6 Tips for Start-ups Wanting to Take Advantage of the Free Trade Agreement to Source from China
With the signing of the free trade agreement (CHAFTA) there is a big opportunity for Australian SME’s to start sourcing products directly from China with no duty rates.
Elyse Daniels, founder of custom jacket company Exodus Wear has been sourcing from China for over 5 years and has experienced many of the pitfalls that can come along with it. Below she goes over her 6 tips for start ups to successfully source from China.
1. Build relationships with face to face meetings
You don’t need to pick up your passport or step foot in an airport to source wholesale products directly from Asia, but even with a language barrier, nothing beats an old fashioned face to face meeting for relationship building. Just because the transaction can be completed remotely, don’t forget that technology connects and disconnects people.
Your suppliers are an extension of your business, so at least in the first instance, I recommend a trip to China or Hong Kong, to meet with factories directly. One of the most effective and economical ways to do this is by looking at the calendar for the exhibition centres and finding a trade show related to your industry.
On day one of the tradeshow meet everyone, see what they can offer and create a shortlist of exhibitors to meet with. It can be difficult to schedule everyone in, and being on show the Factory staff are pretty busy and might be tempted to try to meet with you at the trade show stall. In anticipation of this when booking the meeting, highlight the need to meet away from the stand so you are not interrupted, this also signals that you are serious about doing business.
2. Don't put all your eggs in one basket
There’s a good reason this saying exists. Once you have found a good factory it can be tempting to put all your orders through them, but this is a big mistake. It doesn’t matter what type of business you own, whatever you are selling shouldn’t come from one source.
While the relationship may seem great at first, don’t forget every relationship does. And, like every other relationship there will come a time when things change. Eventually you might need to renegotiate pricing or terms. If you don’t have anywhere else to go, you could be left in a vulnerable position. Sourcing can be a volatile business so spread your risk.
3. Build the volume to negotiate
China is notorious for only wanting to deal with high volumes. For a company starting out this is a bit of a catch 22. It's difficult to grow your volume if you can’t start producing the product in the first place. To get going, my suggestion is do whatever it takes to build the volume.
Realistically until your business builds volume, you need to either produce locally or source from China, but pay a premium, to have a small amount made as a first run. Sure, this might decrease your profit margins, but its a better approach than taking a gamble and ordering a high volume or product to start with. Once you get regular sales and need to start ordering larger volumes you have the sales history to negotiate better pricing.
4. Engage a freight forwarder with an office in Hong Kong
So you’ve found your supplier(s), and have the volume for large orders from China. Don’t be fooled, you’ve won the battle not the war.
Getting your product out of China can be a battle in itself. Many factories don’t have export licences and utilise a third party trading company and freight forwarder as a work around. All companies are welcome to choose their own, but the energy placed here will have little return. Most freight forwarders have their own recommended trading company; this is generally the best solution.
When picking a freight forwarder, choose someone with an office in Hong Kong. There is a lot of power being on the ground and understanding the local requirements. If the company is small, don’t get turned off, often smaller companies will give you better service. The Freight Trade Alliance is a great organisation that can connect you to a freight forwarder. Note: To take advantage of the free trade agreement it is not enough to just source the goods from China; they need to have a Certificate of Origin to qualify for the free trade agreement (keep in mind that Hong Kong is not included in the free trade agreement).
5. Understand the cultural differences
It can take a while to get used to the way business is done in China. At first factories will seem like they won’t want to deal with you, but they are actually trying to seem not too eager. In China, if they appear to be too eager it implies they are desperate for your business, so they like to give the impression that they don’t need your business, however they will work with you, but only because they like you.
Your gender and age has a big influence when sourcing. Being young and female has been challenging at times. People have literally laughed in my face and I’ve had to convince them to work with me. Only once they see the volume of stock we order, all of a sudden we start getting treated like a treasured customer. For myself, a workaround has been to bring an older man to the meetings with me, it seems ridiculous but this route was less painful than doing it on my own. There are a number of other cultural considerations to make. Austrade has a very useful guide that can be found here.
6. Factory audits and payment terms
And finally, the most important point has been saved for last. Factory audits and payment terms are absolutely critical to a successful import. Always, always, always engage a third party quality inspection company to audit the factory and inspect your goods. Be careful not to use the standard template checklists from the factory. If your product has specific requirements make sure you create a suitable checklist for the inspector to use.
Never pay for your goods upfront. A 30% 50% deposit is standard practice and it is reasonable to suggest that payment will not be made without a physical sample. After the order is complete send in a third party inspection company to check the goods prior to making the balance payment.