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What Should Midsize U.S. Manufacturers Know About Doing Business in China?

Is your company considering conducting business offshore? Consider the experience of one Blackman Kallick client, a mid-size manufacturer that has been sourcing product in China for more than 20 years. "Our company started doing business overseas primarily because of competition," says the company's chief operating officer (COO).

"Price levels in the marketplace were continuing to decrease, and we knew that producing the product here would be difficult—especially the raw materials, such as castings," he explains. "We simply had to go offshore."

Focus on quality

The COO emphasizes the need to continually ensure product quality. "It's a constant battle," he says. "A lot of trading companies have a tendency to switch their suppliers, so if you're not following up on a regular basis, your past evaluations will be worthless. A trading company can go years without changing suppliers, but we've also had them change up to several times a couple times in a year.

"We send our manufacturing engineer to China about three times a year," the COO explains. "Each trip is about four weeks long. We've done business in Korea, and Taiwan and Vietnam, but we're mainly focused on China today—primarily because of cost."

Moving toward importing the finished product

"Today, we do 60–70% of our castings and about 30% of our fabrication and machining offshore," the COO explains. "Our machine shop in the U.S. is definitely smaller today than in the past, but we still do a fair amount of our own machining. And we do all assembly and testing here." We also do 80 to 90% of our painting here in our plant and what is done in Chain is checked to be certain it meets our paint and the industry standard.

But that, too, is evolving. "We are considering bringing in a finished product from overseas," he says. "It will probably take us two years to complete that one product line. To get to the point of bringing in a finished product from offshore, we definitely need a very qualified supplier. We will look to people we've worked with in the past."

Choosing suppliers carefully

The COO says there is no shortage of suppliers in China—but you need to be very careful in choosing them. "There are a lot of people out there. You can go on the Internet and buy product in China all day long," he says. "But what you're getting is not your product, and it's not necessarily the quality your company would want.

"The companies we do business with would produce a product per our manufacturing drawings, our standards and our process sheets," the COO explains. "Everything that we've done in the past, they would have to do.

"It's up to us to maintain quality," he adds. "We have to be there to be sure they're conforming."

Dealing with translation and conversion

"In China, the language is definitely a barrier," the COO acknowledges. "They always have somebody there who can speak English, but there's a major translation factor in understanding our drawings and our process sheets. We're getting to the point where we're having those translated into Chinese."

And language isn't the only barrier. "Using the metric system vs. U.S. standards is another problem, because the Chinese convert everything to metric," says the COO. "So there's the added factor of conversion error."

The COO emphasizes the importance of choosing good suppliers and staying in touch. "We deal with more than 20 different companies in China," he says. "We're in constant communication, by phone, e-mail and our trips."

Consider the added cost

"There is an added cost to doing business offshore," the COO stresses. "Most people don't look at that; they see something for 30% less and figure it's a bargain. But there is some added cost—especially when you're doing three trips of up to five weeks each every year. It costs to get there, so once our person is there, he'd rather spend his time moving from one supplier to another rather than coming back and forth."

Sometimes, doing business internationally can lead to frustrating delays. "Dealing with offshore foundries has definitely lengthened the time it takes to get a product," says the COO. "If we oversell our forecast, getting product to fill that void is more difficult."

Establish clear agreements

"We're just getting to the point of negotiating nondisclosure and manufacturing agreements with our offshore suppliers, and it will be a major step," says the COO. "Fortunately, in our case, we've never had a problem with a supplier competing with us. But now that we're dealing with more than 20 suppliers, we need to get the agreements more formalized. My recommendation would be to do it right at the beginning."

Don't cut ties with U.S. suppliers

A final word of advice from the COO: "Don't put all your eggs in one basket. It's extremely important to evaluate the various offshore companies you're dealing with," he says. "I know other companies that have given up their U.S. supply line, moved offshore—and found themselves without product for months, if not a year.

"We've never moved 100% of any product offshore," he says. "We might start off at 25% of our needs and increase the volume as we go along."

Staying competitive

"Doing business internationally has allowed us to maintain the profit levels we want to see, and to remain competitive," the COO concludes. "Without offshore sourcing, we wouldn't be competitive—and we probably wouldn't be here today."

For more information on doing business overseas, contact Blackman Kallick's Paul Oetter at 312-980-2920 or poetter@BlackmanKallick.com.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.