EP 9 - Steve Simonson - 7 China Mistakes and How to Avoid Them

China offers extraordinary and game changing opportunities to entrepreneurs, but there are also caveats, road mines and lightning bolts that can happen along the way.

On today’s expert insight episode, Steve Simonson talks about the top seven mistakes that business owners often make when dealing with China. Here are some of the awesome things you will hear in this episode:

• Steve’s axiom number zero - I don't know nothing about nothing and how it helps him in business.

• The number one mistake most business owners do in the beginning.

• Why a purchasing system is critical to the understanding of your profitability and your business in general and a lot more!

So listen to today’s episode to find out these top seven mistakes and how you can avoid it.

Welcome to the Awesomers.com podcast. If you love to learn and if you're motivated to expand your mind and heck if you desire to break through those traditional paradigms and find your own version of success, you are in the right place. Awesomers around the world are on a journey to improve their lives and the lives of those around them. We believe in paying it forward and we fundamentally try to live up to the great Zig Ziglar quote where he said, "You can have everything in your life you want if you help enough other people get what they want." It doesn't matter where you came from. It only matters where you're going. My name is Steve Simonson and I hope that you will join me on this Awesomer journey.

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01:15 (Steve Simonson introduces today’s main topic, the top seven China mistakes that newbies often make.)

Steve: Welcome Awesomers! This is another episode of the Awesomers.com podcast and my name is Steve Simonson and I’m excited to be here with you today. This episode is number 9, that is podcast episode number 9. So to find the show notes and relevant details pertinent to this particular episode, just go to Awesomers.com/9 . Easy to find and makes a lot of sense as the old solid gold people used to say, “If it’s got a good beat, it’s easy to dance to”. So today we're going to talk about the top seven China mistakes that newbies have made or will make. And we're going to think about it and finally, not just newbies even veterans, even people who have been doing it a while will find them sometimes at odds with China. How you interact with them and how you secure your sustainable and systemic supply chain. I’m going to make a riddle out of that someday. I just want to share with you that China is a really fun place to do business. A really extraordinary opportunity, but there's also caveats, road mines and lightning bolts that can happen along the way and we are going to talk about some of those today. More importantly how to prevent them. This is an insight episode, as you may recall on Awesomers.com even though we are just starting. This is our ninth episode. We put together different show formats and this one is called an insight type of episode. This is where somebody like myself with a deep experience at a particular subject matter will come and give you their view of the world and extol the virtues of their opinions. And ultimately the objective is to bring expertise to you that you could not necessarily get either on your own or get it for free. As an example, many times I have consulted for many companies regarding the supply chain in China, logistics and things like that. it's not uncommon for me to bill out very significant rates to 4 to 500 companies for example. Upwards of $50,000 a day and then I scaled down a little bit smaller for mid-sized companies that say do between 100 and 250 million, they get a little lower rate especially if they book a lot of days. So the point is my expertise is something that's valued in the market but I am bringing it to you here today for free as I like to do. Because I love entrepreneurs and Awesomers are one of those elite sets of entrepreneurs that I particularly enjoy focusing on. So this insight episode is my effort to bring some of my expertise to you I hope you enjoy it. Now that I've first talked about my credibility and how much I know about China, I want to re-assert a new topic or a new philosophy which is my axiom number zero and that is I don't know nothing about nothing and I share this because context is king. For me, although I'm a China expert and I have deep experience there. I go into every topic in every meeting and every situation possible with this premise. I don't necessarily know what's going on and I need to learn about what's going on. I encourage you to take that approach even if you've been doing business in China for a year, two years, five years even. There's probably something you could pick up in what I'm about to share. And I know I'm a learner at heart and I pick up things every single day from people with more experience of me and people with less experience with me. There's lots of ways to skin this cat. I just like to point out the axiom zero is nothing about nothing and this allows me to come in with humility to any subject, and I encourage you to do the same now. In the future episode by the way I'll outline my axioms. An axiom is something that I've said it so often and it's just become part of my DNA. Anybody who's known me and worked with me will have heard these axioms over and over. Instead of sounding like a crazy old man, I call them axioms. I'm kind of marketing my crazy old man nature to repeat myself and that becomes a feature not a bug. That's a marketing lesson baked into this China presentation. Again for context, because, you're still getting to know me for those joining us on the Awesomers podcast. It's fairly new you don't know my background, but this is my 29th year that I've owned my own business. I've been trading and traveling to China for well over 15 years, now probably closer to the 16-17 years. And over that course of time my companies have sold directly and through wholesale channels, 250 million dollars to consumers directly and another 500 million to wholesale customers, also through various sales channels. The point is after 750 million dollars’ worth of turnover which is quite close to a billion dollars at this stage; I don't do the math very often. But at some point it'll take over to a billion kind of like McDonald's when they used to say, a hundred million served 500 million served now they just say billions of billions are served. I don't keep too close track of the numbers. Let's just say we've put some points on the board. The fundamental take away you should have here is, I still don't know anything about nothing. Despite all of that background and experience, I'm still learning. We still make mistakes even. But try to share some of these lessons that we've learned to help you prevent some of these mistakes. Now as a final point of interest we have engaged on behalf of sellers, e-commerce companies, trading companies, distribution companies and even manufacturing companies to help them with their China logistics and this is the the Symo Global team in particular. The team there which is based in China will help with negotiating; they'll help with sourcing, taking photos and other general functions that are necessary to conduct business with China. Along the way we've been fortunate enough to gain some social proof and people have been able to find better deals. Increased cash flow, reduced cost of goods sold and general efficiencies despite the scary landscape that is often considered China right. It can be very scary if you haven't done a ton of business there. When you've done tens of thousands of containers and hundreds of millions of dollars of product at some point you're like,”Yes I don't know everything but I know a couple things”. And so our lessons are to be shared with those around us. So we're going to share the top seven newbie mistakes right after the break but first we're going to take this short break we'll be right back.

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08:44 (Steve Simonson talks more about the top seven ways newbies make mistakes when dealing businesses with China.)

Steve: We're back again everybody Steve Simonson here talking about the top seven ways newbies make mistakes in China or have made mistakes and perhaps will make future mistakes. This is part of the Awesomers podcast series. Our mission again is to try to help you eliminate some of those skin diseases, some of the wounds that I've experienced firsthand. But make no mistake, despite us sharing these lessons some of which you'll say, “Ah, that doesn't apply to me”. Although later you'll probably come back going, “Yes, maybe that did apply to me”. But initially some of these lessons you go okay I get it; this is nice, I'm on board. But they're still going to be a learning curve right. Nobody can skip the idea of learning and then gaining knowledge. Though I forget the guy’s name but one of the key guys at Amazon's AWS which is their Amazon Web Services Business, this is the big tech division of Amazon that's responsible for so much of the Internet's operation, and he said something like, “You can't compress or there's no compression algorithm for experience” right? SO as much as we want to share these lessons, I just want to let you know there's still a learning curve that's to be expected and just be patient with it and understand that's part of paying your dues. Our idea though is to make that the learning curve as short and as flat as it can be versus steep, difficult and long. That’s our mission.

The point number one is, a lot of times when people are thinking about sourcing a product from China. Their simple mission is simply to pick a product and get it to ship to America because that is a giant deliverable for somebody. Especially if you've never developed your own brand or packaging or are you done your own import and so forth so just getting from point A to point B is kind of the typical newbie approach. That's fine but honestly there's more to it than that. Without understanding your true desired results from the very beginning so as early as possible as you can, it's harder to get that desired result. In the end you're not engineering the outcome properly. What does this mean in real life? This means that you may know the product that you want to do and you may even know the factory that you want to deal with but, have you considered what the import/export piece of the puzzle is when it comes to? Does the factory have an export license on the import side? Do you know all the HTC codes and Harmonized Tariff Codes? That's what HTC means by the way. Are you prepared and is your carrier, your freight forwarder prepared to bring this product in? Do you know how much it's going to cost? These are the types of things that are pretty basic and you'll get to them because you're forced to get to. But there's other things especially as your business grows, maybe you are in the product development stage. But have you considered how you're going to do the marketing for this product if you're doing it on an Amazon platform? For example, what's your product launch going to look like? Have you calculated how many units you may have to do it a promotional rate to build up enough demand and awareness in the marketplace and how is that going to impact your margin? Have you planned inspections before the product ships, which is a critical step? Have you considered having some sample prototypes and then sent over so you can do some testing before the major production run? What about the idea that you know somebody in finance needs to wire some money or needs to pay a bill at a certain point of time? So all of these types of things should be sketched out ideally. I like to make a flowchart and just say, here's what I'm looking for at the end here's where I'm at the beginning. Then you just put in all the steps that need to happen along the way. Flowcharts are one of the best ways to force you into having a good thought process and to drive towards continuity and consistency in any of your systemization. For me, I love the idea of writing it down and having that flowchart. Then just going step by step and some things can go in parallel, right? There's no reason you can't certain things at the same time especially if you can delegate those tasks. But you know it's not an uncommon thing to forget the financial measurement at the end for example. You've launched the product, you've made some sales and it's even time to order new stock. But if you don't know how much money you made on that product and you have another product that you also are selling, how do you know whether you should double down on a winner and kill a loser? Are they both functionally performing the same from a financial standpoint? Just having turnover doesn't mean that you're making money on it. All of this should be baked into your equation to say I'm bringing in a product, here's the ROI I hope to achieve, return on investment for those keeping score at home, and then figuring out all the steps in between. I think that's really important. The buying process is really about understanding the needs of all parts of your company or all parts of your team that need to be involved. I want to make sure I don't forget anything particularly about the the factory. So often we don't treat factories in a proper way I will say in fairness, I do think that largely the factories are commodities. Which means somebody else who's making whatever your product is whatever your widget is, somebody else can make that product. So factories themselves are commodities. Relationships on the other hand are not commodities. Dealing with the factory and reminding them that, “Hey you know I really want this to be high-quality” is really an important part of the process. One of the most important things that happen is, factories hear that you want a low price and they help you engineer that low price, and that is this next problem we're going to talk about right here. We just talked about this pricing issue and again the common situation that I see happening is that a factory will say you want allow price and you're like, “Yes I want a low price” and then they will engineer that product quality down to meet your price now. They don't necessarily tell you that they just heard you say you want it for five bucks they told you; seven you said no I insist it needs to be five. They figured out how to make it for five dollars. But if you don't really understand that their engineering doubt in the quality, it's possible that's part of the equation to meet that lower price that's going to be a problem. That's a sense of miscommunication. Therefore it leads to point number two that lack of understanding. We had an issue one time on a product, we luckily sent over 200 prototype units and send them out to testers and the testers came back and said, “Hey the hinge is breaking on these things” and we were like, “Why would the hinge break?” We went back to the factory and this product was probably around eighteen or nineteen dollars. It was a Bluetooth type of keyboard and they said, “Hey. Well first of all, we told the factory these things are breaking, the hinges are breaking and we think it's because they're plastic” and they're like “Yes! Yes! That's probably the reason. Plastic hinges are not that strong.” And we're like well listen; we have to have these things strong. They need to be metal. They have to be rigid. The hinge was supposed to spin 360 degrees. They can't break. And they go, well that's going to cost you. And we're like well; we needed to know how much. And it worked out that it was like 50 or 60 cents per unit, right it’s less than a dollar unit yet it would have led to a 50 or 60 percent return ratio. This is the point about miscommunication, lack of understanding. if they hear you just beating price into their head without talking about quality enough you're destined for trouble.I also want to reiterate that lack of understanding comes from inherently the language barrier, right? No matter where you're from if you're not a native Chinese speaker and you're using China as your factory, you're going to have a natural language barrier despite the other party's ability to carry on business in your native tongue. This goes in any direction any language. If you don't have two native speakers you have a chance of increasing miscommunication and lack of understanding. The other thing is, a lot of times we communicate by email. If you have ever texted a friend even a close friend or emailed them and they came back at you like why did you send me that angry text or they took the message entirely wrong way. It's because these email messages, when we typed them and when we read them ourselves we put our own little accents on the words and we say them in a nice friendly way. We're typing, “Hey, you know. How you doing? I had a question about this or that”. But when the other person reads it they're like, “Hey! How you doing?! I got a question and it's about this and it's about that!” Right? They can put their own tones to it. The point is you can't read tone in an email or text so be careful that your wording very carefully, and that you're using appropriate support language like “this is really important” or “I'm asking because I don't know”. In my opinion you always want to leave yourself a little opening to be wrong. I often will write at the end of my messages I could be wrong but here's the way I see it. How do you see it? And ask for the other party's opinion. Imagine a factory who doesn't speak your native language and they're getting a quickly typed email message. Perhaps in frustration from you. And for you it's crystal clear but often, they don't have any idea what you're talking about. And my opinion is, as the buyer, it's your responsibility to communicate clearly and confirm their understanding. All assumptions you made about communication and about their understanding are your fault. Particular in China I want you to be very afraid of the word yes and the phrase yes we can. In Chinese they say Kui Kui right? So you'll be at the factory, you're talking on the phone Skype whatever it is and you'll say can you do this and they'll look around the room and they'll talk amongst themselves, “Yes we can. Yes we can” and that sounds like great news to you. But I want to just tell you that phrase and the word yes in general can have a range of meaning anywhere from certainly. We totally understand what you want and we can execute with excellence that's on one range of the spectrum all the way down to no way on earth. We can do that and how dare you ask it. But they answered yes to both of those rights. So I want you to be sure that you take the responsibility to ask for follow-ups. The word yes does not mean yes necessarily in Asia and large but in particular in China. Just because you heard the word yes doesn't mean they meant yes. This is a big fat warning for you. Please don't mistake this. Yes does not mean yes in China. When you hear yes but your Spidey sense is tingling start asking follow-up questions and say, “Well I hear you saying yes”. But how are you going to do that exactly? I say it in a different way. Rephrase the issue I said I wanted this particular packaging. You said yes, but I noticed that the packaging that is on the current product weighs you know its 40 weight paper instead of 80 weight paper. I want to be sure that we're agreeing to 80 weight paper right. So this yes is really about you diving in and making sure that they understand and don't make any   assumptions that they do understand.

20:34 (Steve Simonson talks more about the language barrier and how Awesomers can overcome this challenge.)

The other thing I want to share with you particularly English speakers, but this applies to any language most often from around the world we're going to speak English to the Chinese factories now. The Chinese is really smart they're getting to their developing Spanish, German and Russian and all the other languages. But this applies to any language when you're speaking to China in your native tongue just because they can speak with some degree of fluency in your own native tongue. Don't use slang they don't understand it. By the way, I have world class people on my team and even still they don't understand all the slang unless you have lived in a culture for an extended period of time. You shouldn't expect them to understand slang. When you do get them to agree to something, ask them to repeat back to you what you said in their own words and that's another way to press that button.  Do they really understand? Remember that this lack of understanding leads to massive confusion problems and back-end issues when it comes to everything, from product quality to timing to you name it. So that's a big one.

21:46 (Steve Simonson discusses purchase orders and purchasing systems.)

Okay. So I want to just ask you a rhetorical question here but, do you use a purchase order? No matter how you answer that, I can say that the number three problems that we see creating issues between China and America or China and anywhere in the world is the idea that you just send an email to them and you say give me a thousand units of this, we talked about it at four five bucks a unit or whatever the price is. An email by the way is not a purchase order and the lack of a purchasing system is so critical to the understanding of your profitability of your business in general. I just can't stress it enough. The idea for you to create a sample process or to create a purchasing system means that it starts once the purchasing process starts, once you've completed a sample approval process right that should be its own process. So you start, you've got the sample process completed and you have an approved sample and you're ready to make an order. An email again is not an order. Even though they'll accept that, for your benefit you need to go deeper. I'll give you just kind of the rough flow of how that looks. First you want to go to create a purchase order. Depending on how many people in your company. If you have a purchasing department there should be somebody who approves that purchase order. Now if you're the sole operator and you're the person making the PO and approving the appeal fine. But just remember that that's a process that needs to be considered for the future. Now once you send in that purchase order they're going to send back a PI or pro forma invoice. You need a process to match the purchase order and the PI to be sure that they match. The factory, although they understand your purchase order in terms of the requirements their PI is the thing that they rely on the most. That's what they're counting on. And in a future episode by the way, I'm going to share with you a Chinese purchase order. A proper way to format and so forth. So look for that in the future. But for today just understand that when you get that pro forma invoice back you're going to make sure that it matches every detail written on your purchase order. Have nothing to chance and don't make any assumptions about anything. Now the next question is, are you financing this thing right? If you're not, if you don't have any terms with the factory then you're going to wire some money. You're going to book the balance onto your books and then once the final shipment ships, you'll pay that balance. If you are financing and you do have terms, then you would just booked the payable and you would just set it for whatever future date you've agreed to base on those terms, whether the 30 days, 60 days or 90 days. Now if you're listening to this and you say well China doesn't give terms. Then let me just explain that yes China does give terms and again in a future episode we'll dive into that detail and how we achieve getting financing, and how really any of you long term can get financing from China as long as your order sizes are sufficient and frequent enough to justify the paperwork. So can you get financing in China? Yes you can. Is it something that you're going to use for a 200 unit order? No it's not, because the paperwork just isn't worth it. Another one of my axioms I forget the number but is the juice worth the squeeze. And if the transaction volume is too small or individual transaction is too small, the paperwork is just not worth it. So that's when cash works and of course, China will tell you they only take cash. But I will tell you as an expert, they do financing trust me. Tens of millions of financing without question. So once you have that part of the process, and then you need to figure out how to update your inventory. You need to figure out how you're going to do receiving for that purchase order and you need to figure out a variance process when that purchase order comes in and it's not exactly what you thought it would be. There's some variation to it. That's the variance process part. Maybe it's how many units you ordered versus how many you received. Maybe it's the size of the units or some other critical things. The key is when you receive a PO, allow for variances and then update your available inventory. Either at your home warehouses it maybe you have your own warehouse. Maybe use a third party warehouse for inventory receiving and staging or maybe you're going directly in Amazon Regardless, all of these policies and procedures should be put in place, have good continuity and good financial controls. So again, I've already said this twice but I'm just going to repeat it one more time. A purchase order process does not include emailing your supplier and going yes I'll take 2,000 units’ times six bucks a unit like your email to me said. That's not a good purchase order and I'll tell you why right now. So why is it not enough simply to send a purchase order? It's not enough because there's no detail in a purchase order besides the number of items you want times the price which equals a total amount right?

26:58 (Steve Simonson explains why specifications are critical.)

That's all you're essentially sending via email most often and what I want to tell you is specifications are critical they are absolutely critical. Every detail that you can come up with about your product should be a written specification which you can include on the purchase order. Now having a purchase order specification is a really critical thing to me because we include that with every purchase order. It's part of our contract. So think about types of specifications you may be wondering. Think about these types of things. What kind of material is used? Is it a cloth? What type of cloth? Is it a PU which is the fake leather kind of stuff polyurethane is the base I believe? Is it made of metal and if it's aluminum? What kind of alloy is it?  What's the number of the alloy? There are specifications that are really detailed for every material weight, thicknesses, gauges, density, stitches per inch defining the type of zipper buckles. Any kind of attachment is a very important thing otherwise you will see what has been called for many years qualities fade. And if you think I'm being alarmist, you can look for a future episode where we're going to talk about the book poorly made in China because it is the best examples about how China operates. That buyer would never really understand until they've been deeply entrenched and dealing with China. In fact, that book which is one of my favorite books poorly made in China. I will put that in the show notes if we can get it in there. It's not my stories directly but it kind of talks about 15 years’ worth of my experience and all the good the bad and the ugly and believe me, many parts have been ugly so definitely a good thing to read. Specifications are outlined in that book that if you don't specifically call it out you can watch them just dial it down, because over time they want to increase their profitability on that long-term customer and if you didn't say what you wanted exactly. Then they can just kind of dial it down and visually you don't see, they'll try to tweak it down again. And then if you if you notice something then they'll go oh okay sorry will tweak that back up a little bit. And what I'm saying is take out the randomness of quality fade and try to engineer the outcome from the beginning as always. So another question to ask is, are there’s specific lab tests that you couldn't expect your item to withstand? Can you name those specific tests? Like ASTM, numbers that talk about minimum or maximum tolerances and this is a really important topic and something that I truly believe in in terms of specifications. All right, so you're wondering just how much I do believe in lab tests and other types of indicators that are objective. I didn't point that out but specifications are objective measurements right. If you say I want a thousand stitches per inch, that's something that can be measured and therefore it could be managed. If you just say I want the sheets to be high quality or I want this this particular lumen to be strong without specifying the type of alloy or the item number and any sort of lab test they should resist. Then you're just kind of leaving it to chance. Now I talk to sellers about specifications all the time and I want to drive this point home as the brand owner who's building this brand you're responsible for lack of specifications. So if you didn't write the spec and there's a problem with the quality that's on you. It's your fault. I know, sucks being candid here with you but this is just my opinion. If we don't write it down and say deliver this, we assumed that they were going to deliver or we said we want it to be high quality. Something vague then that's our fault and you shouldn't hold the factory responsible or even be mad at them for not living up to your assumptions. And now it's a little more problematic when suppliers switch the specs because they want to save money and that goes into that quality frayed discussion. I want to make sure that you guys really think about how you can measure this. So once you write the specifications then how do you hold them to account. Obviously inspections are part of it but then part of the equation is to run tests from time to time. You don't have to do it on every spec, every time, but you want to do it enough. A lot of people ask me how do I know what tests and I would tell you to contact one of the labs who does the tests and tell them about your product and they will give you some examples of tests that you can run. So I just looked up one. I've pulled up a catalog and this is some of the toy tests that are available that maybe you've heard of maybe you haven't. So if you sell toys there's something called for the EU the test is called an EN 71-1. Now for the US it’s called an ASTM F963. Now I know those. All you listeners out there going whoa now the sexy talk begin right.  I'm talking about stupid numbers. But my point is all of these have requirements tied to them. As an example there's also the China number for that same test as a GB 6675 and what this pertains to is the physical and mechanical attributes of that particular item. I'm going to give you another one even though I know that this is sizzling talk its hot podcast talk but I want to just drive this point home. So for example all of the tests that fall under the EN 71 for Europe or the ASTM F963 they include things like flammability. They include things like chemical. They include things like the cleanliness of stuffing material. The cleanliness of stuffing material with chemical analysis. One is a visual eye check. How clean does it look and another is absolutely looking at the chemical nature of it. Pennsylvania has a regulation for example regarding the stuffing of toys, the cleaning of washing, that's also part of the ASTM F963. Then there's for electric toys there's an electronic safety test the EN 62115 for Europe or ASTM 963 Section 4.25 also in China is the GB 62115. So what's my point? Instead of you having to come up with the lab tests and the requirements and ASTM this or that? You have to talk to a laboratory and get those requirements. Figure out the requirements that make sense for you and then hold them to account and test them from time to time. You don't have to come up with this stuff on your own and there are literally tests for all kinds of things. Obviously toys flammability makes sense. I'm looking at another lab test and it's like general standards for student articles like writing paper, correction fluids, and erasers. There's tests for all kinds of stuff furniture product tests, general standards for food, contact materials which includes all kinds of different tests. Standards for jewelry craft spectacles and the list goes on and on. It's so important to me that you guys understand this is not just me having my own unique crazy idea. This is how things are done. This is how big companies do it. Do you think that Walmart or Costco or any of these big brands target pick your brand Tesco? Do you think they would order something from China without writing down the specifications to a really detailed level? I'm sure you would agree that they will definitely be rigid about their specifications. So the other thing about specifications is something that I like to talk about in the perspective of the broken window principle. Now this principle and you can look it up online but essentially the principle is if one windows broken in a neighborhood, this was kind of what I talked about by Rudy Giuliani in New York many years ago, that if one neighborhood was broken in a high-rise in that neighborhood pretty soon more windows were broken and the next thing you know people were moving into that house and doing drugs and all kinds of criminal activities. Then the buildings next to it started to decline and have broken windows and then having all kinds of bad things happening in that building and pretty soon the whole neighborhood that had gone down and it's all because of that single broken window. And the principal with the Chinese supplier or how it applies is that if you are on them you're saying here are my specifications. Here's my lab test here's my inspector - the suppliers are far less likely to change the materials or try to reduce the thickness or try to do other things because they know the sheriff's in town they're checking on them. They will only take the risks of trying to change those specifications or invoke quality fades where they think they can get away with it. The sharper that you are and the more you're on it, you have a better chance of surviving those quality fated issues. Now does that mean they won't try it long-term? No, it doesn't. That's why physical inspections and lab testing to verify our steel requirements far under the future as far as you can imagine. So now that's a bit of a rant on specifications we're going to take a quick sponsor break and we're going to be right back after this.

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26:58 (Steve Simonson talks about the next mistake which is the lack of oversight.)

Steve: Okay gang here we are again, Steve Simonson talking about the top seven ways that newbies make mistakes in China. I hope I said that right and we're up to number five which is lack of oversight. Now oversight is really all about the inspection and shipping process. Now I just talked about the broken window principle and I want to you know kind of reinforce this concept that if the factory doesn't think enforcement is always right around the corner then they are more likely to try to cut corners. So fundamentally if the police are walking the beat and they're always kind of on the street there's less likely to be crime in that area and this is totally true with Chinese factories. The more rigid you are about your inspection process, your laboratory enforcement process, the less likely they are to try something. Now I do have a general policy that is called trust, but verify. This is not unique to me but this is a core principle. As I do business with China I want to trust them and I want to have a good relationship with them as I said earlier although factories are commodities. Relationships are not commodities so I want to do business with a factory that I've chosen for the long term and I want to do it in a transparent and friendly yet fair and firm way. So I'm going to trust them, but I'm going to verify that trust. I think factories they actually will appreciate the fact that you are sophisticated and they will respect the fact that you know what you're doing. When you start asking for these things and holding them accountable for these types of things. So I'm going to give you a quick example. Twelve years ago or more now maybe when we first started, we didn't do quality inspections. We did the same thing everybody else does. Hey we need a container of this will you send it to us they're like yes. Then we send them the money they send us a container. No inspection. Then after we got a couple shipments we're like these colors don't match at all and so now we can't even mix the batches. Now we have to start entering inventory batch number so that we make sure we don't ship these things to the same customer and so on and so forth. And after we investigated we found that the factory had actually outsourced the containers from time to time which are what caused the problem. So they were too busy and we would send in orders and they say you know what we will send it to Fred down the road. Fred being a very traditional Chinese name and so Fred delivers a product as well as he could but it didn't match the other product because a completely different factory made it. Now they didn't ask me if that was okay. They didn't clear it ahead of time and nothing fundamentally changed about the execution of the purchase order. We place the order they shipped the order. The difference though is when they outsource it to somebody down the street it created quality problems that we later identified as this unexpected outsourcing. So all of this was part of the fact that we weren't doing inspections and we could have prevented that because the inspector would go why I am going here instead of the normal place. That would have been an instant recognition that something's changed. Now over time then we've added testing equipment to our own inspectors and then we even use those third-party labs I talk about. That as you grow becomes an important part of your verification.  Now

I do want to take a step back and there are probably people on spinning them up and they're like oh my god this is so complicated. All of this is an evolution. So you don't necessarily start out as an expert.  You don't necessarily start out with massive volume but over time the way you protect yourself and the way you hedge the risk is by putting these processes into place. And this is a big reason why places like the Empowery Ecommerce Cooperative exist because they've already identified inspection companies. They've already identified third-party laboratories for verifications. They've already identified arbitration companies when you have a serious dispute of the factory and sourcing and photography and other things so you don't have to solve all these problems yourself like we did 16,17 or 18 years ago. There are ways that you could be helped so remember that as you go. You don't have to have this entire perfect the first day. Just know that you got to build towards this. Anybody can do it. It is a process though so I don’t want you to panic and think you have to do it all today but I would say that any product you’re shipping that is, let’s just say above a thousand US dollars get it inspected. Why take the risk? Just have an inspector do it. There are many inspectors available. Most inspection companies will have multiple offices around China so they can do it very quickly and very inexpensively. It's just so easy that it's the cheapest form of insurance you can ask for. Inspect it before it goes anywhere especially if you're shipping directly to Amazon. And Amazon gets it goes “oh I received all this but the UPC is wrong or the FN SKUs wrong or whatever the case may be or worse yet there's a quality problem and now you can't control it because it's already here. There's no way you're going to get your money back because you prepaid that. All of these problems are preventable and manageable. That's my message. I hope I'm not I feel like I'm harping on the negatives but this is to manage those weird things that can come up and I'm quite happy doing business in China. I love China. I love the Chinese people and I enjoy doing business there but I'm aware of how these things go. So I have to be prepared and protect my customers my company and everybody in between.

43:19 (Steve Simonson talks about the 6th mistake- everything takes longer and it costs more.)

All right so we're up to number six and this is actually part of my axiom number 21 which is everything takes longer and it costs more so when you first try to source a product from China. You're like I know what I want I found this thing on Alibaba and you're imagining that if it's 30 daily times I can have this thing here in 30 to 31 days from the moment you decide you want it. But it always takes longer and inevitably costs more. You'll forget about some tariff or some duty or something that you never contemplated going in because you didn't kind of have the time to engineer the outcome. So the reason I mention this is because if you always know in the back of your mind that to expect surprises. When things take longer that's an unwelcome surprise. When things cost more that's a bad surprise. We prefer a good surprise. Hey this was faster and cheaper than you thought but it's not likely to happen it's certainly anytime you develop a product it just always seems to take longer it cost more. When you're onboarding a brand new factory the first run for example of a product it just takes longer and it costs more that's okay it's just part of the process. If you understand that going in you're going to be better prepared. And then over time you get better incrementally things get better and better the more you do business with that Factory. The more things become systemic. The easier it is. I was talking with parts of my team in the last couple days and in the last week they probably cleared twenty-five or thirty containers on their way to clearing about 140 containers this month and it's just part of the process nobody's breaking a sweat. It's not like that you're not working hard that's just what we do. We work. But nothing's breaking, there, there's no chaos and really fundamentally a good buddy of mine, Mike Bazar. I'll probably have him on the future he says part of his mission and product development or merchandising is to bring order from chaos. If you follow and understand these seven steps that we're talking about here you will bring order from chaos because you'll be prepared and again point number six is all about preparing mentally for this kind of inevitable surprises you're going to have. I'll give you a quick horror story from a buddy of mine. He's a brand new seller. He sees the opportunity to sell online he's really excited by it and that's great he vets out a few factories picks one not the cheapest one but at one that looks pretty good to him and he's really excited about it. And then he gets the product it ships all the way to America and it turns out he can't get that product into America, because it's got like a two or three hundred percent import duty on it. And it's because it's a certain size that the duty applies to if it was a slightly smaller. I'm talking about like an inch or two smaller it's possible that it would have gotten through without the two hundred percent duty but because it happened to incur this duty now he can't even bring it into the US and make any money. You can't double or triple your cost and still make money well again there's different margin structures but in this case let's just assume that's correct and I absolutely is correct. So he decides all that I'm going to ship it to another country in this case Canada. So he ships it to Canada kind of sorts through and gets through all that mess and he learned a ton. And if I ask him does everything take so long take longer and cost more he would give an unequivocal absolutely it does and so I just don't want you guys to think that this is somehow unique to you or that maybe you're so special that it's not going to apply to you. Even if you had the first order, the second order, and the third or go perfect with no delays and no surprise costs it's coming. And again I will re-recommend that book. Go read the book poorly made in China and you could see Paul Midler's new book called what's wrong with China and that's the great Paul Midler. I hope to have him on an Awesomers podcast in the very near future to talk about his books. But in poorly made in China I think is a fundamental piece that anybody who's importing product or buying in China needs to read because it tells you the way it is and it really gives you a sense of what's happening over there. So I know I'm ranting so I'm going to move on. Alright so number seven is lack of compliance. So these are things like do they have MSDS sheets for your product. Do they have the appropriate FDA certifications if that's required? Are they an FDA approved factory and you know in addition to whatever documents they require. Do you have any required testing for example batteries or chemical composition? Do you have licenses for things like Bluetooth? If it's a patented product are you maintaining compliance with patents? Are you aware of the duties countervailing duties anti-dumping duties and some of these tariffs that are being bandied about right now?  By the way your lack of awareness of these things doesn't mean that you get out of them. So I've heard a lot of people when I want to share some of these things are like I've been imported from China for three whole years and I haven't had a single problem and when I first looked it up my product it would had a 20% duty. But the factory gave me a different quote code that has a zero percent duty now that always makes my skin crawl because when your freight forwarder says this is the duty or product falls under. You should pay close attention to that especially if your factory comes back and goes now just use this just use this HTC code because now you don't have to pay a duty. And you're like well obviously I don't want to pay an extra 20 percent. I'll just do that but the reality is it's up to customs to decide which code is most applicable to you and by the way you can even send in your product and have them classify it for you so that you have it in writing from them. And then if they choose the zero percent later if they change their mind it's not your problem but I want to be sure everybody knows this customs can retroactively enforce collection of duties, countervailing duties any of the things and I don't believe there's a limit. I know guys they're talking about six seven eight nine years that they're potentially on the hook for enforcement. And the way the enforcement works is like this you import it for three or four years and you put down this particular HTC code. And then customs for whatever reason decided to screen or do an intensive examination on one of your products and then they determined you know what the HTC code you put on here is wrong and it actually is supposed to have this 20% duty. Then what they say is anything you've imported that has this HTC in the past we're going to retroactively enforce. This is a potential it's not a sure thing but they have the potential to retroactively enforce on those prior for HTC codes especially if they came from the same factory. Because customs looks and go, well you bought this product from this factory and you use this HTC code and we just did an intensive examination. They determined that it was wrong and you lost 20% we're going to do that retroactively to you. So for all the guys you say oh my factories got a little secret or I can squeeze this by, just trust me customs is going to get paid do the right thing make sure that compliance is absolutely a hundred percent done. Do not try to be slick about it. And China has lots of slick ways and they're now kind of being beaten back but some of the slick ways is if you have an $8,000 order. Some of the factories go, I will just ship it in four orders for nineteen hundred ninety seven dollars so that we can ship them by air and come under the duty and customs thresholds. Well now customs is enforcing lower limits as low as $650 and in some cases at some particular ports of call particularly around Amazon areas they're doing full enforcement. So my point is no matter what a Chinese resource tells you about how they can kind of be sneaky and get around these things. It's not worth the risk. It's just not worth the risk. Every all the guys who are properly doing business are on the same equal footing if there's a 20% duty just pay the duty and move on with your life. It's definitely not worth trying to trick the government. It just doesn't work again I'm not saying this to freak you out just sharing experience. And I have a friend of mine he only imported a product for about a year and a half they misidentified they mischaracterize it and in my opinion the factory that was helping them. They did it on purpose because it was instead of eight percent it was zero percent duty. And so they took the zero percent. They were fat and happy. They went on for whatever a year and a half. Then they had a container pulled in for examination and they got retroactively apply that 8% for that year and a half which came up to $170,000 and that was without the criminal penalties that could be attached to it if they think you're doing on purpose. So again please pay full attention to this just because something worked in the past or because something squeezed through doesn't mean you're in the clear. Be extra careful of the requirements of the importer of record the IOR. If you're the importer of record you are legally responsible for what comes in. If your factory is giving you a DDP price that means delivered and duty paid then maybe they're the imported and they could do what they want and your price is kind of baked into whatever they tell you you’re DDP prices but if you're paying an FOB price which means Freight on board that's when it gets freight on board to the container company. Let's say the port of call like Shanghai an FOB price means everything after that FOB point is your responsibility. So I'm not going to get too much into the import-export details today but lack of compliance is definitely my number seven and it's not a lucky number seven it's a scary number seven.

53:57 (Steve summarizes the top seven mistakes business owners often do when dealing with China.)

Alright so in summary, let's just kind of go through this really quick.

• If you don't consider the results that you're looking for in the beginning, this is number one, and you don't consider the needs of all parties you're going to make a mistake you have the potential to have an experience that's less than perfect.

• Number two, ineffective communication. Beware of the word yes. It doesn't always mean yes. Could mean hell no.

• Having no purchasing system that is sufficient to track not just the financial performance but variations and to manage your product that's a problem.

• Number four, lack of specifications - either poorly defined specifications or no specifications at all. Totally unacceptable.

• Number five, inadequate supply chain inspection and enforcement. If you're going to buy something, you better inspect it. If it's enough volume you better attach lab tests and other requirements and then measure against those requirements. Now the factory should do those kind of on an ongoing basis to make sure they run the tests to ensure quality but you should do third-party independent audits of that from time to time. By the way you should pay for it if those pass and if they don't they should pay for it and the container may be rejected. In many of our terms, if they miss a specification we can reject the entire container even after it's shipped by the way and not pay them for it.

• Then number six is underestimating the time and the resources required especially money. Remember it always takes longer and cost more.

• Number seven is compliance management is either lacking or entirely forgotten.I don't want you to forget about compliance particularly with the law and customs and things like that. These are really important and they're hard lessons learned along the way for many of us, myself included. We've had many horror stories that I haven't had time to go into but I really do hope that this gives you kind of some guiding principles on how you can manage your supply chain.

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This has been episode number nine of the Awesomers.com podcast and I hope that you found this insightful as the title of this episode format. It is meant to inspire insights to be delivered from me to you and I really hope that they have been. And I highly encourage you to share with us you go on to Awesomers.com and find the contact form or you can find us on some of the social stuff online and just let us know how we're doing. If you hate it tell us because you know we can do something different or make it better and not burn the calories on stuff you hate and if you like it or it's there's things we get tweaked about it don't hesitate to give us some feedback. Fundamentally I'm at your service I want this to be something that is meaningful and beneficial to you. Not something that decided not to waste time on in the future well this only works if this is engaging and something you're into long-term. So again to find show notes go to Awesomers.com/9 and you'll be able to find all the show details and notes including some of the book recommendations I made for you.

Well, we've done it again everybody. We have another episode of the Awesomers podcast ready for the world. Thank you for joining us and we hope that you've enjoyed our program today. Now is a good time to take a moment to subscribe, like and share this podcast. Heck you can even leave a review if you wanted. Awesomers around you will appreciate your help. It's only with your participation and sharing that we'll be able to achieve our goals. Our success is literally in your hands. Thank you again for joining us. We are at your service. Find out more about me, Steve Simonson, our guest, team and all the other Awesomers involved at Awesomers.com . Thank you again.