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Sourcing from China in difficult economic times - the concerns and the opportunities

It has become a common understanding among western manufacturers that it is an unstoppable trend to move part or all the production to China and other low-cost countries in order to stay competitive in their home market, and it is possible to find high-quality and yet competitively-priced products in China. With the threat of the current global economic turmoil, more companies realise the importance and urgency of sourcing from China and other low-cost countries. However, economic uncertainty makes some companies who are already doing so slow down their pace and many new companies are still hesitant to make the move.

What are their concerns? 

1: What if the factory goes bankrupt?

This is already happening. For decades, the Pearl River Delta area of southern Guangdong Province served as a primary engine for China’s astounding economic growth and it is where most of our clients’ products are currently manufactured. But an export slowdown that began in earlier 2008 due to rising costs of labour, transportation and raw materials, new export tax regulations as well as the appreciating Yuan (Chinese currency) and that has been magnified by the global financial crisis late in the year is contributing to the shutdown of many small and mid-size factories here and in other coastal regions.

How are the factories we use performing?

Most factories have been affected by the downturn as they are export-focused. One factory told us that their sales volume in late 2008 dropped by 50%. Small scales of layoffs have also been announced at some factories. But so far, they are doing fine and coping well.

One of the reasons is that we choose factories with great care and always look for a company that is well established and financially sound and always one that has been trading for a number of years. Such factories usually have a wide range of clientele with a healthy spread of sales into the domestic market. Another reason is the government’ efforts in promoting the export market and supporting export-oriented companies and factories to go through the difficult times. Since November 2008, the government has increased the tax rebate rate on VAT on a total of 3486 commodities with intensive labour, high technology and high value-added. Most of the products we source are included, such as glass and glazing products, and aluminum extrusions. The factories we work with now enjoy better profitability and hence more stability.

As a locally-based company, we have sourcing executives who speak to and visit factories all the time. Recently we always ask as part of the ongoing supplier evaluations how their business is performing in the current economic climate and we always take the views of many people from the same factory so we get an overall and true picture.

2. What if I don’t have enough volume to justify containerised shipments?

Although sourcing from China poses great opportunities to most western companies, it does require a certain volume to start with. Most factories demand a MOQ (Minimum Order Quantity). For some commodities, the MOQ is often 1 container load.

If this is too much for your business because of the current economic situation, the good news is factories presently are more flexible to take up smaller orders, when they are suffering from falling export orders. Plus it isn’t necessary at the beginning that large volumes and full containers must always be purchased. Although shipping container loads is the most cost-effective, we help our clients shipping LCL (less than container loads) all the time and can find the best shipping rate available.

3. Better wait till the economy improves.

It does sound sensible as in the current tough trading climate companies generally don’t want to invest in further tooling overseas but it actually might be the ideal time. Here is why:

A: Make the lead-time work for you
A typical sourcing project, from the time we receive the enquiry, to the time our client receives the first trial order, usually takes 4-6 months. Why not make the lead-time work for you by starting the exercise now? By the time the economy improves, you would be ready to go. When you work with a sourcing firm like Linkan, there is no up-front cost and your only investment is time. But it gives you the advantage over your competitors of being ready to place orders in China when the time suits you.

B: Better prices and payment terms
Factories are more flexible these days. They are more willing to give away better prices and attractive payment terms in order to retain existing business and win new business. We have recently helped a client negotiate the price down significantly just because we picked up a good time of negotiation.

The best opportunities and the biggest threats often go hand in hand. Turning threats into opportunities requires good market knowledge, careful planning, and effective problem-solving. As a specialist sourcing firm, we are well equipped to facilitate our clients to realise the huge opportunities available. To find out more about the services we provide and products we specialize in, please visit our website: www.linkan-group.com.

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