In How To Find Your China Manufacturer, Dan discussed some of the issues involved in choosing your China manufacturer. I have been involved in this process on the ground in China for more than twenty years and I have developed some of my own standard practices for this.
The major and initial issue in choosing a Chinese manufacturer is determining whether the manufacturer is “real” or not. Chinese companies are masters of disguise. They use the Internet and sourcing websites to make themselves look much better than they are or even sometimes to appear to exist when they in fact do not. But they can also hide the reality even on site. You have to develop an efficient system for breaking through these façades to get to reality as quickly as possible.
The below is the general procedure I follow.
First, you should conduct due diligence on your potential manufacturers. With our law firm, this investigation typically consists of one of our experienced China lawyers reviewing various Chinese government databases to confirm the Chinese company from which our client is seeking to buy its products actually exists and is licensed to sell what it is proposing to sell. These investigations also seek to determine whether the Chinese company is well capitalized, is in good standing with the Chinese government regarding fines and taxes, and is not involved in lawsuits that would make us doubt its reliability/credibility. We also look at what trademarks and patents and other IP the Chinese company holds, because these can be very valuable assets and companies with valuable assets are less likely to walk away with someone else’s money than companies with few if any assets. This is also why we look at their property holdings. We also look at who owns the company because that sometimes gives us additional good insights about the company. After we search the Chinese government databases, we do an internet search on the company in Chinese and in English to try to get any additional relevant information about its overall reputation. We then compile a 4-8 page report on our findings. Because our clients are invariably in a hurry we strive to turn around these reports within 24 hours.
Second, you or your representative should visit the factory. It is shocking how much variation there is in manufacturing systems even within developed areas such as Dongguan, Guangzhou and Zhuhai. Factories making a virtually identical product can range from using primitive hand techniques from the 1930s to using state of the art German or Japanese automated equipment. You cannot believe what the factory says about its systems and you cannot believe the photos they provide. You must go to look personally.
Third, when you visit the factory you have to use your time efficiently. Your goal must be to determine whether the factory is real or a Potemkin village or movie set, composed of all surface and no substance. What every foreign buyer must realize is that any factory owner can create the illusion of being a strong business by putting on a show. The buyer arrives to see a buzzing, active factory with all assembly lines moving at full speed. As soon as the buyer leaves, the place shuts down again, waiting for the next victim to arrive.
I usually do the following to break through to reality:
- I refuse to visit the factory floor first. The Chinese side is always upset about this decision. I just make clear that I have other things I want to do first.
- The first place I visit is the raw materials warehouse. Is the warehouse full or empty? An empty warehouse is almost always a sign of a manufacturer that is struggling. If the warehouse is full, I look to see what sort of material is in the warehouse. Are the materials consistent with what the manufacturer says it produces? Are the suppliers local, national or international? Do I recognize any of the suppliers? Are the suppliers reputable?
- I next like to visit the shipping warehouse. If the export warehouse is empty, this is an obvious signal the manufacturer has no current business. If the warehouse if full, I then check whether the deliveries are for China internal markets or for export. If for export, I then check the destinations. Are they headed for countries that generally have buyers that care about product quality? I also pay close attention to the packing of the product and loading procedure. You can tell a lot about a company by the way it loads its product into containers.
- My next visit is to the finance office of the manufacturer. I just sit on a chair for about an hour and observe what is going on. If there is no activity, I know the company is dead. Is cash moving in and out of the safe? A company that relies on cash transactions is typically not part of an international sales market; its reliance on cash evidences a local player with little China national and international business.
- My next stop is the Chinese manufacturer’s sales department. Again, the first thing I observe is whether the department is busy. Are the sales people taking orders and working with purchase orders and invoices and receipts, or are they drinking tea and staring out the window? What language are they speaking? Are they talking in Chinese or English? No English means no international business. Finally, I just sit in a corner and listen. This can be very valuable. For example, in a recent factory visit I noted that 100% of the phone calls to the sales department consisted of customer complaints about late delivery, short delivery, incorrect delivery and faulty product. That told me all I needed to know about that company.
- Finally, after all this back office visiting, I am ready to look at the factory. Here, I further frustrate the factory owner by refusing to look at the work shop floor. Instead, I make clear that I want to visit the quality control department. If there is no QC department, that tells me everything. If there is a QC department, I once again just take a chair in the corner and watch. My goal is to determine what happens when a quality problem is discovered. Do the QC people go out to the factory floor to see what happened? Do they just pull out the defective item with no further action? Or do they do absolutely nothing? What happens to the defective item? Is it destroyed or is it put aside, presumably for sale in the local market. Some manufacturers will take you to their QC/RD laboratory. The same basic rules apply for this visit. Does the lab show signs of use, or it is just a fancy showroom designed to fool gullible foreigners? I recently visited such a lab at the offices of a food manufacturer. The equipment was beautiful. In fact, it was so beautiful it was obvious none of it had ever been used.
- Finally I visit the factory floor. By this time I have a pretty good idea what is going on at the factory. The factory floor visit is usually just a check on the equipment being used and whether the QC procedure is in effect.
If you use an approach like the one above, you will find you can weed out the bad factories quickly. In my experience, good factories are rare. If your initial review suggests the factory is a good one, you should take the time to move to the next stage of discussing whether you can do business with the factory. Good factories will be busy. You need to have an honest discussion about what you want to have made, in what quantity and in what time frame. On the other hand, if you reject a factory, make your departure as soon as possible. Do not fall into the trap of wasting time going to lunch or dinner with the factory people at factories that you know you will be rejecting. On the other hand, if the good factories invite you to lunch or dinner, take the time to go. Good factories are rare and you should work immediately to build a relationship.