Manufacturing in China – Podcast

This is the fourth podcast in a series that started with Best Practices on Mentoring, starting businesses/communities in Shanghai, and our favorite books with impact.

My fellow Carnet.cc author Vincent accepted to endure a live recording with questions on his experience in manufacturing in China. We’ve had long discussions over the past few years, always very lively. I am so glad that we could seat behind the mic and record 45 minutes of hands on content.

Feel free to listen to the recording on Anchor.fm, Spotify and Apple Podcasts) or read the transcription. Any questions? Comment at the end of the post.

Vincent, please introduce yourself

I am one of the partners at Pinn.hk. We are a product development studio located in Hong Kong. We are mainly developing products for our owns brands Huzi and Infinity Pillow, toys and travel accessories. We design, manufacture, and sell online. I have been in Hong Kong for the past eight years, and I have been enjoying life there so far!

Where do you find a good manufacturer to prototype your product?

That’s the tricky one! It is about understanding what the product requires in terms of expertise. We run the first round of due diligence based on skills needed – most often through recommendations.

For our simpler products, we’d look broadly, via traditional sourcing channels. We attend fairs and exhibitions – meeting with manufacturers that show up. We’ll follow up on these contacts as projects start coming up.
We then contact them, trying to understand if the description matches. That helps us shortlist the one we’ll be visiting on-site.
We mainly work with factories from the Guangdong area, so it’s an easy day-trip there.

What are the key considerations when selecting manufacturers?

There can be some particular production skills required. Picking a manufacturer that wants to learn from us helped find a win-win situation.
We are on a premium segment, with high-quality requirements, often stronger than most companies. Some factories (especially in the Guangdong area) are interested in improving their processes to avoid manufacturing cheap things only. The prospect of working with brands like us is appealing to them!
That gives us the confidence that we can build a stronger relationship with them. Helpful in urgent situations.

Other benefits that the manufacturer might perceive from working with you?

It is a case by case basis. One might be interested to learn about great design. Another one might want to improve their processes based on our experience together. We can also use our experience of selling with online platforms to justify working with us; there is a lot to learn here.

What are the milestones to have with the factory?

As a project grows in complexity, we will validate the costing and technical elements. A pre-production test would typically happen shortly after. It helps us make sure that both parties well define everything from pricing to small details.

Are manufacturers more willing to work on small batches of production?

Ultimately, manufacturers want big orders; they want to keep their production units going. Lower quantities can work if products and tooling requirements match.
We’ve worked with hard and soft products – each requires different methods. With soft products, you can order fewer pieces because it often doesn’t need new toolings.
In practice, small quantity orders will end up at the end of the schedule, at the bottom of their priorities.

Then, if it’s more interesting for you to produce in bulk, how do you deal with production and forecasting your orders?

Large companies have tools and a history of sales to help them forecasting orders a long time in advance. It’s not perfect, but that gets the job done.
For us, we try to scrap information on small trends. We are carefully looking and anticipating where markets might go up or down. It’s not rare to end up with too much or too little stocks. Someone in this industry for long would end up stocking a little more than ideal, to be safe.

What are the typical minimum order quantities?

For our products requiring specific toolings, we would have troubles finding a factory in Guangdong willing to work for less than 1,000 pieces.
For soft products, it’d depend on the fabric you need – some have high minimum order quantities – but you can negotiate down to three hundred pieces.
Beware, it might not be about the manufacturer; you need to look at the entire chain. If you have to order a part that has a much higher minimum order quantity, you can rapidly get stuck on really high numbers.

How did you learn what you know now about the industry

Mainly experience.
You can learn from theories and reading books, but you need to experiment. Most learnings come from each opportunity. Every batch you run will provide another round of insights. Over the years, you’d hope to get better at it.
After some many bruises though, you’d want to remain agile and not get overwhelmed by processes – that’s often a false sense of protection or security. The goal is to find a balance that you’re comfortable with.

Can you describe how the supply chain of a product manufactured and sold in China would work?

China is not one of our primary market for expansion. We don’t have something specific for the country. Typically, if you produce and sell in China, you have to pay the sales tax early.
The scheme that most international brands use is to export a product immediately upon production completion, hence avoiding to pay sales taxes. We stock up in Hong Kong and ship orders from our warehouse there.
So let’s say, somebody in Mainland China purchased one of our product, we’d ship it from Hong Kong rather than from our factories. In that scenario, the customer pays the sales taxes.

Some factories can help you set up the sales tax part, but it requires additional controls. Taobao and JD.com have global solutions as well, assisting foreign brands in selling products on the Chinese market.

Who are the stakeholders involved in this process?

You can get help from designing firms, a certification agency to validate products, import and export licenses, distribution channels, and then the marketing and PR support.
We’ve realized that manufacturing the product is just a part of the overall process. And it’s not because your product is available on Amazon that you’ll get it purchased. You want to outline and execute a marketing and PR strategy. That might require some additional support.

How do you compare Tmall and JD.com systems with the Amazon warehouses systems?

Selling in China is a lot more complicated. In that regard, dealing with Amazon is more straightforward, more open.
But it is not all rosy, Amazon still considers that most sellers out of Hong Kong speak Mandarin, they wouldn’t try English or Cantonese with you. Nonetheless, they can do wonders to support your logistics needs. They have a license to do ocean freights, which means that they can pick up your products directly from your factories in China.
Picture a well-integrated process from the manufacturers to the end customer.

On the other hand, for a foreigner to sell in China without a base in the country – there’s no equivalent to Amazon. Tmall global exists, but it isn’t broadly used yet, partly due to an invitation-only system.
Without an entity in China, the seller will have to fulfill the order and be pretty much on their own.

A few years ago, we discussed Amazon supporting customers to send products back. In general, the fact that it has a lot of power over its sellers. Do you feel that the Chinese platforms have the same angle or will support sellers a lot more?

Well, in China, you do have the seven days return policies. But this is more restricted than the 30 days of Amazon.
The significant difference might be down to customer habits. American consumers are a lot more used to returning products. One might order every color of an item and return all of them but one, the favorite one. That’s not very common in other market places.

You’ve used Kickstart several times to launch a product – what’s your opinion on the platform?

Many exciting projects are happening on Kickstarter, and it’s still a great way to validate a product’s potential. If you don’t have a lot of money to invest, it can help you test if you’re heading in the right direction.
But there are also many stories of how some people took advantage of the platform. So in many ways, you have to do your due diligence and understand if using Kickstarter will have real benefits for you.

For example, some websites don’t publish news about the on-going Kickstarter campaign because of the high failure rate in the execution and shipping phases. That might hurt your PR strategy.

How do you get your product into your customers’ hands when you don’t sell via Amazon?

We leverage fulfillment centers. We work with a center in Hong Kong and the US plus considering one in Europe. It’s effortless to find providers allowing you to outsource most of the worries associated with fulfillment.

There are two types of fulfillment centers for us: the B2Cs, that are connected to our selling platforms via an API and would ship an order as soon as it’s settled.
The B2B warehouses that will specialize in much larger volumes. Typically getting palettes for retailers and wholesalers.

How much time do you spend on reviewing that system that you put in place?

Roughly every quarter or semester, we review and make sure it is supporting our needs. We will also look into customer feedbacks as a way to anticipate updates to be made.
For example, Germany recently changed its customs policy: customs are getting paid on every single item arriving in the country.

With Amazon, things used to be in a grey area where the platform nor the seller were including taxes. Many countries have since changed their policies and made it mandatory for the platform to collect taxes on behalf of the seller. Things are now a lot clearer.

We are officially registered with the German VAT system, but postal services don’t offer “Delivery Duty Paid” services. It requires a specific courier that makes the total price expensive in comparison to the product’s value. That forced us (and many other sellers) to look into different fulfillment methods.

Have you considered stopping to sell in Germany altogether?

Not really, what we did is indicating at the time of checkout that our products were shipped from Hong Kong, hence inquiring additional fees.
But we are looking at alternatives that would allow sending the product from Europe (hence making shipment quicker). The strange situation that we’ve encountered is that shipping from Hong Kong to Europe is significantly cheaper than from Europe to Europe.
And currently, it’s just a few days faster to ship within Europe compared to from HK to EU. Look at a map, and you’ll see that it’s crazy!

How are you charging Mainland Chinese customers and which platforms you’re using?

I can share some of my experience, but I’m also looking for suggestions on a great setup! Right now, we charge Mainland Chinese customers with Alipay (via Stripe). But it’s only in Hong Kong, so customers would need to be ok with paying in a different currency (HKD).
We found that it was more convenient for them than paying with a credit card in USD.
WeChat is not correctly set up on Stripe, so we haven’t offered this option yet.

You can’t charge in RMB if you don’t run operations in Mainland China.

But then it means that your Chinese customers need to do that extra work: getting to your website and being willing to pay in HKD.

The conversion in Alipay from RMB to HKD is simplified, so it doesn’t require much effort from them. But it’s less than ideal.
It’ll be the same if you want to sell on Tmall, Taobao or else, you got to have a business set up officially in China.

Have you looked into setting up in China? What would be your typical channels of distribution?

We are looking into this. Several leading online stores cover the vast majority of the market. If you have a presence on Taobao, JD.com, Xiaomi, Sunning, and several more, you cover 90% of the e-commerce market in China. That’s unheard of in most countries.

What we found is that having a presence on these platforms require a tremendous amount of human resources. Your customers reach out to you at any time, and they expect immediate replies. The challenge that we’re facing is finding the right partner willing to commit to our highest standards of quality.

What would be other adjustments to be made if you wanted to sell on Chinese platforms?

There are more and more Chinese entrepreneurs looking for brands that they can develop in China. They believe in leveraging the massive size of the market to justify bringing prices down massively.
That poses a fundamental question to us:

  • Some brands have different pricing strategies for Western markets versus China, where it’d be substantially cheaper. We aren’t comfortable with this strategy.
  • We make sure that our brand is consistent worldwide, pricing and customer service wise. That might come at the expense of not moving on a popular platform.

What are the top reasons to sell on Taobao or JD.com compared to setting up your own WeChat store?

It’ll be the same situations as posed by Amazon: “the bottom line is the reach of these platforms.”
Customers want to find what they seek. It’s not about your opinion as a seller on the platform. You got to leverage the best places to sell your products.
With a larger market share, you hope to leverage new business opportunities, develop new products, increase the quality, and more.
It means making your own informed decisions – being independent is a lonely path.

Would you say Chinese customers value “China-made” products?

On our segments of products, it doesn’t make a difference as far as we’re concerned. We design and manufacture in China, and we haven’t seen an impact. But it is plausible that our niche market has specific desires and expectations.
Our Chinese customers are mostly in first-tier cities. Most definitely households who have been over the purchasing-craze and are now looking at few but thoughtful purchases. It’s unclear if they pay a lot of attention to Design/Made in China.

Have you considered manufacturing elsewhere than China and possibly in Europe and the US?

Not really, we take pride in the work we do from China. It is a clear advantage to work with factories close to us. We don’t produce in China because it is the cheapest option, we produce in China because we live here and found everything required to be successful.

Matthieu Bodin is an entrepreneur and community builder. As Regional Manager for Techstars in Greater China, he works with 200+ community leaders in 18 different cities to empower project creators across the region. Continuously experimenting with #Innovation led him to facilitate events with MTR, INFINITI, Apple, UNDP, Siemens, French Tech HK, InvestHK, RISE Conference, Techsauce, Echelon and more. As an entrepreneur, he co-founded Note-in, Anekdote.co, JookApp.com, and now Carnet.cc - a collection of thoughts and discoveries. He has spent 12+ years in Greater China: Beijing, Hong Kong, and now Shanghai. He is on Twitter and Instagram with @maboxiu.

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