Monday morning in your office.  Back to the grind.  The Packers lost, but your fantasy team did really good.  Penn St. lost again—Joe Paterno really should retire.  Oh yeah, the Chinese Yuan appreciated against the American dollar; now worth 6.67 to one USD.

Why is this important (not JoePa getting old, the Yuan appreciation)?  You have already signed the contracts.  Your Chinese supplier has agreed to take American dollars in payment through your Hong Kong bank.  The agreements are set in stone, and you have already budgeted for the next 24 containers.  If the Chinese supplier gets squeezed, that is his problem, not yours, isn’t it?

Be cautious. Be aware that your Chinese suppliers are often operating on razor thin margins.  The economic recession of the past two years has had a hard, enduring ripple effect on the entire supply chain.  Political pressure from the United States to revalue the Yuan has meant that profit margins have been tortured at a time when the American consumer has cut back consumption dramatically.  Demand for consumer goods in the U.S. has dropped and factory orders have suffered.  Factories in Guangdong Province have shut down, freeing up labor.  New recruits from the Chinese interior are not finding the jobs that unskilled labor preceding them found.

After visiting hundreds of factories and warehouses throughout Greater China, I tend to identify with the Chinese workers.  When an American sees the word “warehouse”, he might think of a large, metal building.  Well-lit, climate controlled.  When we see “warehouse” we might think of the building pictured housing laundry powder. Yet the man who rents this warehouse might be a supplier of some large, big-box chain.  Little does he imagine that his business is under attack by the American President!

What he does realize is that he used to get paid RMB 8 for every package of laundry powder he delivered to the freight forwarder and now he gets paid RMB 6.  He does realize that what worked for him in 2007 is not working for him in 2010. Where does he start?  The same place you do.  He starts looking for ways to cut costs. Perhaps he will introduce automation to his operations…perhaps you should refer to the photo again!

So he can’t revolutionize his production methods.  What he does may have a significant impact on you.  The manufacturer of your laundry powder might consider more unsavory remedies.

l  The use of substandard materials in the production process would save costs.

l  So would the delay or exclusion of needed repairs and maintenance of equipment. Think of a product which requires strict measurements of a variety of ingredients like laundry powder.

l  Quality control personnel are nice to have around—and probably necessary when competing for a contract—but might be superfluous when money gets tight.

l  Longer production runs are more cost efficient than shorter production runs, but the end products might sit fallow for an extended period of time prior to shipment.

All these measures would contribute to lower supplier costs; all these measures would contribute to a lower quality product on the shelves.

The above are some of the economic costs that might be trimmed.  There are also social costs which you would not wish your company be associated with.

l  The factory boss might withhold payment from his workers, or force them to work in excess of their agreed times.  CBI has seen workers struggling to meet inhuman production quotas by working sixteen hour days.

l  Laid off workers make for cheap workers.  The minimum wage might not be much in China (officially about US$0.35 per hour) but sometimes labor is available for even less.

So when the Chinese supplier gets caught in a currency squeeze is it your problem? Yes. It is. Understand that when your supplier uses sub-standard materials to produce items like laundry powder, it is your trademark, not his, that suffers. Understand that when your supplier hires under-age poorly trained workers to manufacture shoes, the supplier will not give you a rebate. He will pocket the excess. Understand that when the supplier uses lead paint on the toy cars, the parents whose child who dies from ingesting it will sue YOU, not him.

REMEDIES

Due Diligence companies like CBI Consulting, have run the gamut of companies using every legal and illegal, every ethical and unethical, every legitimate and unsavory method to get ahead—often at the expense of the companies who entrusted them with their contracts.

Good due diligence and background inquiries prior to any agreement are not just good sense—they are good economics.  The evaluation of a supplier needs to start before the contract is signed.

An ounce of prevention…

Good due diligence means fewer surprises.  Is the company properly registered to do the work you are asking him to do?  Does the company have the finances and the assets to begin today?  Do they have a criminal record or past problems with the EPA?  Can they be counted on to do the things they promise?  What do their current suppliers and customers think of them?

Furthermore, once you sign the contract your obligation to your customers is not over.  Monitoring is needed.  Have you ever signed a contract with a Chinese supplier only to realize that the negotiations start after the contract has been signed?

The bottom line is to not be naïve.  There are hundreds, even thousands of good suppliers in China.  Just be aware that they take some searching to find.  Be aware that the bad suppliers can find you just as easily as the good suppliers.  Be aware that your evaluation of suppliers does not stop after you sign the contract—in fact, you could argue that your evaluation starts even before you sign the contract.

China is full of opportunity for buyers hoping to get good quality products at the lowest price.

The challenge is finding them.

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