By David Dayton

Opportunities in China

Like I said in the introduction, it’s not all bad news here. Factories want orders!! Of course, everyone wants them, but factories that are still in business have employees and need to pay for them so they are aggressively looking for new orders. This means that buyers with cash are in a great position. Indeed, if your own financial house is in order, this recession can be a gold mine.

First, factories are willing to do projects with much more creative terms than they would have even considered before. The key is to remember that they don’t necessarily trust you. But as long as they have some guarantees they can be surprisingly flexible. Security for your supplier in China is key to getting what you want at the best possible prices.

Second, lower MOQ’s are available for just about any order. Factories that wouldn’t talk with us last year are calling back and asking to meet and talk about projects (long since completed elsewhere) and future opportunities. We’re hearing from scores of former suppliers interested in projects they rejected outright before. We’re doing projects for a couple of clients now with qtty’s that are almost ½ what we were originally told were the MOQ’s.

Third, excess labor is available everywhere. This means that factories can bring in day labor to get projects done more quickly. This may not seem like a financial incentive at first, but if you realize that you can cut one to two weeks off the time that you or your factory has to carry the balance on an order, you could be saving a significant percentage in interest payments.

Most importantly, well connected factories and factories in the right industries have access to cash. Like I mentioned before, Chinese banks and local governments are offering incentives and loans to both businesses and individuals. The question is whether or not you can get any of it.

If you’re in the right area or industry, your Chinese supplier may have cash options. Stimulus industries include: higher technology items, education, logistics, green technology, healthcare, infrastructure, and transportation/logistics. Western China is a highly incentivized area, and most areas outside of big East Coast cities are getting help too.

Despite all the incentives, there are probably thousands of closed factories and no doubt more to come. A much more serious a situation than the much ballyhooed toy factory closures last year. Regardless, factories and equipment are for sale/rent at rock bottom prices. We have a number of Chinese suppliers that have been buying up equipment for pennies on the dollar (fen on the yuan) as competitors go out of business. They are taking for themselves the best pieces and reselling (or saving for resale later) the rest. Similarly, there are thousands of empty buildings for rent in just about every area of Guangdong province.

If you are looking to do more than just buy product or rent space in China there many new opportunities for JV’s and other partnerships that were not possible before when business was booming.

And in just about every factory, product from cancelled orders is available. For cheap! Over the last 6 moths we have been repeatedly offered unfinished product at steep discounts. Furniture, crafts, clothing, bags. One of the recent offers was for 5 containers of small wooden furniture that was originally destined for Wal-Mart. We were offered the entire order with custom packaging at cost.

Another option to consider now is middlemen or trading companies. Typically these companies buy from a larger selection of factories than you’ll have access to and have larger volumes and better connections. If you don’t have the time or inclination to get involved with Chinese manufacturing directly they may be able to offer you some financing or at least a range of products that individual factories cannot.

Options for Financing from outside of China

As I mentioned in the very beginning, the typical TT’s and LC’s are still the standard for paying for orders in China. There is really nothing new in the financial products market back home just because there is a bad economy. Nothing new in China either. The cash that is available is being given to Chinese companies or Chinese nationals or foreigners with assets/businesses in China. But there are a couple of options that are not very common that may be of value to you.

One option that you may not be aware of in your home country is factoring. Factoring is when you sell your PO’s from your retail buyers to a bank or third party for cash. It’s like taking a loan against future earnings. You get the cash now, which is a help with cash flow, and the factorer gets to collect the AR from your client/customer. This option helps cash flow in the short term but will suck out most (or all) of your profit, as rates are quite high.

Another thing that has recently changed a bit in the US (and many people don’t know) is that loan standards have dropped dramatically in the last 6 months. If you couldn’t get a loan/mortgage six to eight months ago, you may be able to get one now.

Third party financing is also an option. If you’re working with China the response from your 3rd party financier (Venture Capitalist) is going to be either “No chance!” or “Wow! China. You bet!” People that I’ve talked to are often not confident that there is a secure ROI from working in China. There are enough unknowns about working here (bad quality, late delivery, lead paint) that many VC’s won’t even look at companies working in/with China. On the other had, I’ve had clients tell me they had people offering them money once they found out they were doing their business in China. I’ve personally never seen the latter. And, because I live here and know what it takes to get good product out of China, I wouldn’t invest in anyone just coming to China for the first time either. Chances of success are slim to none for first-time buyers with no physical presence here.

Other steps to take to secure your investment in China

Finally, no matter what you do end up doing, if you’re coming to China you must do all your due diligence (buy company/entity reports) BEFORE you place any orders. Don’t just take chances because you think that, “Hey, China’s risky anyway.” Yes, it is risky. But precisely because it is risky you should do more DD than less.

Ways to ensure you get what you want out of China include: Being on site as much as possible. Buying from sub-suppliers directly. Paying for factory audits and 3rd party QC. Breaking out large, first-time orders to multiple suppliers to minimize the risk of one going out of business. And of course, get your China-side lawyers involved early so that if you do have problems you’re in a position to do something about it.

With a better understanding of the big picture and some caution, China, even in recessionary times, can be a great opportunity.

Good luck

David Dayton is the owner and manager of Silk Road International. David has nearly twenty years experience working in and with Asia and he leads SRI from our Shenzhen, China office.

This is the second and last part of “China: Sourcing in Bad Economic Times”. Here you can find Part 1.