is the way of the 21st century, right? In the case of importing from China, wrong!

Having chosen his supplier from the internet, O’Hagan made the second error — assuming his delivery would arrive on time.

The third mistake was to harass the supplier in China. And the fourth was to strike a deal where payment was made before the arrival of the shipment.

O’Hagan learnt valuable lessons from the stress truck experience, and although he has not tried to repeat the exercise, he does now import large shipments of silk blankets from China to use in furniture removal, and has never had a hiccup. Why? Like many savvy SME owners importing from China, O’Hagan now works through a broker.

He happened to hear Lindy Chen speaking at a function in 2005, and almost immediately started doing business with her. Chen, an experienced businesswoman who had migrated from China to Australia in 2002, had just founded ChinaDirect Sourcing Services earlier that year, with a mission, she says, “to assist Australian companies to see China not as a threat, but as their competitive advantage”.

“Many [SMEs] don’t even know where to start when [importing from China],” Chen says. “A big mistake is not knowing that Chinese suppliers will never say ‘no’, so that a small shop will tell you they can manufacture anything, and hence the quality control is very challenging.

“Micromanagement of Chinese suppliers has to be bulletproof, to make sure the product is delivered on time, every time.”

To do that, brokers such as Chen help Australian businesses by understanding exactly how to play what can be a bewilderingly intricate game.

Chen has two golden rules for doing business in China: “Rule one is that China is so big that everything is possible. And rule two is that in China, nothing is simple.

“If you are too optimistic that everything is going very well, think of rule two. And if nothing is going well, think of rule one!” she says.

“There are other important rules,” says Chen, “such as being very patient.”

For example, Australian SMEs should never act as if their business is so important to a Chinese manufacturer that their order will always be given top priority.

Australian orders are generally minnows compared with the orders Chinese suppliers receive from companies in, say, the US or Europe – companies which might be classified as SMEs in their home markets but in Australia would be relatively large concerns.

Australians have a tendency towards impatience with suppliers — not a useful quality when dealing with the Chinese. Pestering and badgering a Chinese manufacturer that a delivery is late will often have the opposite of the desired effect.

According to Chen, a broker need not be an expert in the industry sector where a client operates — her company’s supplier database exceeds 30,000 in number and runs to products ranging from aprons and air-conditioners to bulldozers and washing machines.

Much more important is local knowledge, familiarity with Chinese social and business culture, and, naturally, the language. Chen is fluent in Mandarin and English.

“Face” is also still extremely important to the Chinese. Witness the Mattel debacle: Mattel’s vocal allegations of Chinese incompetence caused such serious loss of face for the Chinese that Mattel put its entire future relationship with China in jeopardy. Only when Mattel publicly apologised to the Chinese late last month and blamed its own design faults for the toy recalls was this redressed with the Chinese “face” restored.

Developing cultural knowledge doesn’t necessarily mean an Australian SME needs to visit China to forge customer-supplier relationships, although it can help (see below). Having a representative locally is just as useful and less costly. Chen, for example, has 13 staff in China. “They do all the detailed groundwork, making sure every single step is followed efficiently,” she says.

O’Hagan says he has learned from Chen that it is impossible to overstate the importance of being pedantic with ordering goods, and importers must always remember they are not protected as they would be with Australian goods under the Trade Practices Act.

“Specifications have to be down to the millimetre, even when ordering blankets,” O’Hagan says. “In Australia, you take it for granted that if you ask for something, people know what you’re asking for. In China you have to come up with the specification for absolutely everything, even the type of paint to use, as some of those American toymakers have been finding out,” O’Hagan says.

James Wilkinson, the proprietor of Merlo Coffee, which imports coffee paraphernalia from China, says ensuring consistence can be a problem, even with the best broker and the most stringent specifications.

Merlo Coffee imports, among other goods, thousands of branded coffee cups from China each year. Wilkinson says they are not always the same product.

“You can’t always guarantee that if you buy a cappuccino cup it’s even the same size as the last shipment and might be completely different from the one before that,” Wilkinson says. “You can get the sample in and sign it off but there’s always a small variance. And every time you re-order, you have to go through the whole process of getting a sample first.”

Hence, he says using a broking firm helps minimise the financial risk. “If you deal direct with a Chinese supplier, unless you have all the legalities sorted out then you’ll get burned. You pay [a broker] a management fee so that when you sign the product off, you’re OK if it’s not right when you get it and you’re refunded.

“In Utopia it would save on management fees if you went direct, but you do get the peace of mind when someone knows the legal systems and the manufacturers,” Wilkinson says. “There will always be things that go wrong, but we also buy stuff from Australia and Italy and things go wrong.”

Chen’s operation has well-established credentials, but in an area where regulation and oversight is vague, SMEs need to remember that cowboys in Australia operate under the guise of “agent” or “import representative”, tricking potential clients into thinking that just having Chinese language skills is enough.

Helen Baker, the commercialisation manager at the Triton Foundation, says: “Although it’s improved in the past six months, there are still a lot of people out there saying they can do the job of sourcing reliable Chinese suppliers when they can’t. They’ll deliberately mislead potential customers and charge them upfront.

“And some of them charge a huge amount of money,” Baker says.

She says that when choosing an import broker, SMEs should always demand to know the identity of every supplier. Any import broker or agent who refuses to reveal a supplier’s identity is, according to Baker, likely to be a shark

“We had a situation with a broker who charged $5000 to source a manufacturer, then came back and said it was $22 per unit for several thousand units, but wouldn’t say who the supplier was. Then the client sat in the middle till the shipment came, locked into the broker and no idea who they were actually buying from.”

The Triton Foundation is a not-for-profit Queensland Government-auspiced body that helps innovative businesses with specialised new product development advice. It also helps SMEs guard against unscrupulous practices.

“We have a twofold system [for importers],” Baker says. “One is we refer people and those are proven referrals. Second, we have a services agreement [SMEs can] use which is a contract saying all intellectual property rights are assigned back to the client. Shark operators would be in breach of that if they didn’t reveal to a client who the supplier was, and it’s a contract easy for [an SME] to present in court if something goes wrong. Anybody refusing to sign that contract is indicating they’re a shark,” Baker says.

SOME RULES OF THE CHINESE GAME

  • Patience is the supreme virtue when sourcing Chinese-manufactured goods.
  • Be pedantic with order specifications.
  • Use an import broker with good credentials and one who will tell you exactly who and where your suppliers in China actually are.
  • If you want to visit China, get your broker/adviser to escort you or arrange introductions to a local business guide to one of the twice-yearly Canton Fairs, vast import-export trade expos with more than 32,000 exhibitors (held in northern Spring and Autumn – see www.china.org.cn for details). The Fairs are a great starting point for developing business relationships.
  • Beware of agents paid commission by Chinese suppliers. Use import broking firms which charge a management fee.

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