Would your sourcing project get past Mark Cuban’s feasibility audit?
How do you know if your sourcing project is a good fit for China?
We are going to discus three aspects to consider if your sourcing project is a good fit in China!
Last month, I posted an article "Starting a Business in China: How and Where to Start" and in that article it gives information on how you familiarized the business law in China and the relevant operating requirements when starting a business in China. Now we are going to discuss 3 aspects to consider if your sourcing project is a good fit in China.
1) Substantial labor component for sourcing product
If your product is heavily labor intensive. For example, if the product cost is $10 and $9.90 of this is due to labor costs, then maybe your product is more suitable for a place like Pakistan, Bangladesh or Indonesia. We’re talking about textiles or apparels, things like that.
If your product has too little labor component, meaning maybe it’s $9.90 raw material and 10 cents labor component, in that scenario because of the sophisticated equipment and high technology, it might actually be less expensive to run that product in the US. For example, the high volume injected plastics. In China, when you make injected plastics, sometimes they use a lot of the hand-labor to cut off the flesh from the mold when the injected plastic is made. In the US or Europe or Japan, there might be a million-dollar machine that’s so sophisticated, it makes 50 widgets a second with no man-hours. Now if the project is heavily raw material based in terms of its cost markup, then it may also make sense to run in the US.
For the vast majority, probably everybody that’s reading this article, your product is probably somewhere in between in terms of labor ratio. Maybe it’s somewhere between 10-80%. In those scenarios, China is probably a good fit. I just want you to be cautious that if your product has very little labor or it’s totally labor intensive, then you need to be open to the thinking that maybe China isn’t a right fit.
2) Uses readily available materials and equipment
Are the materials that you need readily available in China? Not just the material but the equipment. For example, when you’re thinking about going to China directly. One time, early on in my career, we paid a lot of money to this Scandinavian design firm that came up with this really great product design for manufacturing, DFM, so the schematic of how the product is going to be designed.
They use very tight tolerances, very sophisticated production techniques, and it looked awesome on paper, the 3D drawings and the CAD files. This product was going to be great. But we couldn’t get it made in China because the raw materials that the Scandinavians picked weren’t available, and the equipment. We needed a really big, I think it was a 200-ton hydraulic press to get this thing made. And it just wasn’t available at the time in China.
So when you’re thinking about going to China directly, ask yourself:
- Are the raw materials that you have readily available in China?
- And is the equipment readily available in China too?
If you’re not sure, you can do a search on tradesparq or global sources website—very easy to find out if this material is available. Just like you’re going sourcing for a finished product, you go sourcing for the raw material. Now if no one shows up, you’ve got a problem. If you have 200 potential suppliers, that’s great news in this case.
3) Suitable volume for you sourcing project
You also need suitable volume; meaning do you have a volume at which the China factory is going to be interested in doing business with you. Also, at small volumes, you might not achieve the pricing points that you’re expecting. For example, I remember I met a man at the airport, and he was buying socks, athletic socks. His rationale was he should be able to get them for a dollar from the factory. I asked him “How did you come up with that number?” He explained to me that the product sales for roughly $4 at Wal-Mart, USA. He knew that Wal-Mart applied a certain markup—let’s say it’s 100%—and he assumed that if he went factory direct, maybe even to with the same factory that Wal-Mart was using, he should get it at this low price. However, his logic was faulty because his volume was only 10,000 pairs, whereas Wal-Mart was buying a million pairs. So it’s all about volume.
If your volume is too small:
- You might not be able to excite the factories; they might not be interested in doing business with you.
- Your pricing points are going to reflect your volume.
So when we talk about the feasibility of going to China factory direct, it often comes down to this minimum order quantity. Would the cast of Shark Tank agree that you have the volume to go to the factory directly? ... More from feasibility series coming soon ...
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ABL Blog: Sr. Editor and Primary Content Creator: Michael J. Bellamy
Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses. Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.
A featured presenter on China issues at seminars, trade shows and corporate events across the globe.
Learn more about Mike and AsiaBridge Law at
https://www.asiabridgelaw.com/business-advisory-services/
Mike is the author of “The Essential Reference Guide to China Sourcing”
(available on Amazon).
