Finding The Right Supplier in China
Today’s blog post is about finding the right supplier and finding the "right supplier" is a different process for different industries and order sizes. It really comes down to knowing where to look for them. That article will explain how to find the right supplier for your particular needs.
Factory direct vs. Asia direct
Let's look at buyers based on their order size and the type of products they wish to buy. Essentially there are four tiers at which you will find the right mix of product, quality and lead time for your particular needs.
Tier 1: Large volume, going factory direct.
Tier 2: Going factory direct, but not on your own.
You might be using a broker, an agent, and the middlemen. The factory is getting the order, but the people that you’re communicating with are representatives of the factory, or perhaps the buyer’s representative. It’s not quite direct, but you’re still purchasing at the factory level
Tier 3: Buying at the wholesale level
Tier 4: Buying at the retail level
Different tiers = different buyer strategies
Different tiers require different strategies. Everybody wants that China direct price, but factory direct and wholesale direct are very different in terms of the strategies you need. Today we’re going to walk you through the basics of each strategy and explain why they are different.
First, let’s define the term "factory" as there are essentially three types of factories:
- WFOE (Wholly Foreign-Owned Enterprise) (Sometimes called WOFE)
You’ve heard about those factories in Europe or America that pick up and move their production line to China. The ownership remains American, for example, the quality system is American, the sales team and management may be American, but the factory is actually based in China. It’s called the WFOE, wholly foreign-owned enterprise. It’s based in China, but it’s owned by a foreign entity that is non-Chinese.
- FIE (Foreign Invested Enterprise)
And example of a FIE would be an American manufacturer that decides that they’ll move production to China, but they don’t want to own the factory out right on their own, so they set up a joint venture, or they invest in an existing factory. Keep in mind that foreign invested enterprise also includes all those factories that are owned or invested by Taiwanese, Hong Kong, overseas Chinese, and Singaporean. I actually do a lot of business with the foreign-invested enterprises that are Hong Kong-owned or Taiwanese-owned, because on the outside they look Chinese, but if you look into their background, you will often see they have a little bit more experience dealing with the requirements of overseas, they are a little bit better at marketing and communication and English speaking, for example. But most importantly, they really have the concept of how to manage people, systems for quality control down a little bit better than perhaps their Chinese competitors. And by Chinese I mean Mainland Chinese owned, Mainland China based. And there’re a lot of those factories out there.
- The Local Factory. The sake of this article, let's call them "Chinese Factories".
What is the main advantage of a FIE over a local factory or WOFE?
I’m not saying that all Foreign Invested Enterprise in China are better than the Chinese factories in terms of price, quality and lead time. That’s not the case. But as a general rule of thumb, it works like this:
WFOE/WOFE
On one end of the scale you have the WFOE. The reason that the pricing is a little bit higher on the WFOE is because they spend more money on their quality systems and they understand the marketplace a little bit better, so they know how to position their product to maximize their niche and since they are owned by foreigners (non-Chinese), they really understand the customer expectations and the price that other non-Chinese are willing to pay. They often have excellent customer service and you can expect very good warranty. But you pay a premium when you’re dealing with a WFOE, but at least you won't have as much handholding when it comes to project management.
China Factory
At the other extreme we have those local factories I talked about, they are Chinese-owned China-based. Some of them are world class, many of them require a bit more handholding when it comes to understanding your order and meeting expectations for price, quality and lead time.
Maybe they don’t have the polished websites;
maybe they don’t have the engineering chops.
You might have to support them, hold their hand a little bit more.
But, generally speaking, they have the lower price. In particular, you will often find the lowest price from the medium-to-small size Chinese owned, China-based, local factories.
FIE
In terms of pricing, the FIE usually claim the middle spot by being lower than the WFOE but higher than the local China based, Chinese owned factory. I mentioned earlier that I use those types of factories a lot. In my case, they are often Hong Kong, Taiwanese or Singapore FIE's that are based in China.
Tips:
When you’re vetting these factories as potential supplier, realize that at first glance they all look like factory buildings, but behind the scenes, they can be very different animals in terms of the quality mentality and pricing, depending on if they are a WFOE, FIE or "Chinese Chinese" factory.
Finding the Right Supplier: What's next?
In the beginning of this blog post I mentioned the 4 different tiers and the need for different strategies. In my next blog post I'll explore the 4 tiers and write about buying at the wholesale level, dealing with retailers, and of course the pros and cons of working with brokers, trading companies, agents, and middlemen.
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).