I’ve been meaning to write about this topic for a while but didn’t get around to it, so finally here it is.
For a lot of you fellow Millennial hustlers and nomads who want the good life, you have probably already been exposed to the business model of Amazon FBA (fulfillment by Amazon). This is one of the most popular e-commerce business models out there today, and is one of the easiest ways for people to start selling physical products online.
I won’t go into detail in this post on how to get started on FBA or how it works – if you do some Googling you will find plenty of blogposts and articles teaching you how to get started on Amazon. However, since I have been physically based in Shanghai for quite some time, I have expertise on how things work in China and how to deal with Chinese manufacturers and logistics, so I will cover these important topics in this post.
Why Source Products from China
In this day and age of global geopolitical tensions and China doing everything possible to make the rest of the world hate them, you might think “I don’t want to deal with China.”
That’s the wrong mentality, because business is business and you should keep your emotional investments away from it.
The truth is, China is still the top producer of 90% of physical products worldwide, with manufacturing know-how and production infrastructure that are far superior compared to the cheaper “new players” like Vietnam, Indonesia, or Bangladesh. If you are importing simple products such as textiles, simple clothing, or grains, then you would probably be right to look at countries in Southeast Asia for better value (and maybe to satisfy your political ideology). However, if you are making anything remotely complex, whether be watches, tools, intricate clothing, collectibles, electronics, etc., you’ll be ordering from China, no doubt.
Sourcing from China is Complicated
Okay so, since everyone needs to source products from Chinese manufacturers 90% of the time, it should be straightforward, right?
Wrong. Business is driven by profits, and you can bet all Chinese manufacturers will be doing their utmost to get every last penny out of you if possible. Likewise, since the birth of e-commerce, tons of new people have started importing items from China, which has made the space more competitive and more crowded from both ends. Both suppliers and buyers have had to upgrade their bullshit filters in order to separate the serious buyers/suppliers from the time wasters.
Doing business in China is often not straightforward or black-and-white, at least far less so than what we are used to in North America or Europe. When dealing with Chinese manufacturers, any contracts and legal documents in English can even often hold no weight, since China has its own laws and only recognizes documents in Chinese. As well, there are plenty of nuances to be aware of when dealing with Chinese suppliers, and they can often range from high quality suppliers to shady suppliers that are downright trying to rip you off.
All of these factors mean that when you are navigating the murky waters of doing business with China, you need to be careful and you need to understand the nuances.
The best way to gain that understanding is to physically visit China, attend the Canton Fair, meet with suppliers, and tour factories. However, under the current pandemic situation with global travel halted, it is not possible to do so. Which means you should either spend a ton of time researching the topic or you should have someone trustworthy on the ground to guide you through the process.
How to Find a Supplier from Abroad
The easiest way to find suppliers for a certain product is to use international commerce websites like Alibaba or Global Sources. While these websites have pretty crappy layouts, they are functional. You can simply search for the item(s) you want to produce/sell, and you will find pages of results with the item and relevant manufacturers.
When examining potential manufacturers, you should check their history and reputation as much as you can on Alibaba or Global Sources. How many years they have been on the site, their “gold supplier” status, how much business have they done and what’s their annual turnover (dollar value), where is their company/factory located, and what’s their response time and rate to customer inquiries.
You should make a shortlist of several potential suppliers, and then contact them all. You should clearly state what you intend to make/purchase (whether it’s a generic product they already have or there’s customization required), and you should ask them for the MOQ (minimum order quantity) and pricing quote.
Note that when it comes to pricing quotes, there are different types of quotes depending on how much of the supply chain the manufacturer has to handle (shipping terms). If you just want them to make the products and you take care of the rest, then you would ask for the EXW (ex-works) price – this is what I recommend if you can find a reliable freight forwarding agent to help you with logistics. If you want the supplier to handle everything, then you can ask for FOB (free on board – supplier is responsible up to the point where the goods are aboard the ship) or CIF (cost insurance and freight – supplier will handle everything until the port of destination).
I personally would recommend always going for EXW, for a very important reason.
You see, nowadays Jeff Bezos and Amazon have been making a big push for Chinese sellers, trading companies, and even manufacturers to go direct and sell their goods on Amazon US or elsewhere. This has posed a huge challenge for existing Western sellers (especially private label and generic sellers), since these Chinese sellers well trained in Amazon no longer need you as the middle man. For this reason, selling on Amazon (US, CA, or Europe) has become very competitive, and if you have a product that sells well you would definitely want to protect your edge.
This is why I highly recommend you separate your supply chain so that the entire thing does not rely on your manufacturer – in the worst case scenario, they could simply start selling your product, since they already control every step of the supply chain.
When I sell on Amazon, I personally keep my supply chain separated – I always order EXW only, and my supplier’s responsibilities stop when they finished producing the batch of products. I have a trusted freight forwarder that then picks up the goods and arranges the shipping vessel, and takes care of the logistics all the way to the Amazon FBA warehouse. By breaking up my supply chain, I ensure that my FBA business is not susceptible to a single point of failure. Also in terms of cost, my way is not any more expensive than ordering CIF, because my freight forwarder is experienced in dealing with shipping and customs, and offers good rates.
When you have picked a few potential suppliers, you will want to order samples so you can physically check them to make sure they are up to your standards. Often times there will be some back-and-forth with iterations and adjustments (for customized products) until you are happy with the sample, before you pay the deposit and give the supplier the green light to begin manufacturing.
Sampling, however, will cost you money – if you order a sample product to be shipped from China to the US, the courier fee will typically cost you tens or even hundreds of US Dollars, not to mention that suppliers will typically ask for a $100 “sampling fee” just so they know that you are serious about ordering and not just wasting their time. You can thank all the non-serious people who thought it would be awesome to start a e-commerce business but then quit or cheaped out early on at the sampling stage for that.
If you do the math you will see that if you order a small size (lower shipping cost) sample which you work with the supplier to reiterate/adjust and reorder 4 times, the sampling process would cost you $100 (initial sampling fee) + $50*4 (shipping 4 times) + whatever extra cost for each sample after the first (let’s say $20*3) = $360 total. On top of that, you are looking at let’s say ~10 days for each shipment plus 3 days for each adjustment = 10+3+10+3+10+3+10 = 49 days. That’s nearly two months just to get the sample right!
Since ordering individual samples can be such a time consuming (and expensive) process, it makes sense to have someone on the ground to help with sampling, especially if you are doing multiple iterations and adjustments. For this specialized service, my team at The China Job can help you, and it would save you money and most importantly, time, so that you could go to market faster.
Communicating with Chinese Suppliers
Communication is one of those things people often underestimate, but actually makes a huge impact on results. When communicating via a cultural divide, it is especially important to be aware of cultural differences in communication and do what is necessary to get your message across.
When it comes to a lot of things in China, there is this attitude of 差不多 which basically means “that’ll do.” This is a super annoying thing when you are trying to do business or produce products, because it means that the supplier and factory workers will often do just the bare minimum, and skimp on quality or details if you are not watching the process carefully.
This is why it is especially important to be 100% clear and precise with all your requirements upfront. If you are making a coffee mug and you want a red stripe to appear 5 cm from the top, then you better state clearly that you want the red stripe exactly 5 cm from the top. You don’t simply say, “put a red stripe on the upper section of the coffee mug” – if you do that then chances are you will get inconsistent results.
Make a detailed list of your product requirements starting from the very beginning when you are sampling, and once your product design is confirmed, have your supplier follow your requirements list to the tee. Even with all the accessories such as packaging and printed labels you must be 100% clear and precise. Don’t forget anything.
The most common terms of payment are what’s known as “30/70 TT” which means 30% upfront when placing the order, and paying the remainder 70% upon completion of production. “TT” just means telegraphic transfer which is kind of an old school term for bank wire or bank transfer.
If you are abroad and found your supplier via Alibaba, then the best and safest way to pay is via Alibaba’s platform directly, with Alibaba being the escrow party – meaning that Alibaba will hold your money and only release it to the supplier when you and the supplier both confirm that production is finished and the goods are shipped.
If you are dealing with the supplier directly off-platform, then you should be sure that the supplier is legit and that you can trust them before making your payment. You can use services such as TransferWise to pay Chinese suppliers directly from USD/CAD/EUR/AUD to CNY (with much better exchange rates than your local banks).
Some Chinese suppliers will have USD bank accounts in Hong Kong, and you can pay them directly in USD via bank wire or even PayPal, but you should pay attention to the fees when using bank wire and PayPal (suppliers will require you to pay the PayPal fees).
Manufacturers vs Trading Companies
Beware if you are dealing with a trading company and not the manufacturer directly. While not all trading companies are bad, some can be a headache – providing shitty service and high prices. I have had both good and bad experiences working with trading companies instead of manufacturer direct – some times were okay but I also had a really unpleasant experience where the trading company made very little effort in having the products meet my requirements, and then practically stopped responding.
How things work in China is that historically since most factories did not have the cross-cultural expertise nor language skills to deal with Western buyers directly, a lot of them go through trading companies. These trading companies are basically China-based middlemen who have a rolodex of factories, which they will order from based on your requirements.
Sometimes when you find a “supplier” on Alibaba, it is in fact not a manufacturer but a trading company. The trading company basically acts as a point of sale for a bunch of factories, and they will take a cut (hence the higher quoted prices).
With many factories in China, they do not have any online presence (especially not in English) so it would be impossible to work with them directly without going through a trading company, and if their products are good then you have no choice. Hence again why it is much more advantageous if you visit China personally and are able to find those manufacturers which you cannot find online from abroad. My team can also help with this at The China Job.
After your supplier has finished producing your batch of products, it’s important to ensure the quality is up to par. This is especially important for your first order – after you’ve ordered from the same supplier several times and built a good relationship (and assuming the supplier has good character), you may not need to worry as much.
For your first order from any new supplier, I would 100% recommend you to do a QC check. Again, if you are not physically able to visit China and do QC at the factory, you should definitely hire a China-based quality control company to do the work for you. A standard check (e.g. checking x amount of units to make sure the defect rate is below a certain %) will typically cost you a couple hundred dollars, but it is definitely worthwhile.
You don’t want to be cheap on this step and then realize after people buy your stuff on Amazon that they are all defective – high customer returns will instantly kill your product/business.
Special Products & Certification
Depending on what product you are buying, you may need certification in order to import into the US or Europe. This applies for things like toys (anything that comes into contact with children) and of course anything that’s to be ingested/consumed (food, supplements, grooming products, etc.) – you need special tests and certification for the latter and you will need FDA approval/certification for the latter.
You should plan for this and discuss with your supplier prior to starting your production process – in most cases if the supplier is big and legit they will have the capabilities and certification in place to perform tests or certifications themselves. That would make life much easier for you.
In some cases, suppliers may not have the qualifications to do those tests and certify your products, in which case you would need to engage third party agencies/labs to do those tests and provide the certification.
Again, make sure you do your research on this stuff before committing to production! If you are just making generic non-invasive products like furniture, then you likely won’t have to worry about this.
The logistics of exporting from China is as follows:
Factory –> China domestic cargo/trucking –> Chinese port of departure –> Customs –> Ship or Plane –> Destination country port –> Customs –> Destination country domestic cargo/trucking –> Amazon warehouse or your own warehouse
Like I mentioned earlier, it’s best to separate your supplier from your logistics process so that you avoid having a single point of failure. I use a freight forwarding agent to handle the shipping process (including customs and tariffs) all the way to the Amazon FBA warehouse, and it works smoothly. If you are interested in learning more about the freight forwarding process or getting introductions to reliable freight forwarders, you can reach out for a consultation.
Be aware that you should know how much import tariffs you need to pay for your particular product. Every country has its own import duty tariff codes, and the % you pay varies based on the category of product (the product’s HS Code). You should make sure to figure this out for what you are shipping prior to making your order, because if you are shipping a product with high import duty, that could eat into your margins significantly.
The Trump-China “trade wars” in 2019 actually led to an extra 15% import duty to be added to all Chinese imports into the USA, which caused a problem for a lot of US-based e-commerce and Amazon FBA sellers.
That pretty much sums up the process of how to source products from China. For any advanced questions, you can visit The China Job and ask for a specific consultation.
PS: For anyone who’s doing or is new to doing Amazon FBA, JungleScout is a go-to tool for all FBA sellers. It is one of the longest-running and most accurate Amazon product research tools out there, and I am still using it today. You should definitely try it out if you haven’t already.