Some fascinating findings in this recent BearingPoint survey
of China sourcing strategies, which should be required reading for
every western business before they board the 'plane for Beijing.
The survey is compiled from interviews with 39 German companies, but the findings are not country-specific and they bear out anecdotal evidence that EngagingChina has collected from companies in the west.
One of the more surprising findings, particularly if you are used to reading horror stories about Chinese suppliers, is that almost three out of every four German businesses are satisfied with their China sourcing strategy. And 20% are "very satisfied" -- mostly businesses in the chemicals, industrial equipment and media sectors.
No surprise to see that the the main reason for sourcing from China is to save costs, mentioned by 91% of respondents. The majority achieve costs savings between 10% and 25%, and nearly one quarter said they saved more than 25%.
But sourcing from China is no longer driven solely by cost savings: 59% said they hoped their Chinese connection would enable them to open new sales markets.
One of the key issues identified by BearingPoint is that size does matter. Two thirds of disappointed companies have annual revenues below €1bn.
The higher the purchasing volume, the more attractive the buyer is for a Chinese supplier. BearingPoint says western companies purchasing relatively low volumes of Chinese products, will need to identify and stress other aspects if they want to create interest from Chinese suppliers -- for example, stressing that the company has a prestigious reputation in the west.
The length of the contract also heavily influences the level of satisfaction with their Chinese suppliers. Based on their own assessment of their China sourcing strategy, BearingPoint divided the respondents into two broad groups: successful and unsuccessful.
Half of the unsuccessful companies had contracts lasting less than a year, while all the successful companies had contracts of between one and three years.
China neophytes can take comfort from the finding that satisfaction is not correlated to the number of years that the western business has been sourcing from China. So its never too late to start sourcing from China.
BearingPoint's survey confirms what we have long suspected, namely that that the development of personal relationships between contacts, the famous guanxi (*), is crucial. This issue is explored in more detail in CMO magazine.
Successful companies rated personal connections as the most important factor in choosing a supplier. Unsuccessful companies, by contrast, preferred to use online sourcing tools and trade fairs, and downplayed guanxi.
But what happens if you fall out with your Chinese supplier? The successful companies have already established an alternate source in China. The unsuccessful ones prefer to carry extra inventory or throw in the towel on China and choose another country.
Other key takeaways: quality control should done before the goods leave China, not afterwards; patent and brands needed to be registered in China before providing material to potential suppliers; use independent bodies to certify suppliers; don't forget the hidden costs -- shipping, customs and so on; draw up the contract in Chinese based on Chinese law.
Finally, don't rush. Negotiations with Chinese suppliers should be conducted without any time pressure and contracts should only be closed after having assessed their capabilities and commitment.
(*) Guanxi literally translates as "relationship" and has been a central concept in Chinese society. It describes a personal connection between two people in which one is able to prevail upon another to perform a favour or service. More here
