Posts

img_6706

What is going on in China right now?

This is a guest post by my partner in crime over at our sourcing operation of ImportDojo :) 

What is going on in China?

I am happy to provide you a bit of insight into the struggles of the worlds factories so for you to understand the background when you get emails like “shortage of packaging, long delivery times, factories shut down, massive price increases” etc.. 

Probably most of you have encountered rising prices and stubborn suppliers in the past few weeks. While some of this is the daily business of all of us, the degree of disturbance has taken dimensions unheard of in the past years and it is important and interesting to go deeper to find out what is happening and what causes the problem.

The US Dollar and its Chinese brother CNY

When Donald Trump won the election the USD fell into a short depression, recovering within hours to a strengths it had not had for almost 20 years. The USD compared to the EUR surged two days after the election to a surprising 1,078 conversion rate and continued to drop to a stunning 1,044 conversion rate in last week. As a reference point, the EUR was recovering and compared to the USD before the election results it had strengthened up to 1,150. This meant, that items purchased for the EURO zone in USD from China suddenly increased by about 9% in their landed price. 

Since we all compare profitability of products with the current possible sales price on the market, that meant margins were melting by 9% and a lot of projects, which looked fabulous before, were doomed. We heard it many times from our customers, that they were expecting a different price calculating back from the sales price on the market to the buying price. The point is, that it takes between 3-5 months for this exchange rate fluctuation to take effect in the market.

Of course the financial professionals will argue about the validity of the above numbers and I have to say they are correct. The strengthening USD forced the CNY to depreciate, which meant that compared to the USD the CNY became a bit weaker and everything coming from scratch from the chinese market in terms of raw materials could become a bit cheaper eventually. However the depreciation of the CNY towards the USD is limited to around 2-3%, while the currency strengthened by 9%, so for the European market it is a loss of around 6% just because of the USD. For the US market on the other side it definitely is a chance, since the depreciation of the Renminbi takes effect and in theory all items should become 2-3% cheaper. Now this is where the second problem kicks in.

The environment

At 4:20 PM on Friday, 16th of December 2016, Chinas environmental control agencies issued a five day “red alert” about a hazardous, choking smog spreading across the northern part of China and Beijing. Skies went black, the public was advised to stay indoors and switch on the television and the whole thing had a little bit the feeling of a catastrophe approaching. The AQI (air quality index) surged from average 150 (which is already unhealthy) to 500-700 in certain areas. Schools and nurseries were shut down, cars older than a certain age were banned from the streets and life almost stopped.

Beijing is just one of 21 cities in China declaring red alert throughout the last 20 days. A couple of days after Beijing, Shanghai followed and around 200 million people were effected by the exhaust fumes of the factories producing for the whole world. The government did the only thing that was right and targeted high polluters like steel mills, coal plants, painting and packaging factories, oil processing plants and all factories not fulfilling the environmental criteria set out by the government at the beginning of the year. As a result, by the end of last week more than 2.500 factories all over China have been shut down. Some of these manufacturers will get the chance to reopen after the red alert passes, many of them will have to either improve and get up to the standard required or file bankruptcy.

We may say “Lucky our factories are not affected”, but it would be a lie. The truth is that only very few of the 1.500 factories we work with have had to completely shut down. However this does not change the fact that their raw material suppliers for steel, aluminum, copper, plastic (oil related) as well as packaging are not there anymore. Yes, China is out of stock on raw material and packaging material. The result of this government policy is, that in the past 3 weeks cold rolled steel prices have gone up by 40%, hot rolled steel prices by 30%, plastic by 25% and packaging – if you are lucky and you can get it – by 35%. Aluminum and Copper follow the main steel indexes.

We have hit rock bottom on this and probably this is as bad as it gets. Suppliers are postponing orders without any guaranteed new shipment date where they purchased the raw material but did not purchase the packaging yet. In some cases if the material is not yet purchased, suppliers even cancel orders with their customers because the price increase they have to ask for would be in a range of 20-30%, which will make them lose their reputation. 

Chinese New Year

The cataclysm is the 28th of January 2017, when all factories put down the work 12% of the worlds population starts their 2 week holiday with a journey to their hometown. This is also the point in time where the environmental “red alert” will probably be lifted again and everything can go back to normal. However nobody can foresee the effect of China standing still 1 month earlier than anticipated because of these environmental issues and we are working hard to find a solution for each and every customer who encounters this problem along their way.

The potential chances in this situation

Concluding this newsletter the situation does not look good at the moment but it is an amazing chance to get some sourcing and product development work done. Offices remain open and concepts can be drafted, samples can be inspected and quotations can be handed out. Even though production is not at its peak, the factories can focus on selling their assortments and capacities for the coming year, for orders after Chinese New Year.

We are prepared to take on your new ideas and requests before Chinese new year and offer a discount to existing customers of 10% with the coupon code #christmas, sent to any of our employees at ImportDojo. Here in Hong Kong our merchandisers work over the christmas holidays and will be happy to grant this lower price to any service from our services overview except for photography and virtual address services here: http://importdojo.com/sourcing/

Finally, there is nothing left to say except for thank you once again for the trust you put in us in 2016. We are looking forward to an exciting 2017 together with you and we wish you a merry christmas, happy holidays and all the best for 2017.

All the best and happy sourcing,

Manuel

chinese-new-year-lanterns

The Chinese New Year and its impact on your business

So what is all this Chinese New Year delays and why are your factories telling you their staff hasn’t come back and they can’t make samples yet or production will be delayed?

I’ve been in China/Hong Kong for the last 11 years so I understand the problems and prepare myself but to many of you this period of time puts a big question mark on the spot. Let me explain why it is so difficult before and right after Chinese New Year to get factories working on your orders.

Wikipedia excerpt:

Chinese New Year celebrations traditionally run from Chinese New Year’s Eve, the last day of the last month of the Chinese calendar, to the Lantern Festival on the 15th day of the first month, making the festival the longest in the Chinese calendar. The first day of the New Year falls between January 21 and February 20.

The Chinese New Year is traditionally a time to celebrate with family and friends.
Many workers will travel to their hometown during that time. Some workers come from far away provinces within China so they usually will be gone for at least 2 weeks. Why is this? Some rural areas in China do not have much manufacturing industries or employment opportunities, so people need to travel far to manufacturing areas for work. These workers will usually stay all year with the factory and then leave for 2 weeks during Chinese New Year to return to their hometowns.

Factories

What does that mean for your business? Factories will be closed for up to 4 weeks!

The actual public holidays are usually only 7 days (depending on the province) but factories take this opportunity to send their workers home, as this will be the only annual leave most workers have all year. The factory will most likely not give staff/workers any additional holidays during the year.

Staff/workers

Unfortunately for factories, many workers do not return to the factory after the holidays. The percentage of workers not returning can be up to 50% in some cases. In a recent case I heard from a factory of mine that only 20% of all workers have come back by now. This is a HUGE problem for the factory.

This leaves factories in a troubled spot. Not only have they been closed for weeks and losing business but now they can’t fulfill orders from clients that have stacked up since closing for the festivities and workers are scarce. It is important for you to also see the situation for the factory. It’s not that they aren’t willing to produce your goods or aren’t interested in your business anymore, they simply can’t fulfill your order. Many small factories actually close down for good after the Chinese New Year because either their workers haven’t returned or they went on to bigger factories who can offer a better salary.

This can result in long production times for you after the Chinese New Year.
It’s also difficult to reach many factories during the Chinese New Year. Sometimes it’s not clear how long they will be closed and who will return to answer your emails/phone calls. Make sure that you ask your factory/supplier for details on their Chinese New Year operation hours.

To battle this problem many factories have great incentives in place, such as bonuses, educational programs, free dormitories or lunch within the factory, which makes workers return.

As for regular staff of the factory this shouldn’t be a big issue for you.
Most staff has a higher salary than workers (sometimes it can be the opposite), which will include your sales contact at the factory. They usually enjoy more benefits than workers, such as health insurance, bonuses or provided accommodations.

Logistics

Since the factories are closed, most of the logistics companies will also close, but those will most likely only close for the official days of the public holidays.

Be aware that many companies try to ship out their orders before Chinese New Year. This is a very busy season for all parties involved. Logistic companies will also charge you higher than usual rates during this period. Many vessels will be fully booked, so make sure that you reserve and book your space when you have an upcoming shipment.

Solution

So how can you battle this difficult period of time? I wish I had a bullet proof system that can be applied to every factory but it really always depends on the product and factory. Here are some ideas that should help:

1) Look at your sales numbers in September/October and place larger orders right then and there in October to ship out before Chinese New Year. Place orders that will last you until May/June. I know this might be a impact on your cash flow but it is really the only guarantee not to run out of stock until after the Chinese New Year.

2) Try to work with bigger factories right from the start. I know bigger factories have higher MOQ’s so you can start with smaller factories but you should gradually move onto bigger factories. The bigger factories have more benefits for their workers and they are more likely to be in full production right after Chinese New Year.

3) Speak to your sales representative before the Chinese New Year. Ask for estimate delivery times and when they will likely be back at 100%. Plan accordingly.

And most important:

4) Do not rely on one factory only to produce your goods. This actually doesn’t only apply during Chinese New Year but it does especially in that period. If one of your factories closes down for good you may want to have a spare factory in hand.

Once you see your product is running well place re-orders and at the same time look for more suppliers that could potentially replace your existing one just in case.

So you see it is rather normal that you don’t get immediate responses from factories or that samples or orders can take much longer than usual.

Hope this gives you a bit of an overview and better picture of the situation.

Comment here if you have any questions or send me an email.

Please share and like if you found this post helpful :)

All the best and happy sourcing,

Manuel

http://importdojo.com/importdojo-masterclass/

 

CNY

Placing the order – the essentials

You are ready to place the order. Make sure all details in previous sections are clear.

  • Inform the supplier within your order that you will perform an inspection. The costs are on you but if any re-work is necessary another inspection will be on his account.
  • Price and article number (including any color reference)
  • Shipment Date
  • Payment Terms
  • Inspection Date
  • Logistics Provider
  • If possible attach a product picture
  • Instruction on labels, markings on the carton
  • Instructions for Destination Address (your address)
  • Export carton markings
  • Rating labels

Place your order and wait for the supplier’s confirmation or PI (pro-forma invoice)

 

Pay attention to public holidays in China. These can seriously affect your order and shipment. Here are seven main holidays in China where most of the factories are off (excerpt from Wikipedia):

 

Date English name Pinyin Dates (2014) [2]
January 1 New Year Yuándàn Wed 1 January
1st day of 1st lunar month Chinese New Year[3] Chūnjié Fri 31 January – Thu 6 February[4]
5th solar term (April 4 or April 5) Qingming Festival Qīngmíng jié Mon 7 April[5]
May 1 Labour Day Láodòng jié Thu 1-Sat 3 May[6]
5th day of 5th lunar month Dragon Boat Festival Duānwǔ jié Mon 2 June [7]
15th day of 8th lunar month Mid-Autumn Festival Zhōngqiū jié Mon 8 September[7]
October 1 National Day Guóqìng jié Wed 1-Tue 7 October[8]

 

 

The period with most holidays is the Chinese New Year. Some factories close up to 4 weeks, which means that your order is in a long queue before and after the Chinese New Year. Try to ship goods out before Chinese New Year.

 

The general lead-time for shipment from the day of order placement, to shipping, to goods arriving at your warehouse is around 90 days.

 

Here is a breakdown on why:

  • Order placement and administrative clarification (labels, packaging, etc.): 5 days
  • Purchase of raw material: 20-30 days
  • Arrangement of production: 10 days
  • Start of production until shipment: 5-10 days
  • Shipment (goods at sea): 30 days
  • Customs clearance and transport to warehouse: 5-10 days

 

Keep this in mind when planning promotions or sales.

Never miss any updates. Subscribe to our newsletter now.