You’d think US imports were soaring

On Oct. 13, Maine International Trade Center (MITC) invited me to deliver the keynote address at their annual Import Forum for Maine small and medium-size businesses. MITC shared state and federal trade import data with me to prepare a macro-economic backdrop to importing goods to Maine. What I saw was not surprising to me, but might surprise anyone following US political media.

One of the more important takeaways from the US trade data is that import trends closely match economic trends as a whole. Below you can see (on separate scales for ease of comparison) how closely the trends for total US economic output (shown in green) and volume of imports (shown in blue) match one another.

In Maine, import trends also mirror economic growth, but in Maine this is mainly due to the state’s outsized energy industry. Since my audience and customers are non-energy businesses, I stripped away energy imports and had a look at import trends for non-energy businesses only to Maine. What you can see in the chart below is that for most businesses, import volumes (shown in orange) are growing faster (actually, shrinking less fast) than the economy as a whole (shown in blue).

This means that Maine’s non-energy businesses are importing more of their total economic output over time so, in a sense, they are importing “more” than they used to.

This is surprising, if not particularly exciting. If you watch TV or read the news, you’d expect to see data showing exponential growth in imports or great swings in the proportion of economic output that is coming from overseas.* What we actually see, in Maine anyway, is the somewhat more mundane reality that businesses that make and sell stuff are importing slightly more of what they make over time.

But is this trend about to change soon?

My prediction is no. The steady increase in global trade generally, shown above specifically, for imports to the US and ME, is facilitated in large part by free trade agreements that the United States cannot renegotiate or abandon by presidential executive action alone. So even if the current or future president tried to remove or implement further barriers to imports, it’s unlikely that congress would agree. That means that short-term changes to US policy and law either in opposition to free trade (such as abandoning NAFTA) or in favor (such as ratifying the TPP), are unlikely to occur.

To me, all of this points to the continuation of the status quo, the slow and steady expansion of imports to the United States.

In conclusion, I’ve attached some photos of an example of the type of infrastructure improvements that facilitate the expansion of international trade. This the international port terminal in Portland, Maine, which I toured before the MITC event and which is expanding steadily with government support.

Thank you for your comments, suggestions and referrals!

Joe

How to negotiate with Chinese factories?

If you negotiate too hard, you risk cut corners and poor quality. If you don’t negotiate hard enough, you risk handing the factory your profits.

Everyone has his or her own negotiation style and there’s no single way to get the best deal, but here are some lessons I’ve learned that can enhance anyone’s bargaining skills in China without undermining quality and relationship down the road.

  1. Start as early as possible. Try to get a non-binding estimate at the outset to make sure you’re in the ballpark. You don’t want to spend weeks or months discussing a design just to find out that prices are 10 times those in your break-even model.

  2. Understand the factory’s costs. If the factory can provide you with a rough breakdown of materials, parts and labor (usually referred to as a “BOM” or “Bill of Materials”) you can independently verify those costs to estimate how much labor, overhead and profit the factory is including in their prices. If a factory’s prices are more than double the cost of goods, something isn’t adding up.

BOMsample.JPG

  1. Understand the factory’s incentives. Even more important than the above, if you can figure out what kind of customer or project the factory is looking for, you’re on your way to a bargain. Keep in mind the factory may be looking for more than just a source of big orders. Access to new markets, using a new type of technology or a genuine interest in your product can motivate just as much as projected profits in some situations. Try to find out what drives decision-making and investments at the factory and frame your project to fit to get the best deal.

  2. Sell yourself. Some people balk at this (“Why should I have to bend over backwards? It’s my money. The customer is king, right?”). However, remember that in most cases the factory is both larger, more leveraged and more experienced than you are. A better way of thinking about selling yourself is showing the factory how well your goals align with theirs, i.e. when you win big, the factory will as well. If the factory believes in your vision and sees a valuable role in it, you’re bound to get better terms.

salesproj.JPG

  1. Always have a competing quote. Finally and by far most important is to always have at least two quotes. Even if it is just an anecdotal second opinion from a friend, reference or Alibaba.com, it’s impossible to negotiate in a vacuum. The Chinese also use the expression, “Don’t put all your eggs in one basket.” Competition is an indispensable tool for negotiation in any setting. China is no different.

All five of these tips are best followed when you have a personal relationship with your factory. Please contact me at joe@thayer-consulting.com if you know anyone who could use a hand with their Chinese manufacturing.

Thank you!

Joe

How (and how much) do factory workers get paid in China?

The three most common pay packages for factory workers in China are:

  1. Monthly salary

  2. Base salary +

  3. Piece rate

Monthly salary is calculated and paid as a lump sum regardless of overtime hours or productivity. This is is sometimes referred to as an “exempt” salary in the US, as in, “exempt from overtime rates” or “exempt from production quotas.”

Base salary + guarantees a “non-exempt” worker a monthly (“base”) salary and then pays extra (“+”) based on how many overtime hours are worked and/or by how much a productivity quota has been exceeded.

Piece rate is the traditional form of factory labor compensation. For every piece the worker produces, he or she is paid a fixed amount.

[Chinese labor contract, 2016]

Which types of factory jobs are compensated which way?

Factory work can be usefully split into office work (supervising, selling, organizing, etc.) and production floor labor (cutting, sewing, packing, etc.). Generally speaking, office workers in Chinese factories are paid a fixed, monthly wage and workers on the production floor almost always have some kind of non-exempt, base salary + agreement linked to overtime or productivity. Straight piece rate wages used to be the norm in China, but now most factories guarantee their workers have some form of base wage.

How much do they make?

It’s impossible to generalize. China’s a big country with vast differences in wages, productivity and costs of living. All things being equal, average wages tend to be higher the closer you get to a city center and lower the further west you travel from the China coast. Surprisingly, in the last 10-20 years it is becoming more and more common for floor laborers to earn more than their front office counterparts. Skilled factory labor is growing scarce and the younger generation of Chinese may attach more value to the comfort of working in front of a computer than the extra money they might earn cutting, sewing or packing on a hot production floor.

Inline image 2

[A sewer who earns 3000 RMB/month on a piece rate contract outside Hangzhou]

OK, but how much?

For one specific example, during my anonymous interviews for a Thayer Certified “Safe & Fair” labor audit this March in a cut and sew factory of 15-30 workers outside of Hangzhou (1.5 hour drive from Shanghai), workers told me that their monthly salary averaged 3000 RMB per month ($463). The managers told me that if they paid less the workers would go somewhere else. One worker told me, “The reason I work here is because of the stable salary.”

The workers are paid based on piece rates, but the factory basically guarantees them enough work that they can meet the 3000 RMB threshold by working regular hours of 8 hours a day, 6 days a week.  To give you some perspective on their wages, my report estimated that average monthly living expenses in that town are roughly half their average income (between 1000-2000 RMB ($154-$308). Inline image 1

If you’re wondering how much your workers make, what conditions they work in and how they’re paid, please email joe@thayer-consulting.com.

Thank you,

Joe

Weakening RMB = Time to ask your Chinese factory for a discount?

I was recently reminded by one of my clients that the Chinese currency (Yuan, CNY, renminbi or RMB) had been depreciating steeply against the dollar. “Is this a good time to ask for a discount on my factory prices?” she asked me.

exhangerates

 

If I were to choose one macroeconomic lever that has the most direct impact on a Chinese factory profits, it would be the exchange rate. The other economic statistics we see in the media (GDP growth, purchasing indexes, minimum wages, interest rates, etc.) are all important in their own right, but nothing impacts an export-driven factory’s profits more directly than exchange rates.

Why is this so?

Data and graph courtesy of xe.com, http://www.xe.com/currencycharts/?from=USD&to=CNY&view=10Y

I learned this lesson first-hand, while working for a Chinese golf bag manufacturer in Shanghai from 2006-2008.

A factory has three main costs: labor, materials and overhead. Our factory, like most, almost always pays for all three in local currency, RMB. However, like many successful Chinese factories, especially at the time, we were exporting and selling to foreign customers, mostly American. Therefore, almost all our income came in the form of foreign currency, mostly US dollars or USD.

Consider the microeconomic situation at our golf bag factory when I started working there in 2006. Let’s say at that time, for each golf bag we were paying about 20 RMB for labor, 100 RMB for materials and charging our customers 20 USD for a finished golf bag. After adding our OH costs and applying the prevailing exchange rate at the time (about 8:1) we were making a profit margin of roughly 15%.

Exchange rate

1 USD = ? RMB

8

FACTORY COST (for one golf bag)

1/1/2006

Labor, RMB

¥20.00

Materials, RMB

¥100.00

Overhead, RMB

¥15.00

TOTAL COST, RMB

¥135.00

TOTAL COST, USD equivalent

$16.88

SALES PRICE (INCOME), USD

$20.00

Profit margin, %

15.6%

Note: All these figures are roughly, but realistically, contrived for explanatory purposes.

Now, imagine the RMB strengthening against the dollar, which makes our factory’s materials, labor and overhead relatively more dear while making the USD from our customers less and less valuable.

In the two years from the beginning of 2006 to the end of 2007, the value of the RMB versus the Dollar increased roughly 12.5%, from 8:1 to 7:1. In RMB terms, our factory’s expenses had not changed, nor had our USD prices to our customers, yet our profit margin decreased by more than 75%. For those unfamiliar with a “cut & sew” factory, 15% margins are decent for a medium size bag maker, but 3% is unworkable. Below you can see the detailed figures that illustrate this example.

Exchange rate

1/1/2006

12/31/2007

% change

1 USD = ? RMB

8

7

-12.50%

FACTORY COST (for one golf bag)

1/1/2006

12/31/2007

% change

Labor, RMB

¥20.00

¥20.00

Materials, RMB

¥100.00

¥100.00

Overhead, RMB

¥15.00

¥15.00

TOTAL, RMB

¥135.00

¥135.00

TOTAL, USD equivalent

$16.88

$19.29

14.29%

Sales price, USD

$20.00

$20.00

Profit margin, %

15.6%

3.6%

-77.14%

Our story was shared by tens, if not hundreds, of thousands of factories across China in 2007-2008. You may have read about the massive swath of factory shutdowns at the time. Mine was one of those.

From the opposite (US government and media) perspective, anyone who’s read about China’s currency manipulations from a Western point of view will be very familiar with the story of China (and other export-driven economies) artificially depreciating their currency to boost their economy. Just apply the above exchange rate figures in reverse and you can see the opposite effect on profits. You’ve also probably read about the opposite situation as well, where manufacturing companies and economies are hurt by a strong local currency. (Japan has exemplified this problem in recent years.) Above is the microeconomic logic behind this.

So, let’s return to my client’s question. Should she ask for a discount based on the recent devaluation of the RMB vs the USD?

She currently pays about $5/piece for canvas bags. Last summer the exchange rate was about 6.2 RMB = 1 USD. When she approached me at the beginning of February the RMB was trading at about 6.6 to the dollar. This is the opposite effect that I described at my golf bag factory. The Chinese factory was profiting from the decreased value of local currency.

7/1/2015

2/1/2016

% change

Exchange rate, 1 USD = ? RMB

6.2

6.6

6.45%

FACTORY COST (per bag)

7/1/2015

2/1/2016

Labor, RMB

¥5.00

¥5.00

Materials, RMB

¥15.00

¥15.00

Overhead, RMB

¥5.00

¥5.00

TOTAL, RMB

¥25.00

¥25.00

TOTAL, USD equivalent

$4.03

$3.79

-6.06%

Sales price, USD

$5.00

$5.00

Profit margin, %

19.4%

24.2%

25.25%

Her factory would appear to be pocketing an extra 25% in profits versus six months earlier, so at first glance, you’d think she’d deserve a share of that windfall. However, my advice was to hold off on re-opening price negotiations with her factory.

Why?

  • Exchange rates can be a double edged sword: Will my client raise her prices when the RMB appreciates (as it already has in recent weeks)?

  • The recent devaluation is relatively minor: Six percent is a lot for a trader managing billions of RMB, but a relatively small change in the context of my client’s order volume.

In my client’s case, I suggested keeping this currency advantage as a bargaining chip when discussing other less sensitive costs like sample charges, minimums or payment terms in the coming months.

If you’re wondering how exchange rates might affect your factory or import/export business, please email joe@thayer-consulting.com.

Thank you!

China’s Greatest Competitive Advantage is Education?

In preparation for teaching Global Sourcing at FIT (Fashion Institute of Technology, SUNY) this winter, I’ve been reading an entertaining and practical book by David Birnbaum, called “Birnbaum’s Global Guide to Winning the Great Garment War”.

birnbaum

The book is a critique of the traditional notion that importing garments is merely a matter of scouring the globe for the cheapest labor. Birnbaum satirizes various old school New York importers, like Herbie the Mouth (“When a sewing girl gets a quarter an hour, it’s time to get out.”) and Wendell Wasp (only buys if he can bargain the factory down by 25%). His explosion of the prevailing myth that there is a direct relationship between factory prices and the actual cost of a good to the buyer is one of those things that I’ve known for years but could never explain in the systematic way that Birnbaum has.

It’s great timing for my business, because even if Herbie and Wendell are an endangered species, they have their modern equivalents. I hear their voice all the time:

  • In the media: Import/export and manufacturing stories are obsessively devoted to a country’s labor costs at the expense of other forms of comparative advantage (infrastructure, tariffs, education, etc.).
  • Established importers: Clients who face a constant headwind to grind down factory prices from wholesale buyers (retailers like Kohl’s, Bed, Bath and Beyond and JC Penney) who regularly infer a 1:1 relationship between factory wages and total cost of goods.Screen Shot 2016-01-25 at 10.36.15 AM
  • E-commerce: Businesses that source consumer products by requesting quotes from 5 Alibaba sellers, then sending the lowest price back to all 5 to see who can beat it and finally selecting their supplier based on the lowest number to come back.Screen Shot 2016-01-25 at 5.06.51 PM
  • Startups: Entrepreneurs who are willing to finance a week long visit to Vietnam to vet a factory at the prospect of a 15% wage increase in China (which will amount to a less than 1% increase in their total cost of production).

Birnbaum makes a convincing case that China’s most important competitive advantage as an exporter has been its level of education rather than (or at least relative to) factory wages. Labor costs are an important macro-economic lever, but are only one amongst many. For the importer of goods, in particular, Birnbaum clearly explains how “macro costs” and “indirect costs” such as education, infrastructure, tariffs, quotas and bureaucracy are much more critical factors to consider than “direct costs” such as wages when you decide in which country and factory to produce goods.

It’s a great read and I’d encourage anyone considering mass-producing consumer goods to skim through at least the first few chapters. Alternatively you’re more than welcome to come sit in on my sourcing class, Thursdays 6:30-9:20pm at FIT to learn more.

As always, please email joe@thayer-consulting.com if you know anyone who could use help with their manufacturing operations in China.

How do you find good factories in China? + Chinese New Year

Choosing a factory is a lot like making a hire. Personal references are preferable, but sometimes the internet serves up the best candidate.

Personal references to factories in China are rarely possible for inventors, startups and small businesses who don’t have an existing manufacturing network and/or who are mass producing an entirely new product. So, just as in hiring employees, to find a contract manufacturer for your product, you ask friends, get references to friends of friends, and search for reputable agents and/or a brokerage platforms.

That common-sense approach is the foundation of our “Pyramid” approach to factory sourcing.

However, we execute this process more reliably and quickly than you could yourself.

    • Our Pyramid is wider than yours. We have a much larger tier 1 and tier 2 network, which gives us a greater chance of finding a direct link to your potential supplier.

 

  • We’re better at mining the 3rd tier of the Pyramid. Even lacking a direct link, we have vetting methodology, tools and experience which allow us to more effectively identify high-potential “gems” on web platforms and trade databases.

 

Here are three guiding principles we follow that anyone can use together with the Sourcing Pyramid to give themselves the best chance of finding a good factory in China.

  1. All other factors being equal (price, turnaround, etc.), rank your factory candidates from top to bottom.

  2. Prioritize your search from top to bottom. Always start your search at the top and work your way down. That doesn’t mean waiting to hear back from personal contacts before checking Alibaba, but start your search at the top and give its followup your highest priority.

  3. There is more potential for a “gem” (a perfect fit) the further down the pyramid you travel. Don’t discount new options simply because you don’t have personal references.

We always look forward to your questions and referrals. Please comment or email joe@thayer-consulting.com.

Thank You,

Joe


A reminder to all that Chinese New Year (CNY) is February 8th. Communication with our factories indicates that 1/15-20 will be the final days of meaningful production activity and that the post CNY ramp up will be in early March. Please plan accordingly.

Shenzhen with benefits?

During my recent trip to Taiwan, I was struck by how similar China’s most famous electronics manufacturing hub, Shenzhen, has become to Taipei in terms of scale and costs.

stats

And yet Taipei is much more developed than Shenzhen, both in terms of its technology, infrastructure, environment and culture. Here are some statistics, anecdotal evidence and photos from Taipei that stood out from my trip.

  • Second highest GDP per capita in Asia, at $48,400. (Shenzhen’s is $24,336. For context, New York City’s is $57,329.)
  • Downtown, office-based factory setting

  • First class municipal infrastructure, mild car traffic, orderly subway

  • Natural surroundings (photos taken less than 15 miles from city center).

  • Amazing, affordable food

For someone who has spent a lot of time in Mainland China, it was hard not to see Taipei as a sort of “Shenzhen with benefits” (clean air, democracy, safe food, etc.) option for electronics sourcing. However, Shenzhen tends to attract more of my clients than Taipei.

The discrepancy in recent economic growth hints at one reason my customers’ projects still end up in Shenzhen rather than Taipei, despite the similar manufacturing costs and lack of “benefits”. My customers are working on new products, new companies or both, which represent high potential, high risk, “marginal” business to a factory. There is more appetite for marginal business in the growing market of Shenzhen than the mature market of Taipei. When I pitch a new customer and/or product development project to a factory in Taipei I mainly hear an explanation of the costs (risks) involved and what can’t be done. When I have the same conversation with a Shenzhen-based manufacturer, the emphasis of the conversation is on what can be done.

The receptiveness of Shenzhen’s factories to new electronics projects makes it much more appealing and accessible to entrepreneurs and product developers than Taipei. However, it is always worth exploring Taiwanese options when sourcing electronics because if you can find a receptive partner there are definitely benefits.

Questions, referrals, coffee?

I’d love to hear from you,

Joe

2 Weeks in the World’s Factory

[Originally sent via email newsletter August 27, 2015]
A few captioned photos from my most recent trip to Hong Kong, Shenzhen, Dongguan, Qingdao and Xiamen.
Inline image 1
The other side of Alibaba
Inline image 1
The factory farm
Inline image 8
Cupcakes!
Inline image 10
Quality Control
Inline image 9
Wood, copper and grease
Inline image 2
Not all dust and concrete
Inline image 6
“We make shoes… and pico projectors.”
Inline image 7
Guess the product that comes from this mold!
Hope everyone is enjoying their summer. As always, please reach out to me with questions, ideas and referrals.
Sincerely,
Joe

Planning Christmas in July

When do you need to place your orders for the Holidays?

[Note: Originally published June 30, 2015]

Here’s a visual representation of the steps involved in manufacturing a product in China:

Now consider the time necessary to execute these steps. Here are some rules of thumb for production planning in China.

  • 1-2 weeks for sourcing suppliers
  • 4-6 weeks for sampling and approval
  • 4-6 weeks for tooling (if your product is molded)
  • 4-6 weeks for production, QC and testing
  • 4 weeks for ocean shipment
  • 1 week for air shipment

To visualize these timelines and quickly compare options, we use a dynamic planning tool called a Gantt Chart.

For example, imagine you have a design for an awesome new handbag.

You start looking for a factory July 1st. Here’s what your production horizon looks like:

This means time is tight but you can still deliver the bags to your customers by Christmas if you place your order 9/16 and boat ship the goods from China on 11/3.

If you ship your bags by air, you could have them in your warehouse by Black Friday, but would forfeit a portion of your profits.

However, for a wholesale-driven business, Holiday products need to arrive in a US warehouse by September or October so they can be delivered to retailers in time for the November sales spike. These companies should already be placing their Holiday orders and planning for Spring 2016.

In short, if you haven’t started planning your Holiday inventory yet, the clock is ticking. All things being equal, you should focus on simpler, smaller and lighter products the tighter your deadlines become. We’ve got the tools to get your products ready for sale this Holiday season.

Shoot joe@thayer-consulting.com an email if you’re looking for last minute options. We’ll be in China July 25-Aug. 15 to accelerate our clients’ sample revisions and approvals in person.

Thank you!

Top 3 Crowdfunding Tragedies

#1 OVERFUNDING: Radiate Athletics: The Future of Sports Apparel

  • radiate
  • CEO quote: “The whole thing has been a nightmare.”
  • Summary: Unexpected success, no mass production strategy
  • Stats: asked for $30k, raised $580k = 1833% overfunded
  • The whole story
  • Moral: Prepare for the best. Make sure you’ve gotten feedback on feasibility, MOQ and price from a *factory* (not just an engineering team or prototyping lab).

#2 TECHNOLOGY: The Pocket Drone – Your personal flying robot

  • pocketdrone
  • CEO quote: “The company’s leadership … took on over $100,000 in personal debt … in order to assemble and ship all the units that were ordered.”
  • Summary: Product not engineered for mass production
  • Stats: asked for $35k, raised $929k, overfunded 2555%
  • The whole story
  • Moral: Engineer for mass production. If you ever hope to make a profit from your product, you need to design something that is relatively straightforward to mass-produce. A working prototype is not necessarily proof of this.

#3 CHINA! Kreyos: The ONLY Smartwatch With Voice & Gesture Control

  • kreyos
  • CEO quote: “[My worst decision was] falling victim to … VIEWCOOPER CORP and its CEO Pro Yang who, ultimately perpetrated an intricate conspiracy against Kreyos.”
  • Summary: Eaten alive in China
  • Stats: asked for 100k, raised $1.5m = overfunded 1402%
  • The whole story (must read for anyone who’s been to China)
  • Moral: What can go wrong, will. Murphy’s Law is the only law you can count on. Always have a backup factory and references whenever possible.

 

We put our clients in direct contact with factories in China from the outset, double check timelines and budgets and answer all your questions about how manufacturing in China works.

Learn more on our website

Email joe@thayer-consulting.com if you know someone who’d like a free coffee or phone call to learn more.

Thank you!

Joe