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China Sourcing 2016 – Is it cost-effective?

2016 January 21

china-sourcing-under-the-microscopeOver 22% of Australian imports come from China. (ABS statistics here.) Hardly surprising, since China accounts for almost a quarter of global manufacturing. Yet recent news reports raise questions about China.

  • Rising wages.
  • Devaluation of the renminbi.
  • Turmoil in the Chinese stock markets.
  • And of course long-standing concerns about product quality.

Even with the China Australia Free Trade Agreement reducing many import tariffs, you might wonder. Is China sourcing worth it?

At Hornet, we believe it is. To explain why, let’s look in more detail.

Rising wages do not make China sourcing uncompetitive.

china-sourcing-2016-wage-comparisonLabour costs in China have certainly risen in recent years. But they started from a very low base.

Compare average wages in Chinese manufacturing to those for local Australian labour. Despite increases, labour costs are still less than one fifth of local wages!

Or you might compare China sourcing to offshore manufacturing in other countries, such as India or Indonesia or Vietnam. Wages are lower, it’s true, but there are other issues to consider.

Productivity

If your order takes 5 days to manufacture in China, but 8 days in India, daily wage costs are note a good comparison. Look at the total labour cost of your order instead. China’s productivity is higher than many low-cost countries. And it’s getting better all the time.

McKinsey found that China’s productivity increased by 11% per annum from 2007 to 2012. That compared with 8% in Thailand and 7% in Indonesia. Plus, with increasing use of robotics, there’s more productivity increases to some.

Infrastructure

china-sourcing-2016-new-silk-road-mapBasic infrastructure like roads, ports and reliable power support manufacturing. China has developed infrastructure already, and continues to invest.
Plans for a ‘New Silk Road‘ are part of a government strategy to open up markets and make trade easy.

It’s not just trade agreements. Transport infrastructure, including freight rail, will make China sourcing more affordable and reliable.

That transport investment is also opening up the centre of China for export-based manufacturing. And wages in inland China are lower than in the coastal regions.

Supplier clusters

In Australia, we know well that the loss of major automotive manufacturers will cause hardship for many parts suppliers. In China, major manufacturers have attracted similar second tier suppliers, who are located close by. So all the parts required are readily available. In addition, competition keeps component prices down.

A devalued renminbi will help keep China export competitive.

For Australians looking to import, the falling Aussie dollar can seem like a big hurdle. But remember, the USD-AUD exchange rate only matters if your contract is in US dollars!

china-sourcing-renminbi-puzzle

With our own offices in China, Hornet routinely negotiate contracts in renminbi. And the renminbi is falling against the US dollar. At least as fast as the Aussie dollar is.

So the AUD-CNY (China yen, or renminbi) exchange rate is unaffected.

As China moves onto the world stage and relaxes restrictions on its currency, the renminbi is likely to fall further still. So Chinese manufacturing will become even more cost-effective.

Chinese stock market turmoil

Chinese stocks tumbled in mid-late 2015. They fell again early this month, triggering a trading halt.

But the Chinese stock market is not as closely linked to the country’s economy as Westerners might expect.

The ABC reports, ‘at best only around seven per cent of China’s population engages with the stock market. Those who do buy stocks can be less likely to trade based on solid reasoning and more likely to simply follow others.

‘More likely to follow others’ means a panic herd reaction is only to be expected.

What’s more, the Chinese government has historically intervened to keep the stock market stable. This January, it appears they didn’t.  ‘There’s been a lot of surprise in the market that China hasn’t slowed this decline,‘ says a Barcalys representative.

While the stock market drops make headlines, they’re really an overdue adjustment. And possibly a sign that Chinese economic management is becoming more like the West.

China sourcing does not mean low quality goods.

We’ve written many times about China sourcing and quality. There’s one key point to make, so let’s make it again.

China sourcing doesn’t cause quality issues. Poor sourcing practice causes quality issues.

Major multinationals (Caterpillar, Apple, Nike, Ford…) manufacture in China. These companies invest in quality control and get quality product from China. (Most of the time! There are some mistakes, like this Panadol syringe.)

Ensuring on-the-ground quality control can be difficult for smaller companies. It’s not always easy to justify international travel, let alone someone full-time in China.  And you might not have staff with relevant experience. Hornet’s services resolve this problem. You can opt for an end-to-end sourcing service, or just ask for help with quality control.

ChAFTA (China Australia Free Trade Agreement

China-australia-free-trade-tariff-reductionsWe’ve written about this previously. It’s good news for China sourcing.

Import tariffs are gradually reducing on items including clothes, footwear, household electronics and cars.

The first tariff reductions occurred on 1 January this year.  The correct documentation is required. More information here.

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In summary, sourcing from China remains a reliable and cost-effective option for many Australian businesses. But it pays to investigate the options for your business. You may want to do everything yourself – in which case you’ll need to invest in regular travel, plus have strong quality control systems, a great deal of patience and good attention to detail. Or you may want to work with a partner like Hornet, with expertise on the ground in China.

Whether you’re sourcing retail items, industrial goods, spare parts or packaging, there are factories in China who can supply you. If you’d like to discuss your needs further, just call or email us at any time.

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Other useful articles from the Hornet blog

Why use a sourcing agency?

Manufacturing Map of China

China Sourcing vs India Sourcing

Impact of the China Australia Free Trade Agreement for Importers

ChAFTA Update

Sources:

http://www.tradingeconomics.com/china/wages-in-manufacturing.

http://www.tradingeconomics.com/australia/wages-in-manufacturing.

http://www.economist.com/news/briefing/21646180-rising-chinese-wages-will-only-strengthen-asias-hold-manufacturing-tightening-grip.

http://www.economist.com/news/leaders/21646204-asias-dominance-manufacturing-will-endure-will-make-development-harder-others-made.

http://www.abc.net.au/news/2015-08-01/a-look-inside-the-strange-world-of-chinas-stock/6665964

http://www.wsj.com/articles/china-market-plunge-has-investors-wondering-about-more-turmoil-1451919595

Importing from China – How much do you know?

2015 October 26

importing-from-china-quiz-illustrationAre you a China sourcing expert?

Do you have the knowledge and expertise you need for successful sourcing and importing from China?

  • Can you ensure quality product?
  • On time?
  • Every time?

10 quick questions will help you find out…

Take the China Challenge now!

 

 

 

 

 

Packaging Design for International Sourcing

2015 October 20

packaging-design-crushed-fragile-cartonEven customers who give great product specifications often forget packaging design. Others specify retail packaging, but don’t mention shipping boxes.

This post looks at all levels of packaging for your product.

Why they matter and what you need to address at each level.

Good packaging design needs thought and pre-planning. It may cost a little more. On the other hand, it costs far less than repairing or replacing damaged products.

And for many clients, pre-planning actually saves on repacking costs once goods reach Australia.

Types and Levels of Packaging for your Product

Let’s look at these from the innermost level outwards.

Retail Unit Packaging

This is the final sales packaging for the product. It’s the first packaging most people think of.

Packaging design considerations include:

  • Branding. Logo, tagline, colour, imagery and style are important. So is the packaging material.
  • Promotion. Related to branding, but not the same. Think about special packs for promotional campaigns, like this current Nutrigrain offer.
  • Product protection. Products such as glassware, ceramics and electronics may need internal packaging materials as well as a carton.
  • Ease of stocking. Many fast-moving consumer goods are sold in rectangular cartons. The shape makes it easy to stock shelves. It’s efficient use of space too.
  • Labeling requirements. Regulations vary for different products, but be sure to check requirements in your packaging design.
  • Barcodes. Yours. Your distributors. You may print as part of the packaging, or you may leave a space and apply stickers later.

Inner Cartons

This packaging is one level up from the individual retail unit. If you’re supplying to retailers or wholesalers, it’s the level of packaging you’ll use to deliver to them.

In Hornet’s experience, many clients could improve business results by looking at inner cartons much earlier in the sourcing process.

packaging-design-inner-cartons-outer-cartonsDesign inner cartons to meet your retailer requirements and have goods packed in these cartons in China.

Your unit cost may increase a little. But you save on the expensive process of packing and unpacking your product once it’s imported.

Not only is it less work to do it right first time, in China, you also get the benefit of cheaper labour.

So before you place your next order, talk to your retailers. Then specify inner cartons which satisfy all their requirements.

  • Order quantities. Retailers often have a preferred order configuration – for example, lots of three, or six. If your inner cartons match this configuration, your pick and pack operations in Australia will be much easier.
  • Branding, labeling, barcodes. Your distributors want to make operations easier for their warehouse or store staff.  Find out what their guidelines are and follow them.
  • Remember Occupational Health and Safety. Do your partners have limits on the size or weight of cartons their staff can handle?
  • Carton materials and quality. A common issue here is carton thickness. These cartons are still being handled by warehouse staff in bulk. They need to be able to stand up to this treatment.
  • What about labeling for fragile goods, or markers indicating which way up a carton should be stacked?
  • For some products, the inner carton may double as a retail display unit. This can save a lot of rework and increase sales!
  • Think about what happens when your inner cartons are opened. Remember, warehouse staff have to open hundreds of boxes. They use a knife and they’re in a hurry. An extra layer of cardboard at the top of your inner carton can protect retail packaging boxes inside it.

Outer Cartons

These cartons are your top level shipping carton. They are the units used to pack onto a pallet, or into a shipping container.  They are also known as export cartons.

The key issues for this level of packaging are protection during transport and accurate shipping.

For product protection, there are many aspects to consider.

  • Strength and thickness of cartons. They need to cope with rough handling. They may be dropped or knocked. Bad weather can lead to turbulence during air freight. Container ships roll with big waves, so items may shift even if well packed.
  • Temperature variations. If your product is sensitive to temperature, you need to allow for this. Does it expand or contract? Leave space, but still make sure the product is secure.
  • Humidity. Once a container is packed, there is limited airflow. The air may not be able to hold as much moisture if the temperature drops, so condensation occurs. Include desiccants in your packaging to minimise mould and water-staining from excess humidity.
  • Theft and pilferage. Branding on outer packaging can be a temptation. It doesn’t add any real value. Avoid it.

You do need clear information on your export cartons though. This is often called the ‘shipping mark’.  Usually it includes:

  • Your business name.
  • Product code or other reference numbers.
  • Net weight & gross weight of the carton.
  • Dimensions of the carton.
  • Number of cartons in the consignment (so your cartons might be labeled 1/280, 2/280 etc).
  • Country of destination.
  • Indications if your product is fragile, hazardous or needs to be stacked a particular way up.

packaging-design-shipping-markThe shipping mark can be printed directly onto cartons or attached as a sticky label. It should be waterproof, as cartons may be exposed to rain or other moisture.

Remember cartons are often stacked tightly together, so have the shipping mark on more than one side. (Usually three sides.)

Also consider having the shipping mark in both English and Chinese when shipping from China. So the people handling your shipment understand it!

Additional Export Packaging Options

While most products are packed in cartons, they’re not appropriate for everything.  You may need to use wooden crates or metal drums in some instances. In this case the shipping mark will almost certainly be on a label.

Your export cartons will probably be packed onto a pallet and/or into a container for transportation. Both these options restrict air circulation, so humidity and temperature control become more important. You may need extra measures at this level to protect your product.

Other packaging design considerations

  • Packaging waste is an increasingly important issue.  The Australian Packaging Covenant aims to encourage re-use and recycling of packaging. If you ship to other countries, research regulation before finalising your packaging design.
  • Certain packaging materials may be restricted, or require special treatment. Wood used in crates and pallets is a prime example.
  • Unless you are shipping full containers, the weight and dimensions of your packaging will affect your total freight bill. Light, strong materials and efficient use of space can save you money.

Hornet’s number one packaging advice?

Specify your packaging as carefully as you specify your product. And get it checked as part of your pre-shipment inspection.

For more advice or assistance with your export packaging, just contact us!

China vs India: where should you source and manufacture?

2015 September 24

china-vs-india-flagAnyone sourcing from Asia should be aware of ‘Made in China 2025‘ and the ‘Make in India’ campaign. But to source your product, you need more than government-level campaigns. How do you make the right decision for you? What are the factors in your ‘China vs India’ decision?

Labour Costs

It’s well known that labour costs in China are rising.

Bloomberg reports that the average hourly wage in Indian manufacturing is US$0.92. In China it’s US$3.52.

On labour cost alone, India should beat China every time.  But it’s not that simple.

First up, wages vary dependent on the type of manufacturing.

Compare manufacturing exports of the two countries.

china-vs-india-major-exports

China has a lot of hi-tech manufacturing. This requires more skilled workers. So costs are higher.

Productivity matters, too.  It takes 1.6 times as many worker hours to produce goods in India. So you pay a lower hourly rate, but for more hours.

Adjust for productivity and Chinese labour costs are only around twice those of India.

That’s still significant, of course. But cost of labour isn’t the only factor in the China vs India debate.

Labour Laws and Business Regulatory Environment

‘Simultaneously the most crippling of Indian diseases and the highest of Indian art-forms.’

That’s how Shashi Tharoor describes bureaucracy in ‘The Great Indian Novel‘.

The World Bank’s ‘Ease of Doing Business’ ranking tells the same story. China ranks 90th out of 189 countries. India ranks 142.

To be fair, this ranking is for setting up a business, not sourcing product. But it includes some key factors.

  • Getting credit. This is the only factor where India ranks above China. 36 vs 71.  That’s reflected in payment terms too. A deposit of 30% is standard when sourcing from China, but many Indian suppliers accept a 30 day payment term.
  • Trading across borders. A score of 98 for China vs India at 126. Also, much Indian manufacturing is for the domestic market, whereas many Chinese factories target export markets. (And if you source via Hornet, we”l consider that when selecting a supplier.) So your Chinese supplier is more likely to export, plus the regulation is simpler.
  • Enforcing contracts. China ranks 35 – ahead of the US at 41!  India ranks a shocking 186 out of 189. If anything goes wrong, you don’t want to be dealing with the Indian legal system!

One more thing about Indian regulation. Labour laws and taxes are tougher for companies with over 10 employees. There’s little incentive to expand. So two thirds of manufacturing employees work for companies with 10 or fewer staff.

What does this mean for sourcing from India?

  • Supplier selection is more complex and time-consuming.
  • One supplier may not be able to handle a large volume.
  • Smaller companies often have limited resources and can be less stable.

Companies of under 10 employees exist in China too. But there’s no artificial limit, so the range of company sizes is more balanced. In Hornet’s experience, it’s easy to find the right size supplier for your project.

Infrastructure

china-vs-india-infrastructureChinese government support has also led to good infrastructure.

Transport

Chinese cities and industrialised regions have excellent road networks.  2013 figures show China has 74,000 km of expressways. India has around 600km. The Indian government is investing in infrastructure, but major improvements will take time.

This paper on time efficiency at ports globally confirms that Chinese ports operate at world class efficiency. Indian ports need an extra day on average to process a ship.

Power

In developed countries, we take our power supply for granted. In India, that’s not so.

china-vs-india-powerA 2013 report by the Federation of Indian Chambers of Commerce and Industry details the problem.

  • 5% of firms suffer 21-30 hours per week of power shortage.
  • 21% suffer more than 30 hours per week.
  • 64% feel erratic power supply affects their competitiveness.
  • 61% would pay more for reliable power supply.

In the same year, China State Grid reported that ‘nationwide power supply reliability was up to 99.948%.’

Supply Chain Clusters

Finally, strong supply chains exist in many parts of China. Cities or regions have developed a manufacturing speciality and related businesses cluster close together. Short supply chains mean less material in transit, so less overhead cost. There’s also less risk of delay when demand spikes suddenly.

In conclusion

When Hornet started out a decade or more ago, China was the obvious choice for Asian sourcing. The challenge was quality, not cost. Now the picture is more complex.

Quality manufacturers exist in China. But it’s still inconsistent.  It’s important to audit factories carefully and ensure proper quality control measures. On the other hand, China is no longer the default option for low cost. (Despite the recent devaluation of the yuan!)

At Hornet, we’ve investigated other Asian countries, including India.  We’ve sourced from India. So far, it’s been textiles and clothing. We’ve experienced many of the issues described above. We haven’t opened any offices yet – we worked with carefully selected partners to test the water.  We continue to monitor the Indian market.

In many ways, India in 2015 is like China when we started out. Costs are low, but you need strong quality control. And structural factors like transport and power cannot be controlled. Any international sourcing leadtime should include a buffer. In China, you may need that buffer. In India, you will!

The decision whether to source from China or India depends on your specific project. Ask yourself these questions.

  • What product do you want? In what volume?
  • How much lead-time do you have? What will be the impact of a delay?
  • What’s your quality standard? How much tolerance do you have for variation? (It’s not just precision electronics vs clothing. Quality for luxury retail clothing is not the same as for a give-away t-shirt.)

We hope this article gives a good background on the China vs India sourcing debate. For a detailed discussion of your project, please contact us.

Finding a Factory in China – A Real Life Example

2015 July 28

Many of Hornet’s sourcing projects start with finding a factory in China.  Today we’re sharing a real-life example of how we do that.

finding-a-factory-bamboo-warehouse

Background

The client for this project is working with us to source an apparently straightforward product. Bamboo stakes for gardeners.

Sounds simple, doesn’t it? China, the home of the giant panda and of the bamboo pandas eat.  And all we need are lengths of bamboo cane.  How hard can it be to harvest, trim and ship bamboo from China to Australia?

Challenges

Quality

Our client has a number of quality requirements for the bamboo stakes.

  • Species of bamboo. (There are around 1200 species of bamboo, with different characteristics. Many rot quickly when inserted in the ground, which is clearly not good for bamboo stakes!)
  • Length of the stake.
  • Diameter of the stake.
  • Size of the hollow in the middle of the bamboo.  This is important because it affects the thickness of the bamboo wall, which affects strength.

Import Regulations

Even more important is that bamboo is a plant material.  Import to Australia of any plant materials is heavily regulated.

We consulted our customs broker and the Import Conditions Database to confirm regulations. Search on bamboo and you’ll find not just general requirements, but more detailed ones for certain species and certain uses. We needed to be sure that the bamboo was cut, dried and treated correctly before import.

Finding a factory with experience in bamboo for the Australian market was a key decision factor.

Factory Location

Bamboo factories are located all across China. We needed one with good access to major ports for easy shipping.

Continuity of Supply

Demand for bamboo stakes changes rapidly with the season and the weather. We had to be sure we could get additional product quickly at any time.

Some bamboo factories process only bamboo from their own plantations. Some have a network of suppliers across China.  This gives better reliability, so we added it to our selection checklist.

The process of finding a factory

Initial research

Jack Wen, who heads up the Hornet team in China, researched several dozen factories. Many were eliminated due to poor location, lack of experience exporting to Australia, or uncertain supply.

Jack also checked factory registrations were correct and up-to-date. He looked at the factory size and number of employees. A good fit with the client’s expected volumes means a factory which can handle volume, but where the client’s order is big enough to matter.

After the research, Jack had a shortlist of 5 factories. Now it was time to inspect physically.

Factory Inspection and Audit

The inspection visits helped Jack eliminate two more factories.

One was close to ports, but the actual location was remote and mountainous.  In bad weather, the roads would be impassable.

Another had a very small drying area and warehouse.  This meant it would be less responsive if order volumes changed.

finding-a-factory-bamboo-drying

Client Factory Visit

For this project, the client wanted to visit the factories and conduct final negotiations in person. Our China team organised the visits and Jack accompanied the client. He assisted with translation, plus provided advice and feedback to our client.

Practical benefits of using Hornet

Time saving. Imagine identifying and researching two dozen factories by yourself.  Without a native Chinese speaker who knows where to investigate online. Even just location and registration status would take many hours.

Cost saving. In this case, our client wanted to visit the factories for final negotiation, so they still spent money on a trip to China. But Jack’s previous inspections saved them time and money spent visiting unsuitable factories.
Many of Hornet’s clients don’t visit China at all. We negotiate for them. So they save thousands of dollars in travel.  (They save several days of time as well!)

Improved communication. Having a native speaker who understands the business culture makes communication easier. And since Jack was involved in the project from the start, he understood our client’s needs far better.  That meant he could advise as well as interpret.

Emphasis on quality. The factory shortlist was not decided on price. It focussed on consistent supply of product to meet Australian standards. Unless you know a factory can deliver what you need, there’s no point in discussing costs.

Do you need help finding a factory in China? Contact Hornet and let’s discuss how we can help.

HotelTonight’s Australian Launch – How Hornet Helped

2015 July 3

hoteltonight-surfboard-close-up
‘Plan less. Live more.’

Play more. Relax more. Explore more. Unwind more. Indulge more.

That’s the promise of HotelTonight, a last-minute hotel booking app which has just launched in Australia.

(‘Surf more.’)

HotelTonight may be a hi-tech San Francisco start-up, available only on mobile, but it still understands the importance of real world delivery. And Hornet has been delighted to help out.

The press has focused on some really cool features of the HotelTonight app:

  • you can book a room in just 10 seconds!
  • discounts of up to 50%
  • guaranteed rooms available for every night of the year

Meanwhile, Hornet and the HotelTonight team have been doing all we can to make the delivery live up to the promise.

For them, it’s been about hand-picking top hotels in Sydney and Melbourne for the launch. About publicity. About organising a launch event and other activities to help stand out in the travel market.

For us, it’s been about sourcing a whole range of items to assemble into the HotelTonight ‘spontaneity kit’.

hoteltonight-spontaneity-packThese nifty little bags contain all you need when you make that last-minute decision to stay overnight rather than make the long trek home. Toothbrush, toothpaste, a change of undies. Even a pair of sunnies to hide the bags under your eyes in the morning. Everything in the pack is branded with the HotelTonight logo and the whole idea is to fit in with the company’s spontaneous and fun image.

Fun doesn’t come without any challenges. We needed the first hundred packs ready on a very short lead-time before the Australian launch. Then we had more time to finalise the bulk of the order.

So how did we do it?

In consultation with the HotelTonight team, we decided to split the sourcing.

For the small initial order, we worked with our sister company Xpadite to fulfil locally. We accessed their network to source items and overprint with the HotelTonight logo and slogans. Local sourcing also meant we could meet face-to-face or talk on the phone with no time difference. Samples arrived overnight or even the same day. And there was no risk of international shipping delays to mess up deadlines.

For the rest of the order, we leveraged Hornet’s overseas offices to source more widely and control costs. We used our experience with the initial order to refine specifications and quality checklists too. The separate parts of those orders are all starting to come in now, and we’re happy to say the quality is just fantastic.

It wasn’t just sourcing goods, though. All those things needed to be put together to make HotelTonight spontaneity packs. We did that in our local Australian facilities, where we’re also storing stock until it’s needed.

So who gets the spontaneity packs?

  • Some were sent out to journalists and bloggers as part of a PR campaign around the launch.
  • Some were in evidence at the launch party last Sunday. (Thanks for the invite, Stefan, Meagan and team!
  • Some were at the pop-up hotel suite at the Overseas Passenger Terminal in Sydney.
  • We’re guessing some will be at the next pop-up suite in Melbourne in August – but if you want more details of that, you’ll have to download the app.

hoteltonight-pop-up-suite

And in case you’re wondering, at least one member of the Hornet team has tried HotelTonight in Australia already. Scored a room at $50 less than it would have cost any other way. Had a fantastic time. And true to the HotelTonight motto, it was booked on the spur of the moment.

With fun at work and a great offering like this, HotelTonight is one company Hornet are thrilled to be working with.

hothoteltonight-pop-up-suite-bed

hoteltonight-pop-up-suite-pillow-fight

China Australia Free Trade Agreement – Importer Update

2015 June 24

China-australia-free-trade-tariff-reductionsThe China-Australia Free Trade Agreement (ChAFTA) was signed in Canberra on 17 June 2015.

One more step in the process, but it will still take time for ChAFTA to come into force.

Here are the key points for Australian importers.

Parliamentary Process

The Agreement still needs to be accepted by the parliaments of both countries.

In Australia, the process began the day the Agreement was signed.  Trade and Investment Minister Andrew Robb tabled the Agreement in the Australian Parliament.

JSCOT

The Joint Standing Committee on Treaties (JSCOT) is now conducting an inquiry into the Agreement.  This is standard procedure.  It will report back to Parliament, usually within 20 joint sitting days.  Parliament then reviews the report and makes amendments to relevant legislation and Regulations.  The timeline for this stage is not fixed.

After this, Australia is ready to exchange diplomatic notes.  This will confirm it is ready for the Agreement to come into force.

Senate Inquiry

The Australian Senate Reference Committee on Foreign Affairs, Defence and Trade is conducting its own inquiry.  This is independent of JSCOT, with different terms of reference.  Submissions close on 28 August.  This inquiry will report within 1 month of JSCOT.

Chinese Ratification

In China, the government is following its own treaty-making process.  This involves submission to the State Council, then referral to the Standing Committee of the National People’s Congress for final ratification.

Diplomatic notes will be exchanged once both countries have completed their domestic processes.

Implementation

The China Australia Free Trade Agreement will come into force 30 days after the diplomatic notes, unless another period is agreed on.

If all goes well, the Agreement should come into force towards the end of 2015.

But will all go well?  The FTA includes Investor State Dispute Settlement (ISDS).  Australia is already being sued by foreign tobacco companies under a similar clause in a different treaty. The Productivity Commission says the FTA is ‘dangerous.’  And voters are worried about cheap Chinese labour in Australia. Delays are certainly possible.

Import Tariff Reductions

There is one key impact of the China Australia Free Trade Agreement for importers.  That’s the reduction (phase-out) of import tariffs for Chinese goods.

This includes the 5% tariff on Chinese manufacturing exports, electronics and white goods, which will gradually reduce to zero. There are usually 3 or 5 stages of tariff reduction.  More details are in the Schedule for Australia and associated listing by Harmonised System Code.

Note that staged tariff reductions occur on 1 January each year, not on the anniversary of implementation.  So juggling stock levels to bring in the bare minimum before Christmas could save you money.  Just make sure you don’t leave customers unsupplied!

Ensuring your Imports Qualify for ChAFTA Treatment

If you want goods imported into Australia to qualify for ChAFTA, you will need the right documentation.  That will be a Certificate of Origin (COO) or a Declaration of Origin (DOO). Either must be issued by an authorised body in China.

It’s not yet known what those bodies will be.

You will need documents for each individual shipment.  There’s more detail in this DFAT document.

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There are no immediate changes for importers,  But it’s time to review your options.  In a previous post about ChAFTA, we quoted David Morfesi, Executive Director of the Institute for International Trade at the University of Adelaide.

Reducing the costs of imports from China is likely to be as important to small businesses as encouraging more exports to China.

If you source locally, lower import tariffs may make sourcing from China more attractive. But this could increase your leadtimes, especially for first shipments where you need to find a quality supplier.  Hornet recommend starting early.  That way you have time for any problems which arise.

If you normally order large production runs in China, don’t import too much too soon.  Consider using a warehouse in China to store excess stock until import tariffs decrease.

Y

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To keep up to date with the Australia China Free Trade Agreement, consult the DFAT site.

Australian Import Compliance – Key Points to Consider

2015 May 28

import-complianceCompliance is an important consideration when sourcing internationally and importing to Australia.

There are multiple aspects of compliance.  This article outlines major issues you need to consider.

Hornet Group have a decade of experience sourcing from China.  We’ve project managed everything from automotive to industrial to toys to packaging.  So we have a good idea what we’re talking about.

While import compliance issues are similar for all products, the details vary from category to category.  The information we’re giving here is general.  We can’t and don’t guarantee it’s complete or up-to-date.  Before starting on a sourcing and import project, we recommend you do your own research.  If you work with us, we’re happy to lend our expertise.  But regulatory compliance remains the responsibility of the importer.

Compliance with Import Regulations

Import of certain products into Australia is prohibited.

The list of prohibited imports is surprisingly small.  Suicide devices.  Dangerous breeds of dogs. Stem cells and other products from human embryo clones.  Anything at all from countries where Australia has imposed sanctions.  (Libya, North Korea and other such places.)

Many more products are restricted.

They’re restricted in different ways.  You may need a licence.  Your product may simply need to meet specific standards.  As we said, the devil is in the detail.

Some of these restricted products are exactly what you’d expect.

  • Weapons, explosives and firearms.
  • Chemical and biological agents which can be used as weapons.
  • Drugs and narcotics.
  • Therapeutic substances.

Others may catch you unawares.

  • Substances with human or animal origins.  Important if you’re sourcing leather goods like bags or shoes!
  • Goods bearing the word ANZAC – and advertising materials relating to them.
  • Cigarette lighters
  • Novelty erasers (if they look and smell like food)
  • Some laser pointers
  • Some incandescent lamps

A whole range of other products are fine to import as long as they do not contain excessive levels of heavy metals.  One way to handle these is to include the requirements in the product specification.  Of course you also need strong quality control.  This includes testing samples before committing to an order, and further testing at the pre-shipment inspection.

  • Toys
  • Cosmetics
  • Pencils and paintbrushes
  • Money boxes
  • Ceramics – if they are to be used for food storage, preparation or consumption, but not if they’re for purely decorative purposes.

By now it should be obvious why you need to research import compliance requirements for your specific product!  An excellent place to start is the Australian Customs information page on prohibited and restricted items.

Labelling and Trade Description Requirements

We have written previously about labelling requirements.  These apply to many categories of goods.  Additional requirements apply for some categories like food, medicines, textiles, clothing, shoes and agricultural chemicals.

Labels must include a trade description which is:

  • in English
  • in prominent and legible characters
  • on the main label or brand attached to the goods, in a prominent position and in a way that is as permanent as practicable

The trade description must include the name of the country of origin and a true description of the goods.

This Customs page has more information about labelling and contact details for further enquiries.

Compliance with Australian Standards

Import compliance also means your product must meet any and all applicable Australian Standards.  There are nearly 7,000 of them!  Many apply to processes rather than products, but you do need to sort through them.

For most products, it will be fairly easy to identify which standards apply.  But remember, your product may cut across several categories.

Hornet had an enquiry some time back about importing a ‘food van’.  Essentially a café on wheels.  Let’s take a look at the compliance requirements for that.

  • It’s a vehicle.  There are specific requirements and permits required to import any vehicle into Australia.  There are also Australian standards for road vehicles in general, commercial vehicles and special purpose vehicles.
  • It has inbuilt appliances for cooking, refrigeration and other food preparation.  There are also Australian standards governing electronic appliances.
  • It has water storages and pumping systems. These too are subject to Australian standards.

Of course this an extreme example, but you can see why investigating compliance early in your project is essential.

The best place to start is the Standards Australia website.

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We hope this gives you some insight into the kind of compliance issues you need to consider when sourcing from China or other overseas locations.  If you have further questions, we’re always happy to help, so just contact us.

 

How Hornet’s warehouse in China can help your business

2015 April 29

warehouse-in-china-hornet-staffAll Hornet’s clients know that we have our own offices in China.  It’s one of the key ways we ensure quality sourcing for everything we handle.  But do you know that we also have our own warehouse in China?  Or perhaps you don’t think that’s relevant to you?

There are three main ways Hornet clients can benefit from our warehouse in China.

1. International distribution from China

Many of our clients sell products not just in Australia but internationally.  It makes no sense to import to Australia, then export them again later.  So we oversee manufacturing and quality control, then we ship some goods to Australia and some to our warehouse in China.

As orders arrive from overseas distributors, we pick, pack and ship direct from China to those countries.  Freight is quicker and cheaper than from Australia.  Warehousing is cheaper than domestic storage too.  So our clients benefit in at least three ways!

They may get a fourth, hidden benefit too.  Combining volume requirements for business in multiple countries means a higher production volume.  It may be possible to cut cost per unit, increasing margin.

Clients use this drop-shipping model for products such as custom packaging, industrial goods and homewares.

Drop-shipping from China is not always best. It works well if you have good international trade volumes.  That generally means bulk shipments to distributors, agents or retailers.  If you’re an online store with only a few overseas sales, there’s generally not much value. The courier costs for drop-shipping are not much different.  Plus, you have to bear the costs of warehousing, and manage stock levels, in two countries. That makes your operations more complex.

If you’re not sure what’s right for you, contact Hornet to discuss your options.

2. Order consolidation in our China warehouse

Some clients ask Hornet to manage production of multiple different products for the Australian market.  These may come from different factories and be ready at different times.  warehouse-in-china-stock-consolidationCombining orders into a single international  shipment can save a lot of money.  It’s most effective when we can use one FCL shipment instead of two or more LCL shipments. (If you don’t know what FCL and LCL mean, find out here.)

The process is simple.  We have completed, quality-approved orders shipped to our warehouse in China, and store them until all shipments are ready.  We then pack everything on one bill of lading to send to Australia.

Order consolidation works best when orders are completed around the same time. It also helps if your deadlines are not too tight.

3. Fulfilment services in our China warehouse

Other clients have complex products, where parts may be sourced from different suppliers and require assembly into one unit.  This could be an industrial item product – say installing lightbulbs in lamps.  Or it could be a retail gift pack.  Imagine a luxury toiletry set, with a branded bag made by one supplier, brushes from a second supplier and soap or lotions from a third.

Chinese labour costs may be rising, but it’s still cheaper to assemble than in Australia.   Recently we worked with a major university to source branded custom manufactured items.  They included a unique gift box together with notebooks, tablet covers, pens and other stationery items.  We assembled everything into student welcome packs in our China warehouse.

Fulfilment and product assembly in China has another potential advantage too.  It can help to protect your intellectual property.  If you’re sourcing a complex product from China, Hornet can use different factories for different parts.  Everything is delivered to our warehouse in China for final assembly.  So no supplier has all the details to copy your product.  Nor do the staff doing assembly.  (Even if they did, they are Hornet employees. We’re an Australian company who don’t manufacture, so there’s minimal risk.)

Where is Hornet’s warehouse in China?

Hornet Group’s warehouse is in Dongguan.  This is convenient to Shenzhen and Huangpu, Port Guangzhou, as well as many production areas.

To find out more about our warehouse in China, please contact Hornet.

Industry Spotlight: Toys and Children’s Goods

2015 April 23

improt-toys-from-china-board-gameWhy import toys from China?

Research puts the Australian toy market at around $850 million per annum.  Most toys are sourced overseas.  So the market for imported toys is at least $500 million, with China the largest supplier.

Sounds great, doesn’t it?

Yet market size has actually decreased slightly over the last five years.  So why import toys from China?

The answer depends on your business model, but relates to other market statistics.

Australian online toy sales are growing at 15% per annum.  Nearly one quarter of all toy sales in Australia are e-commerce sales.

If you’d like to sell toys online, now’s the time!  Barriers to entry are low.  The market is in a growth stage – especially for niche sites. Existing toy retailers and suppliers face different challenges.  Competition is fierce.

Importing toys from China can help you compete, especially if you have a partner who manages the import process for you.  That leaves you free to focus on your product range, marketing and promotion.

What toys and children’s products are the best to import?

import-toys-from-china-planeA large part of the market is branded and licensed toys from international companies. These are supplied via approved distributors only.  There is limited opportunity for margin.

Hornet clients have had success with unusual, imaginative toys, like those showcased on hardtofind.

These may be variations on a standard toy – blocks, plush toys, craft kits, traditional games – or something completely new.  What they have in common is attention to detail and high quality.

 

Business models for custom-designed toys and factory standard toys

Factory-standard toys may seem easier and quicker.  There’s certainly less investment of time and effort required.  But consider the following.

1. You still need to import toys which comply with Australian regulations. You may even need some customisation to achieve compliance.  Your overall compliance workload is likely to be very similar.

2. Unless you have huge buying power, you’re competing with major corporates and chains.  These companies source in bulk and negotiate huge volume discounts.

3. Without a unique element, how will you differentiate in the market?  You are more vulnerable to price competition.

Three good reasons why, when Hornet’s clients import toys, they are almost always custom-designed!

import-toys-from-china-wood-applesFor custom-designed toys, the challenge is more in finding and keeping your market.  Your toys are unique, so price is less of an issue.

Even the simplest toy can be re-invented or re-crafted to become something special.

You also need to consider how to extend your range.  A wider range means more revenue per customer, and better return on marketing.  The options below are listed from easiest to hardest.

1. Create variations on your core product.

This could be different colours, sizes or themes.  This also lowers your risk.  You can order smaller quantities of each toy for your first order, then see which ones sell best.

2. Add similar toys made from similar materials. 

This makes sense not only for brand positioning, but from an operations perspective too.  If the same factory can make your new products, there’s less risk in your sourcing.  You also become more important to your supplier, so you improve your negotiating position.  So a particular company might specialise in fabric toys.  Or wooden board games, or paper craft kits, or so on.

3. Develop new toys for children 1-2 years older than your current market. 

Market to your existing database as their children grow up.

What laws should you comply with when you import toys and children’s goods?

There are two main areas of regulation when you import toys or children’s goods to Australia.

Product Safety

The following is from the ACCC website. (Our emphasis.)

Since many imported consumer products are sold in Australia, importers play a vital role in product safety.  Under Australian product safety laws, importers are treated as manufacturers in the supply chain.  Importers often have control or influence over product design and other aspects of products.

Never leave compliance up to the supplier.

Many factories may not have supplied to Australia before. They are not always aware of Australian standards.  If those standards relate to materials (eg lead in paint) or subcontracted parts, the situation is even riskier.

It is your responsibility to investigate standards and requirements, then share with your supplier. You also need a process to ensure compliance.

Working with a sourcing company like Hornet makes this much easier.  We help you build product safety requirements into the specification. These details carry through into the checklist for the final product inspection.  (Specification and sampling is never enough! Final product must always be inspected too.)

Product safety for toys is very important.  The ACCC site lists safety requirements for numerous kinds of toys. Some issues cover a broad range of toys. Consider:

  • Restrictions on lead and other heavy metals. Details are in this Australian Customs Service factsheet.  Lead in paint was a major problem for Mattel some years ago.
  • Small, strong magnets are also heavily regulated.
  • The mandatory standard for toys for children aged 3 and under includes specified testing methods.

Labelling Requirements

Once again, your best option is to include labelling requirements in your specification.  As a minimum, you need country-of-origin labelling. See Hornet’s earlier post on labelling requirements for more information.

Get your timing right when you import toys from China.

The toy market is highly seasonal, with Christmas far and away the busiest time .  Allow for this in your planning.

Start early!

You may need multiple samples to get a new toy right.  You may find quality problems at final product inspection.  (Good specification and supplier selection processes reduce risk, but don’t eliminate it entirely.)  Schedule some ‘padding’ time for issues like these, then you can still import toys so for when you need them.  Without this leeway, your options are limited.

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Do you import toys already?  Or would you like to source something special for kids from China?  If you still have questions after reading this post, why not contact Hornet for a no-obligation chat?