Asia has been an export powerhouse over the past decade. Although the manufacturing base is increasingly fluid across country borders (labour costs, tariffs etc), this will continue for some time yet. In 2017, East Asia exported 5.2 trillion dollars of products to locations like the European Union, the United States, and other East Asian nations like Japan and South Korea.
It remains that sourcing and manufacturing products in Asia can be advantageous and a benefit to your company. However, there are considerable risks of buying from overseas markets; the internet and platforms such as Alibaba have created a massive market (a positive) that can often ‘brush over’ the risks inherent with distance, new cultures, languages and foreign laws and regulations (a negative).
Anybody who has conducted business in Asia will stress the importance of meeting the manufacturer face to face. Companies operating in overseas markets do not always have this luxury. This is where some form of presence is an integral part of benefiting from your Asian supply chain. The ability to develop relationships, monitor production and relay information to the decision makers should not be underplayed.
Depending on product category, volumes, markets and product value, a company has a variety of options to establish a presence. Setting up one’s own office and operation in Asia is at one end of the spectrum. This requires a considerable amount of capital investment and understanding of the local laws and regulations. It is also relatively inflexible and in a fluid market entrenched with global uncertainty there is an argument that now is not the time to be establishing entities in Asia.
Work with local partners
Alternatively, one can look to work with local partners, such as sourcing companies and trading houses. Of course, there is a cost to this, but there is also a service being provided where often the communication piece is managed in your local market. With the right partner, it is possible to alleviate the risk, leverage product and operational expertise and provide the visibility that you require to manage your suppliers.
Some of the key points to consider when looking at strategic options to have some form of presence in Asia are as follows:
On the Ground
There is no point visiting a factory today, for you to drop down their list of priorities once you have left and are on the plane back home. To develop a relationship that is meaningful, there needs to be some form of constant presence that can be actively engaged with the supplier. We have seen factories in the past change the names on the side of the building for the arrival of their customer!
You need to be able to deal with your key suppliers in their language and in their time zone to ensure clarity and efficiencies (applies particularly for US companies given they are between 11-15 hours behind Asia). It will also help with the development of medium term relationships that are that much more meaningful than arm’s length interactions.
Visibility Across Production
If your company was manufacturing products ‘up the road’, you would constantly be visiting the factory to understand how production was going, whether the raw materials were received on time, spot checking in-line quality, and likely doing a final inspection before shipping the goods. It should be no different when buying from Asian suppliers. Having this level of visibility across your production is primarily possible through some form or presence be it an office or a partner in the region.
The ability to identify issues early means that you can put in place solutions. That can be something as simple as the raw material being late and therefore the critical path being extended. Understanding this at the outset means that different parties from logistics, to the ultimate client can be engaged with and expectations managed.
Clearly ensuring that you are getting your products on time and to the requisite quality ultimately enables companies to drive profitable sales. There is nothing worse than receiving goods in your local market that are not compliant and therefore not salable (particularly when you have paid the factory and they are no longer responding to your calls!). Addressing this risk upstream means that there is greater leverage in any discussions required with suppliers given the goods are still on site.
Another part of risk mitigation relates more to establishing an entity in the region and the potential risks that this can come with. Particularly, in China and India, the bureaucracy and regulations and complexity inevitably result in incremental costs building up and time lines being pushed out. These often become a significant distraction to the business when the primary function will be to source and manage the Asian supplier base. Scale of business and expertise will clearly be a factor when establishing your own entity in Asia, but in a lot of instances the costs and other implications can be prohibitive to a business. Just make sure that this is the right solution for you before you move forward.
We are stating the obvious that any option needs to be cost effective. We have seen numerous companies go down a chosen route without a clear understanding of what the final costs will look like and have ended up tripping up down the line as a result. This is applicable whether you a setting up your own office or working with a trading house.
Look at dollar spend on a granular basis rather than get stuck discussing the difference between ‘capex’ and ‘opex’ budgets as a justification for the $100,000 being spent setting up a new office. Understand the full cost implications of establishing an entity before setting it up. For example, there are considerable costs associated with closing a WFOE in China that not many companies are fully aware of at the time of establishing a local buying office. Lastly, leverage solutions that allow a mix of fixed costs versus variable costs (potentially buying some products through sourcing houses).
Speed to Market
As the well-known adage says: “Time is money.” When setting up a buying office, a quick set-up is essential to maximizing profitability while minimizing risks in the production process. Given the bureaucracy, establishing an entity in Asia can take longer than anticipated. Build in time to make sure everything is taken into account and you know when the entity is fully operational.
At ET2C, we recognize every client has different needs and we therefore look to tailor our solutions to your individual requirements. Whether it is creating a dedicated team in Shenzhen or working on a sourcing basis, we are here to help you source from Asia in the most cost effective and transparent way. Having operated in Asia for almost 20 years, we understand the complexities of doing business in this part of the world. We know the pitfalls, we know the ‘real’ costs of operating an office in China, Vietnam and India.
Still have more questions or want to learn more about our offerings? Take a look at our website , or contact us at any of our many offices across the world . Our supply-chain professionals are standing by, ready to take your call!