China: More Welcoming Than Ever to Small Companies
Higher labor costs and slumping demand put pressure on Chinese factories

- By Amy Barrett
BusinessWeek, click here for link

Katie Smith can tell things are changing in China. She's done business there for 25 years, mostly outsourcing hand-sewn ties for her last company, the $50 million Mulberry Neckwear. Now she's hunting down manufacturers for Rockflowerpaper, her four-person gift and home accessories company in San Rafael, Calif.

In November a supplier in the southern Chinese city of Shenzhen told Smith her order for 5,000 coffee mugs didn't meet its 12,000-unit minimum. That didn't surprise Smith—she'd been turned down on small jobs before. But this time when she walked away, the manufacturer promptly did an about-face and took the order. "China is definitely hurting," she says.

Chris Runckel on BusinessWeek Contract manufacturers are more receptive than ever to small customers, as Smith found. But the downturn also means factories are moving or closing, creating a risk that a partner you sign with today won't be there tomorrow. In the past six months, Chris Runckel, a Portland (Ore.) consultant, has worked on four deals in which small U.S. companies took stakes in their struggling Chinese manufacturing partners. "Many Chinese manufacturers are not well capitalized," he says. "They are being pressured by this [past] Christmas season and cutbacks in orders."

At the same time, the Chinese government is pushing to transform the country into a service outsourcing powerhouse. Those efforts are focused on large multinationals, but in a few years entrepreneurs may find China a viable competitor to India. Until then, China's big draw remains its manufacturing capabilities.

Few countries can compete with China's massive workforce and established infrastructure for producing just about anything. But labor costs have been rising. The minimum wage, which varies by region, saw double-digit hikes in many provinces in 2008. On the eastern seaboard, the minimum rose to about $130 a month from roughly $104 in 2007, according to Waltham (Mass.) researchers Global Insight. That's steep compared with Vietnam, where the minimum wage is about $50 a month.

But quality control remains an issue. Smith, whose company has posted $100,000 in sales since it began shipping in mid-2008, searches for manufacturers at Hong Kong trade shows and on alibaba.com, tradekey.com, and madeinchina.com. Still, there have been bumps. At a trade show last spring, Smith found a factory to make paperweights, and they sent her some great samples. (The samples were free, but Smith paid for shipping.) She ordered 1,000 paperweights, put 30% down, and paid the rest when they shipped. But half the paperweights were defective, with uneven bases or bubbles in the glass. "The contracts do have clauses for returns," she says. "But it is hard to enforce the contract unless you have some leverage." So Smith told the manufacturer she'd complain to the trade show manager about his shoddy work. She got her money back, then found another factory.

Smith says the key to minimizing hassles is to get to know manufacturers personally. She has traveled to China three times in the past year and a half and makes frequent calls via Skype. She also uses a Chinese consultant who speaks English to monitor factories through on-site visits. If you can't do a personal inspection for quality control, ask the manufacturer to send pictures, especially as they handle your run, she says. Smith spreads production across six facilities to ensure that if one folds, her entire production isn't threatened. "The Chinese are fabulous manufacturers," she maintains. "You just have to work on the quality issues and communication."

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