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business in China

By Charlotte Zhanghaixia Westfall and Richard N. Frasch

China’s impact on American business has always been the source of strong emotions among Americans. Bret Harte (1836-1902), a famous American author and poet who wrote about early pioneering days in California, once stated, “We are ruined by Chinese cheap labor.” Nevertheless, today’s successful American entrepreneurs have learned not to compete with China but rather to make money working with it. Consequently, a more modern take on China may be seen in a recently popular song by Kelly Clarkson, “What Doesn’t Kill You Makes You Stronger.” China today is full of incredible business opportunities for American entrepreneurs and business owners, but like any country in the West, it is not a perfect paradise. You must accept the risks of sourcing goods in China while embracing the opportunities that come with it. The good news is that you can manage and reduce these risks with a methodical approach to sourcing in China.

This article is second in a series exploring how U.S. companies can source goods in China, and it discusses eight common mistakes U.S. businesses often make, with a focus on small businesses. (The first article discussed eight basics you should know when sourcing in China. The final article in this series will discuss how larger companies can establish a physical presence when sourcing in China.)

Here are the eight common mistakes U.S. companies should avoid when sourcing in China:

1. Lack of a Well-Defined Strategy

When sourcing goods in China, you must have a well-defined sourcing strategy or “road map,” including locating the best supplier for your particular needs. Too few small companies do the proper due diligence when shopping for goods in China. As a result, they may not get the best deal in terms of price, quality, functionality, or timely delivery.

To avoid this mistake, you must have a methodical sourcing strategy. Successful sourcing strategies typically include:

  • Identifying suppliers through the Internet, social media, and trade shows
  • Verifying and vetting suppliers
  • Insuring payment and managing quality control
  • Deciding which sourcing method (direct purchase, commission-based sourcing agent, using a sourcing provider or a trading company) best fits your needs

2. No Well-Defined Standards for Suppliers

Before searching for suppliers, it is important to have defined standards. Well-defined standards can determine whether sourcing efforts are successful. For example, a company might initially purchase a small order of electronic parts from a Chinese supplier and be happy with the product quality only to learn that delivery on larger follow-up orders would be delayed due to the supplier’s limited production capacity. If the company needs the parts delivered on time to capitalize on the holiday season sales rush, it runs the risk of losing profits, all because it did not eliminate potential suppliers with limited production capacity.

Once supplier expectations are identified, only suppliers that can meet those standards need to be contacted, which can keep you focused, save a lot of headaches, and avoid disputes down the road.

The following is a checklist to consider when identifying supplier standards:

  • Geographic location. China is a big country. Does it matter where the supplier is located in China? Does it have to be in or near a big city? Would it matter if it is located in a smaller city or even in a rural area?
  • Production capacity. You need to figure out what your company’s needs are at present and in the near future. Then, you can choose the right size of a supplier. If the supplier is too small, it may not be able to ship your products on time. If the supplier is too big, there is a risk of not getting enough attention.
  • Quality standards. What is the quality standard you expect from a supplier? What is your expectation of the quality control and verification process from a supplier?
  • Price range. What is your price range for the products you are sourcing? Create a list of suppliers to compare, then cross out the ones whose prices are too high.
  • Technology and communication capabilities. What is your tolerance level for a supplier’s lack of technology and communication capabilities? The reality is that many good Chinese suppliers may not be equipped with the most advanced technology to assist with logistics and communication. You have to run a risk-benefit analysis, balancing a supplier’s track record and reputation against its technology and communication capabilities..

3. Inadequate Due Diligence Performed on Suppliers

Due diligence is perhaps the most important step when sourcing in China, yet many companies fail to perform adequate due diligence and end up being scammed. Some fail to perform due diligence at all!

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About Charlotte Zhanghaixia Westfall

Charlotte is a corporate and securities attorney based in San Francisco. She is a native of China with both U.S. and Chinese legal training, who advises U.S. and Chinese clients on cross-border business strategies and related legal issues. Her specialties are Mergers & Acquisitions, Securities Regulation, and Cross-Border U.S.-China Transactions. Charlotte strongly believes in collaboration and leveraging her broad network of contacts to help clients achieve their business goals.

  • Roger Duyong

    Informative, not only for the US but also the rest of the world.