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Sourcing & supply chain in China & Asia blogs

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Fri, 24 Nov 2023 14:46:26 +0000

Upcoming EU Product Liability Directive: The Basics Importers Need To Know
Posted on Friday November 24, 2023

Category : Compliance

Author : Adrian Leighton

The EU’s forthcoming directive on product liability should make you nervous if you import products to and sell in Europe. To cover this important topic, two highly experienced guests provide their insights and advice: Clive Greenwood, compliance counsel at Liangma law firm in Shenzhen, originally from the UK. Clive has been on this podcast a number […]

The post Upcoming EU Product Liability Directive: The Basics Importers Need To Know appeared first on QualityInspection.org.

What is the intent of the directive?

The intent of the regulators, very broadly speaking, is to improve the following points where the consumer is concerned:

Transparency in the product manufacturing process
Consumer identification of the source of the product
The environmental risk relating to the product
The ability of the consumer to take direct action related to product liability (that’s where this revision will come into play)

Fundamentally, market surveillance authorities will now have the means to prosecute a person in the EU if there are issues with any imported product as this covers ALL products. Until now, some CE-marked products were treated in this way, but soon it will be true for all products. Also, when it comes to liability, there will be no real distinction in the supply chain between manufacturer, importer, distributor, and retailer; these parties can be held liable for product liability claims jointly and severally. (04:23)

What does this directive change for economic operators on the distribution/retail side of things?

Product transparency requirements, such as the upcoming digital product passport, are enshrined in this directive. The product will need to be traceable from the manufacturer to the end-user and all supply chain parties, regardless of size, will be liable.

Current, economic operators’ liability is often shaped by contractual provisions. Typically, retailers transfer liability for product problems back to their suppliers, but that will no longer be an available loophole.

This might affect distributors’ or retailers’ appetites to stock products that are in riskier categories, such as electrical appliances and kids’ products because their liability is now unlimited…this will be worrying news for retailers and wholesalers in general. In addition, if a distributor or retailer is taken to court in Europe, they will need to prove that they have done due diligence on the product & on the factory and to provide the ‘technical file.’ Without this, the product will be considered to be defective by default! So these importers will likely now need to beef up the due diligence and compliance work they do on the products they import and sell, paying particular attention to creating a thorough technical file and product passport. If certain products appear to be too risky to continue importing they will simply drop them and stop importing them, as Amazon has done recently with certain product categories.

Everything is migrating towards the integrated product passport and transparency throughout the production production process. (06:53)

Note: the digital product passport is one of the requirements of the upcoming Ecodesign for Sustainable Product Regulation. The detailed requirements have not been made public, yet.

Transparency in the supply chain.

The burden of proof exposes all of the economic players equally. The technical file must include transparent information about the entire supply chain from procurement of materials to manufacturing processes to shipping to the distribution channels in your country, and so on. In the past, a product declaration was enough, but now you need to prove what was done and by whom at every step of the way in the supply chain. You may use the non-legal method of using blockchain technology to collect evidence at every node of the supply chain and, furthermore, you will probably need an auditing company to audit the supply chain with compliance in mind to ensure that it’s compliant with EU rules and regulations. (12:47)

Even if a factory in China can now be held liable for product problems as a supply chain actor under this new legislation, realistically, can an importer obtain compensation from them?

Many Chinese factories sign no contract with their customers, or, even when they do, they believe they can’t be held liable for problems after shipment. It’s a commonly-held belief that it is almost impossible for a foreign customer (the buyer/importer) to obtain money from a Chinese supplier due to their location, Chinese law, etc. But how true is this?

Many importers fail to use an adequate contract in China, agreeing on something too simple with their suppliers that does not legally cover them against any losses or place adequate liability on the manufacturer by Chinese law.

Some advice from Prof. Choi:

Contracts need to be well-written and enforceable by Chinese law (so probably created by a law firm specializing in Chinese law), stating that the manufacturer (exporter) will create products that comply with EU laws.
Contracts should call for international arbitration in a third country that is a signatory of the New York convention like Hong Kong, Singapore, the UK, etc, rather than for Chinese courts to uphold the ruling of a foreign court in, say, France or Belgium if there is a problem with the products. The former is possible in China, whereas it is unlikely that Chinese courts will uphold foreign judgements. Chinese manufacturers are usually open to agreeing to this.

EU importers would be covered by these clauses in their manufacturing contracts with Chinese factories because if they’re taken to court and held liable in the EU, they can then go after the manufacturer through arbitration to recover damages. This advice also applies to American, Canadian, and Australian companies, for example, who sell their products into the EU, too. (16:56)

How the burden of proof for manufacturers is changing.

Until now EU law would require someone accusing a product of being defective and causing a problem to provide the proof of that before the manufacturer would be taken to task. Now, the logic is going to change and the manufacturer will need to provide proof that the product complies with EU rules and regulations before it can be sold in the EU, but also will need to prove that all the preventive work to ensure the product is safe has been done. If that proof is not available, typically in the form of a technical file, the product will be assumed to be defective by a courts of law!

As a reminder: if a factory in, say, China or India is not mentioned on the product packaging/labeling information, the ‘manufacturer’ (as per EU legislation) is whoever puts their logo or name on the product and sells it in the EU, so it is typically the importer or the distributor. (24:47)

Product labelling must make it easier for any parties, especially consumers, to bring a case against a product’s seller.

Products must be labelled with information that enables parties to make a claim if there are problems. In a few years, a QR code that links to the product passport will become quite common. In parallel, various EU cities will have consumer centers that could be contacted and NGOs like the Consumer Protection Association in the UK will likely also be able to demand access to the product in question’s technical file if a consumer reports a problem. If a company then fails to provide it, that’s seen as an admission that the product is defective.

The technical file typically includes these types of documents:

Information about the producer
BOM
Product drawings and information
Safety test reports based on relevant technical standards
Factory information, audit reports, etc.
Product risk assessment
Declaration of conformity for the product

The authorities can then dig through this information to find the source of the problem and who is liable, even if the vendor, importer, and manufacturer are all from non-EU countries such as in the case of online shopping platforms like eBay or Amazon. (28:45)

Foreign manufacturers are going to be under a lot of pressure to change the way they do things.

Traditionally, Chinese factories and trading companies do not like to share some of the information that now needs to be in the product’s technical file as they consider this to be a trade secret. They do not willingly share their supplier identities, which, again, may be required in certain cases based on upcoming EU requirements. So they’re going to have to now become used to sharing it more openly with customers every time it is requested and a balance will have to be struck on what can and cannot be disclosed, but if they want to win business from EU importers they will have to change their ways. (32:50)

Why the product safety’s burden of proof is on the party who brings the product into the EU.

The new directive is in favor of consumers’ rights as they’re the weaker party that traditionally would not have access to information about problematic products. Now, the supplier must provide this information as the burden of proof is on them and if there is a problem their whole supply chain can be sued and someone will have to pay and each party can’t just hide behind another. This is a serious departure from the past where the buyer would purchase from China keeping in mind that goods purchased are sold with ‘buyer beware’ very much as a caveat. (34:02)

Will this directive even be possible to enforce in manufacturing in China?

The convergence of all the EU requirements regarding product design, reliability, sustainability, transparency, and liability seem to be heading in one direction: That the EU market doesn’t welcome ‘bad products’ and that loopholes and ways to hide from liability are fast disappearing for manufacturers regardless of their location.

(Note: we warned our readers about this in a past article where we looked at the new regulation about medical devices.)

The market will drive Chinese manufacturers to comply because they want the business. Suppliers who want to sell to EU customers will make the effort to comply with these quite comprehensive requirements. Those that cannot or will not will be out of the EU market, and purging ‘lower quality manufacturers’ like this is exactly what the EU Commission wants to do. The best manufacturers in China will quickly adapt, and those left behind are probably less attractive to buyers in any case. This will result in better quality, safer products in the EU and a pool of more capable manufacturers over the next few years. (37:17)

Why is supplier quality important?

“If you have bad suppliers, your products will tend to be bad, too.”

This simple statement sums up the effect of poor-quality suppliers on your products.

Supplier quality can be broken down into two key aspects:

How they behave, operate, and support their customers (us)
If they can provide the best possible quality services, materials, components, and/or products for the needs of the buyer’s project

Poor quality goods from suppliers can kill any type of deal, from the simplest of single-use promotional giveaway products to a Rolls Royce automobile. If the quality you receive does not reach your expectations, as the buyer you will probably be reluctant to pay the supplier.

Dimensions of quality may be the color, material, dimensions, reliability, durability, etc, as long as you have specified what is specifically important to your needs. (01:31)

When should you start being concerned with supplier’s quality and what should you do to mitigate risks of poor quality?

Let’s say you’re developing your own new product, perhaps one with a unique function such as a toaster that has an arm that grabs the bread and moves it so it’s toasted evenly, when would the quality members of the team in your business or of the manufacturer start getting involved?

You want to select good-quality parts from the very start. Some design engineers don’t think about quality or even cost, as their focus is on finding parts that will work, so they push the work of finding quality parts at the right price to the purchasing team.

The design, purchasing, quality, and reliability teams may get together for a meeting at an early stage to go over the product’s requirements and goals, and most new products will have a PRD (product requirement document) which outlines the features, aesthetics, functions, its quality, reliability, warranty period, etc, and they’ll discuss this and assign tasks, such as checking different potential suppliers’ quality. The goal will be to come up with one primary source of parts that achieve all of the requirements, and one or two secondary-source suppliers to use as backups who can also supply suitable parts which are perhaps at a slightly lower level of quality than the primary source. Unfortunately, sourcing second-source suppliers sometimes gets forgotten about in busy projects, but they do provide an important safety net that can reduce the risks of you losing supply if there’s a disruption with your primary source supplier.

Focusing on the quality of critical parts like expensive ones or custom-made ones (like camera modules, PCBAs, batteries, displays, custom enclosures, etc) is particularly important and good suppliers who know what they’re doing must be found for those. Even though it can be busy, you want to avoid having to source new parts when you have already started product development, as this will be time-consuming and costly. (05:56)

Why the quality team must help to include your quality standards in the PRD (product requirement document).

When developing their product requirements one thing that we see businesses skip from including in their PRD are the quality standards that the product and supplier need to abide by. For example, you can’t just state that you want the product to be ‘the same quality as Apple products.’ Since you do not have Apple’s quality standard to share with your supplier, how can they actually achieve this?

You need to do the work to devise your quality standard so they can follow it and produce goods that reach your expectations, otherwise, you’re opening yourself up to a lot of gray areas where the manufacturer might tell you that they have produced the products as instructed even though you disagree. Without a quality standard in black and white to refer to, who is incorrect here? So reducing the risks of misunderstandings would be, for example, very clearly stating how thick the walls of the enclosure should be, how it curves in certain ways, etc. Points like this should be very clear in your PRD and this will require the input of quality engineers at this point. This is especially critical for custom parts that the supplier has never made before. (15:33)

Why small businesses may benefit from working with a supplier who has in-house engineering resources.

Some small businesses who don’t have, say, their own quality engineer on staff, may benefit from working with a supplier who has the in-house know-how to help them develop their quality standard, for example. This may come at an extra cost, but if you have gaps in your team’s experience it’s a good way to make progress. Paying extra to be sure that critical parts reach your expectations, for instance, may well be worthwhile. (22:05)

Doing due diligence to qualify that a supplier’s quality is good.

Initial due diligence

Start by checking their website and Alibaba page, it should be clear if they are not very capable of fulfilling your needs.

Source suppliers based on your criteria which might include that they need to be mid or low-tier, their capacity, quality development, reliability testing, technical expertise, and costs. You can run checks, including a credit report check for financial information, to check that the supplier is a legitimate manufacturer, is financially sound, has experience with your product category, and owns their trademarks and patents which shows that you do have in-house development capabilities, etc.

More advanced due diligence

You need to go on-site and audit critical or custom component suppliers’ factories particularly as early as possible in order to avoid wasting time building your product around their parts if they turn out to be unsuitable.

There are 2 focuses when on-site:

Assessing what they can do – can they help design and develop the product or just one part, can they give good engineering advice or will they have to spoonfed, can they make the volumes we need, can they test with their own equipment, can they expand production if needed, etc.
Assessing the risks – what’s the risk of them totally screwing up production, do they have the quality staff needed to follow our quality standard, etc. (23:32)

Checking the supplier’s QMS.

A supplier with a sound quality management system in place is of benefit to you. A lot of Chinese suppliers have ISO 9001, 1345, 16949 certificates, etc, but they’re from local certifying bodies and are not really legitimate, plus the supplier likes to state the qualification but doesn’t actually use the QMS, so you need to check the veracity of such certifications and see if they’re put into practice by the supplier. (33:16)

Audits can also uncover helpful information about suppliers.

There are many useful pieces of information about your supplier and their ability to hit your quality expectations still to be found. For example during a process audit on-site you can also look at:

Component qualification tests for each part will show their testing capabilities and how many samples they tested.
Inspections while on site will help you assess how they are operating their production lines, if they have QC staff checking during production, etc.
Looking at their organisation from the top down and seeing how management works with staff, who can speak English and really understand what you’re talking about, etc. (35:07)

Formalize approved suppliers.

Formalizing approved suppliers provides you with a guardrail against using unqualified suppliers. A list of URLs from Taobao is not going to cut it when you need to go out and source parts as it opens you up to too much risk. You need to have pre-qualified suppliers who you know are capable of delivering parts at the quality you require and expect (maybe scoring them based on your criteria of quality, risks, delivery, etc, into tiers) and you will create that approved supplier list by doing the due diligence outlined here.
You might even have a quarterly supplier meeting for those on your list where you assess them on key metrics and adjust their rankings accordingly (especially if you have larger projects). (37:35)

What is a T/T payment?

T/T payment stands for ‘Telegraphic Transfer.’ In other words, an international wire of funds from the buyer’s bank to the seller’s bank.

When a Chinese supplier asks for a T/T payment, what they really mean is they want a wire transfer. (Technically, a T/T payment is not exactly the same as a wire transfer through the SWIFT system, but the vast majority of people think of them as the same thing.)

A wire transfer based on SWIFT is the most common payment method in international trade with Asian countries. It typically takes 3-5 working days to clear, and generally costs between 25 and 50 USD, depending on your agreement with the commercial department in your bank.

How to make a T/T payment to China?

Contact the commercial department of your bank, tell them you need to wire (for example) 25,000 USD to a company in China, and they will generally give you a form to fill out. If you do T/T payments frequently, your bank probably has an ‘internet banking’ application that will save you time.

Your supplier will probably send you a pro forma invoice that includes their bank account information. I strongly suggest you ask for that information earlier (as part of your pre-qualification of a potential supplier). Many buyers have been scammed by hackers who send invoices with their own bank account information…

I shot a short video that shows how to fill out a T/T payment application form:

After you have done this, take a screenshot, or get a digital copy, and send it to your supplier.

Important tips:

Make sure to avoid any misspelling, which might cause the payment instruction to be held in limbo for weeks!
You will need to write the company name in English, not in Chinese. Don’t try to do your own translation job, even if your written Chinese is excellent! It has to match exactly the English name that is registered in the seller’s bank records.
If the company name is too long, keep writing it in the “address 1” field. This is sometimes mentioned on the T/T payment forms of banks that work a lot with China:

What is the most common payment term requested by Chinese suppliers?

The most common payment method is a bank wire that works this way:

You have the supplier develop sample(s) until you are confident they know exactly what you want.
You send a 30% deposit (by T/T payment) before production starts.
Your supplier (the manufacturer & exporter) purchases the components and/or materials and arranges the production
You work with a quality assurance firm to inspect product quality (this is optional but usually a good idea).
You send the remaining 70% (by T/T payment) before shipment.
The supplier ships the goods and sends you the documents by express courier.

In graphical form, it looks like this:

Unfavorable payment terms with T/T payment

What is another common, and better, payment term for paying your Chinese supplier?

It is quite similar, except for the end of the process.

Once the supplier confirms the goods are ready, send an inspector to check quality (again, not a must, but highly advised)
If quality is OK, release the goods (allow the goods to be shipped out) — this works best if you purchased under FOB terms
Once the goods are on the ship, the supplier gets the Bill of Lading (B/L), and sends you a copy of it
If the product name, quantity, etc. are all fine on the bill of lading, you send the final payment to the supplier
Once the supplier receives the payment, they send you the original B/L

It looks like this:

Favorable payment terms with t/t payment

Why is this payment term a better choice for importers from China?

The buyer knows the goods have been shipped out before paying the remainder.
The supplier knows the buyer can only take possession of the goods after the original bill of lading has been sent.

Can you negotiate this term? If you insist on it from the very start, and if your suppliers are motivated to work with you, probably yes. If you come out as a beginner and your orders are very small, probably not.

How to negotiate better payment terms from a supplier in China?

There are various ways you might be able to negotiate for payment of some (or all) of the amount after shipment.

Your company is well established and famous — think Apple or Disney. The risk of the buyer’s company defaulting is much lower. You can work work with relatively large manufacturers, who have facilities to finance their working capital easily. And the seller wants to boast about that prestigious customer in order to get more business, so they usually want to make an effort.
You have a buying office in China — having a strong presence in-country does help. A supplier that hasn’t been paid in time can visit you and take different measures to push you for faster payment (especially if your China office signs contracts with them), so they feel there are at lower risk. From our experience, when we help our clients by paying their suppliers, we can often negotiate 0% deposit and 100% after shipment, at end of month with the suppliers after a few shipments (negotiating this from the start is not realistic, though).

How to get help from a financial institution?

There are two ways financial institutions (some banks, but also certain fintech startups) can help you:

You can arrange financing of your suppliers — as the buyer, if you have a healthy balance sheet and you purchase regularly from a certain supplier, you can work with a financial institution that will advance a good chunk of the money to your supplier, while you can pay later (in some cases, 90 days after shipment!) This used to be only possible for large companies, but recently I heard of options for smaller companies.
You can borrow money for a certain time period, to finance your orders. This type of loan is often granted by the same financial institutions I mentioned in the previous point.

Contact me if you need more information about making a T/T payment. We don’t provide this service, but we can probably point you in the right direction.

Frequently Asked Questions for making a T/T payment to China

Tips and tricks about the T/T payment process

What are some mistakes we should never make?

Here are two big no-nos:

You should never pre-pay 100% of the order before production starts. We have seen buyers make this mistake and deeply regret it. Once that’s done, what keeps the factory working hard on shipping good products to you on time? You will become their last priority…
You should never wire the down payment before having a relatively high certainty that the factory knows what you expect of them. Most experienced buyers issue purchase orders, then receive a sample and confirm it is very close to what they want to receive (after mass production), and after that, they send the advance payment. In some cases, you might need

The supplier says they need a deposit earlier to buy one of the components, which needs to be ordered 3 months in advance. Is it true?

It might be true. Yes, it does happen. If possible, get all the information about that supplier, their product price, and so on.

In that case, you can usually negotiate the amount to pay at the time of that purchase. It is not necessarily 100%, but often is. And make sure you understand how much you will still need to pay later for the advance payment (before production).

What to do when an Alibaba supplier asks for payment by TT?

Whether you found them on Alibaba, Global Sources, Made In China, or other similar directories, doesn’t change anything. If you pay them by telegraphic transfer, what I wrote above in this article applies.

Should we issue a purchase order? It is considered as a contract?

At the very minimum, your supplier will send you their pro forma invoice and ask you to confirm it. Naturally, it comes with their own terms, which is why we suggest you issue your own purchase orders (POs).

However, a PO is not a contract. It is difficult to sue a rogue Chinese supplier on the basis of a PO. A purchase agreement, or manufacturing agreement, is what you need (and make sure it is enforceable in China).

Should we pay suppliers in USD or in RMB (China’s currency)?

Both are usually fine (up to negotiation between you and them). The “standard” is to pay in USD, but more and more buyers have decided to remit RMB. This might make sense if your bank offers that possibility. I wrote here about the reasons why many companies pay their Chinese suppliers in RMB.

My bank tells me sending money in CNY (RMB) to a supplier in China is cheaper than sending it in USD. Do YOU advise doing that?

Sometimes it doesn’t work if you select that option. We have seen many projects delayed that way.
So, we suggest you ask a bank officer to confirm this is something they are used to facilitating and it will work out fine.
And you will also need to make sure the supplier gave you a bank account that accepts CNY received from an international source, of course.
Note: more and more companies pay their suppliers in CNY regularly. It is part of a wider system. Quotations are in CNY, payments are in CNY, etc. I wrote about it here.

Do you advise using the FOB incoterm, when the shipment is by sea?

If you purchase products from a Chinese company, do like most other buyers — buy under the FOB (“Freight On Board”) incoterm. It means you appoint the freight forwarder (or directly the shipping line) that will handle international transport.

As we suggested above, you don’t want the supplier to ship the goods before a final quality inspection has taken place. If you buy FOB, the shipment can only take place after your freight forwarder has released the “shipping order” to your supplier.

You can find more information on this topic in this post about negotiation.

When should the “deposit” (or “advance payment”) be sent to the supplier?

In general, a deposit is wired as a T/T payment (or an L/C is opened) only after samples have been approved.
If the supplier asks for an early payment to do a “feasibility study” or “prototyping work”, that might make sense. But keep it separate from the deposit, and have the supplier commit to an agreed deliverable.

Our bank charges us a lot for an international wire. Is there a cheaper alternative?

If your bank charges you 40 USD or more, and their transfers take 4-5 working days to be executed, you are working with a traditional bank that follows an antiquated system (SWIFT was developed in the 1970s). This should change in the coming years with cryptocurrencies such as XRP, but right now there are other solutions.
Some of our clients have used alternative solutions and seem happy about these services. Depending on your situation, they might offer a better deal than your traditional bank. Here are a few examples:

# If you make payments from your country

Wise.com — was set up to compete directly with traditional banks when it comes to T/T payments. Has become quite popular. In early 2020, they added the ability to send money to an Alipay account (but I strongly advise against payments to personal accounts).
Payoneer — very convenient for collecting money from marketplaces such as Amazon. Sending money to another company that has its own Payoneer account is fast and inexpensive.
Revolut — seems to be geared more to European consumers and companies, so far. Fantastic value for certain usage.

# If you can make payments from Hong Kong
The above options are still valid, but in addition:

If your Chinese suppliers accept payment in Hong Kong, you may set up a business account there and do local transfers (immediate and inexpensive). Companies like Rapyd can help if you want to set this up (for 99 USD a month, so that’s viable only if you have a lot of payments to send).

[Note: We are NOT getting any affiliate fees or commissions of any kind from the companies listed on this page.]

What about payments to service providers?

As we wrote in ‘How to Pay a Service Provider Based in Hong Kong or China?’, there are a variety of options.
If the amount is small, Paypal is most often used.
For amounts above 300-400 USD, bank wires (T/T) start to make more sense.

Can a bank wire transfer get “lost” in the system?

I never heard of a transaction that got lost forever (i.e. never arrived, even after honest investigations), but I heard of many transactions that “disappeared” for a little while. The whole SWIFT system is a bit clunky. It would happen as follows:

Payer’s bank processes the application for payment
Payee’s bank doesn’t register the money coming in
Payee asks his own bank to investigate, and no information is found
Payee asks the payer to ask their own bank to investigate, and they find an issue that was holding the execution of the wire

Depending on the two banks’ reactivity, unlocking such a situation can take up to 2 months!

Why is this process (SWIFT) so inefficient?

As we wrote in ‘International Payment to Chinese Factories’:
SWIFT was originally built in 1973 – long before the creation of the Internet. When money is sent overseas, physical assets don’t have to move. Instead, SWIFT acts as a messaging system between banks to clarify the ownership of assets on their books.

Euros are taken from your account and traded for you on the FX Markets by your bank in order to receive USD. Or for smaller banks, they outsource this process to larger institutions. The USD is then sent to your supplier’s bank via a correspondent bank, which actually holds the USD. Chinese suppliers often hold offshore accounts, which means in order to pay their costs in China (raw materials, salaries, rent), this money needs to be sent to an onshore bank. Again a correspondent bank is often involved.But the process doesn’t end there. The USD must be traded on the Chinese FX markets before RMB is finally available to the supplier. And when a wire arrives in China from abroad, the supplier must physically visit a bank branch to collect it. This involves a heap of paperwork, stamps and signatures.

Is it risky to send a T/T payment to China?

If you transfer money on the SWIFT system, there is little risk the money just gets lost in transit.
There are cases where the payer says “I sent this to you 3 weeks ago” and the payee says “I don’t see it on my bank statement”, sure. Both parties contact their relative banks with the unique transaction number, and especially the payer asks their bank to launch a tracing procedure, and eventually it tends to work out fine. As long as both parties are not playing games.Nearly all the risk lies in picking the wrong company, or people, as counter parties to the transaction. Make sure you do proper due diligence. Once you have sent a T/T payment, there is no way to call it back.

Frequent issues

Are there common scams that we should be aware of?

Yes! Some hackers regularly collect payments from buyers who send wires to the wrong accounts. You can read 7 tips to avoid this scam here.

The supplier says they got a smaller amount than we wired. How is it possible?

It often happens. Here are the typical steps behind this, for a hypothetical 5,000 USD amount:

Payer’s bank receives instruction to do a wire for $5,000 and charges a $ 25 fee. Payer is down $5,025.
Payer’s bank chooses to work with an intermediary bank that has a direct ‘channel’ to send the money to the payee’s bank. That intermediary charges $25.
Payee’s bank receives $4,975, and payee’s bank charges $10, which means in the end payee receives $4,965.
The total cost of the payment (to both parties) is $60, which is 1.2% of $5,000.

(Note that the $25 fees typically range from $20 to $40, but there are no absolute rules here. Ask your bank’s commercial department in advance.)

Our supplier asks for payments to be wired on a personal account. Is it a problem?

Ask for an invoice that calls for payment to their company account. If you send money to a personal account, it will be much more difficult to litigate against them if they let you down later.

If they insist on payment to a personal account, there might be several reasons:

The amount of the purchase is very low (for example, 1000 USD), and it makes no sense for them to do all the paperwork for converting your USD into RMB and so on and so forth.
They don’t want to declare it in order to avoid taxes. This is not reassuring, but it is still very common in China. Don’t expect this company to be a perfect supplier over time.

Our supplier asks for payments to be sent to a different company. Is it a problem?

Not necessarily. Again, there might be several reasons. They might use a Hong Kong company to avoid declaring the sale in China (and pay taxes), they might not have an export licence, and/or they might find it much more convenient to collect payments and do all the export procedures under another company.

As I wrote above, this will make it harder for you to litigate against your supplier, since you won’t be able to show a trail of payments from your company to theirs.

What can you do? The very minimum is for you to ask both companies (your supplier — “A”, and the one collecting payments — “B”) to jointly sign and stamp on a declaration that B is collecting payments on behalf of A and that A is the supplier to your company.

About negotiations

Why do suppliers in China, Vietnam, or India always want payment before we get our products?

For three reasons:

They know that it is a “standard” and they suspect that you, as the buyer, will have a hard time finding a better deal.
They need cash to pay their suppliers who, for a good part, don’t extend any credit.
They have heard many stories of buyers who played games and managed to underpay for their production, or even cancelled after production was completed without having paid anything — for good reasons (poor quality) or bad reasons (disappointing sales, low cash position, etc.)

Can the amount of the deposit (before production) be negotiated down?

If the supplier sees your project as interesting in the mid- to long-term, and if the manufacturer has sufficient cash on hand to order and pay the components, yes it is generally negotiable.

If your production is highly customized and (in the unfortunate event of order cancellation) difficult to sell to another customer, negotiating a lower deposit will be difficult. It is a measure of risk prevention.

Do all component suppliers need payment in advance?

It depends on the industry, on the business relationship, on their power on the market, and so on:

Some always do.
Some do if they don’t have any confidence, but extend credit (generally 10-30 days, or enough time for the assembler to complete production and ship the goods out) when they feel the risk is limited.

Our supplier asks us to pay all the remaining 70% before they ship the goods. Is it dangerous?

This is unfortunately quite common. Generally speaking, if you have had a quality assurance agency confirm the quantity and the quality of your goods, the risk of paying before shipment is relatively low. Few companies scam their suppliers after doing all the production.

Can we negotiate for 100% to be paid after we receive the goods?

I have heard of companies in the US or in Europe who have managed to negotiate that type of deal. Here is their situation:

They buy relatively high volumes and are not very tough on pricing (in other words, they are attractive to suppliers)
They buy standard products for which there is high competition
They ask 50 to 200 potential suppliers if they’d be open to that type of deal; they keep talking to the 5% who say they might be interested; they do business with 1 or 2 of them

*Editor’s note: This post was originally published in 2012, and has since been updated to include new information and formatting.

Need help setting the right terms with your suppliers or have any questions about T/T payments?

Do you have any questions about making t/t payments to overseas suppliers that we haven’t addressed here? Any experiences to share with the community? Questions about payment terms? Let us know in the comments below or contact us!

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Fri, 10 Nov 2023 17:10:14 +0000

Sourcing New Suppliers From China: 7 Tips For Success.
Posted on Friday November 10, 2023

Category : Sourcing New Suppliers

Author : Adrian Leighton

Sofeast’s head of supply chain management, Kate, shares 7 tips that will help you get better results when you’re sourcing from China (or other countries in Asia, too). She also sheds light on how we approach the process effectively for our customers after doing so for a decade. Read and listen and you’ll either be […]

The post Sourcing New Suppliers From China: 7 Tips For Success. appeared first on QualityInspection.org.

1. Use platforms to find suppliers.

Alibaba

The most famous of China-sourcing platforms, it’s easy to use and you can find suppliers for almost anything.

Pros: It has many suppliers with international experience and export licenses, English-speaking sales reps, previous experience with foreign customers, an easy-to-use website, and trade insurance programs to provide you with protection if things go wrong.
Cons: A lot of the suppliers are actually trading companies and not manufacturers (you may be able to identify trading companies if they have only a few staff and a room number for the address, rather than a factory).

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This is a similar platform to Alibaba, but it tends to focus more on local suppliers. Since it can be cheaper, you can at least do research here and use the lower prices to negotiate with suppliers from Alibaba if you prefer them.

Pros: Since a lot of these suppliers are local and supply domestically, you are likely to find that some are cheaper than on Alibaba.

Cons: Suppliers here are less likely to have international experience and export licenses, or even speak English. So managing the relationship could be more complex.

Others

You can also consider using these sourcing platforms: Global Sources and Made In China.

You might also use (paid) trade insight programs like Panjiva and Import Yeti to research who has been shipping what from where and possibly get an idea of who their suppliers are, too. Or, if you want a free research solution, it’s possible to search on Google or on Baidu (China’s equivalent) as some suppliers will have websites that can be found there.

Finally, exhibitions like the Canton Fair have been back up and running since Covid, so paying a visit and seeing suppliers in the flesh is a popular option. (04:12)

2. Pay attention to these points when selecting a supplier

You can get a feel for whether a supplier will be a good option by checking:

Year of establishment – companies that are newly established are riskier to work with than those with a fairly long history
Location in China – central China tends to be cheaper than the key coastal areas, but the quality is also usually worse, so you need to make a tradeoff between quality and cost
Number of QC staff – if a supplier has a decent number of QC staff they’re more likely to take it seriously, you can also ask to check recent sample quality reports (10:02)

3. Check their certifications

Larger suppliers will have more certifications like ISO 9001, 14001, etc. Holding these is a good sign that they have, for example, a quality management system in place and you can expect better quality products from them. In our experience, they’re usually not fake, but sometimes they have expired. It’s possible to check the validity of certificates online, though, so you should do this.

If you’re purchasing components or products that have certain certifications checking these is really important because otherwise, you could end up with non-compliant products that can’t be sold in your market/s. For example, if a product has RF emissions, and many electronics with WiFi etc will do so, it will need an FCC certification for the USA or CE for the EU and UK. Off-the-shelf components that are pre-certified are often good options for new products due to the convenience of not needing to get them certified yourself, but if you are making a custom component or product don’t forget that the responsibility to get them certified will fall on you. Most suppliers will assist you in getting products certified and will provide samples etc, however, it’s better if you manage the process in case they do something wrong…ultimately you are held responsible for non-compliant products, not them. It’s helpful for many importers to use a 3rd party compliance expert to help get products tested and certified correctly. (12:39)

4. Collect and verify each supplier’s contact info

Now you’re narrowing down your possible suppliers, this information should be collected:

Location – As already mentioned, location can affect price, quality, etc.
Their revenue – Sums in the millions are better as they tell you that the supplier is financially stable and can be relied upon in the longer term and is less likely to go bust.
Confirm that they have an export license – For obvious reasons!
Find out the percentage of exports they produce VS products for the local market – This speaks for their experience with manufacturing at the required quality level and in compliance with foreign regulations.
What their main products are – So you can be sure they will not find manufacturing your product new to them and struggle with the project.
What their technical capabilities are – As above, they need to be experienced in the capabilities required to manufacture your products.
Who their main customers are – For example, Walmart, Disney, etc, will mean that they’re a good supplier, but you should also know that unless your order quantities are similarly large, these suppliers may not treat your orders with as much urgency or even care as a ‘smaller’ supplier might as their focus is on pleasing their giant customer/s.

Be sure to crosscheck any information provided with what you see online or see on the ground so you can confirm the veracity of any claims and be satisfied that nothing strange is happening. (17:44)

5. Use these tricks to get better quotations

Quotations from Chinese suppliers are usually subject to an MOQ (Minimum Order Quantity). You need to approach them strategically and not just automatically try to bargain down the price; that’s likely to make good suppliers quickly lose interest in dealing with you.

Some tips:

Alibaba prices can usually be negotiated down by about 10%.
If your order quantity is low right now, it may help to introduce your business to them and discuss your annual order quantities with potential suppliers to show them that you have potential and explain that you will ramp up orders later in order to get their interest that way.
Check the average volume requirement by suppliers on Alibaba and try to order that to start with to hook suppliers and get them invested in your project as they spend time on them. Later you can ask for lower MOQs sometimes for marketing or promotional purposes, but only do this when the relationship is established.
You can start to negotiate on the price earlier if buying off-the-shelf products as the cost is a key point here, but if the supplier is manufacturing a custom product or component for you, making sure that they’re a good fit takes precedence over cost because you need to know that you can trust them with your IP and that they’re capable of manufacturing something new and unique.
A good quotation will usually include sample costs and lead times, mass production costs and lead times, payment terms, tooling, validity period of the pricing, and incoterms. (21:47)

6. Select the right incoterms for your needs

Incoterms (delivery terms) have an impact on the price you pay for goods from a supplier, so it’s important to know your options. The most popular incoterms from China are:

EXW- this is the pure ‘factory price’ or ‘unit price’ (usually in RMB) and all logistics are left up to you to arrange and pay for separately. Great for comparing prices from different suppliers, as the costs don’t include various logistics costs that can differ.
FOB – the seller is responsible for arranging and paying for the logistics and customs clearance in China up to getting the goods onto the ship, the buyer then takes over. This is probably the most popular way for importers to handle the order with their Chinese supplier and we usually recommend it.
CIF – the seller arranges and pays for internal logistics and customs clearance in China and the shipping to your destination (this is convenient, especially for beginners, but you give up a lot of control and the supplier may select logistics which are not a good fit for your needs). (27:59)

7. Source yourself or use a third party?

It’s worth getting to grips with sourcing from China by trying it yourself as this is a great learning experience. However, it can be difficult and many importers choose to work with 3rd party experts who are already on the ground in Asia. They will usually do all of the background checking work, check local language resources such as government registers, do factory audits, and will be acting only to find suppliers that fit your needs. You might choose this approach to find suitable suppliers, but then manage the relationship yourself later on.

Read this blog post to learn about this decision in more detail: Do You Really Need A Sourcing Agent in China Or Can You Do It Yourself? (32:45)

A sad example of what can go wrong if you’ve sourced suppliers yourself without doing enough due diligence

A customer came to us recently in an unfortunate position. They’d found a Chinese supplier on Alibaba during the Covid times and had agreed to pay 70% of the order cost upfront (which was over US$100,000) due to what he said was the high cost of raw materials, etc, since he was a nice and responsive person (that’s a red flag, as the usual payment term should be a 30/70 split with the balance paid when the goods are shipped).

They switched communications to WhatsApp because it is easy to use and they paid them directly, not through Alibaba (which can provide some protection by keeping the money in escrow for a period of time). The supplier then started telling them that there were delays due to lockdowns, etc, and this dragged on for two years before we got involved! The supplier was still messaging them asking for even more money at this point, claiming that the goods were now ready but since the raw materials supplier was owed money they just needed to pay one more payment and then everything would be released and shipped so they paid another smaller payment of over US$10,000.

They wanted to penalize the supplier for late delivery, but we had to break it to them that this money probably couldn’t be recovered and that the products were very likely never going to be made.

When we investigated the payment it turned out that they’d been requested to pay a different company in Hong Kong than the one they thought they were dealing with which was in China and this meant that legally there was not much recourse or ability to track the payment. We asked to visit the supplier and check on this situation in China, but, of course, they went silent after that and disappeared.

This is a sad example, but it does illustrate the risks that you face when sourcing yourself from China. If you do decide to source your own suppliers, you need to be sure to follow best practices in order to protect yourself from scams. Paying a third-party specialist to do due diligence on Chinese suppliers might only cost hundreds of dollars and prevent you from losing tens or even hundreds of thousands, so it’s a pretty easy decision to make. (35:41)

What’s the general business environment in China after ‘Zero-Covid’ really like for foreign businesses now?

We hear about the Chinese economy being bad and lots of foreign companies trying to get out of China but how accurate is that picture on the ground right now?

Since the pandemic, the way that foreign investors do business in China has changed and many more are setting up companies remotely and managing them from abroad, outsourcing essential activities like QC to companies like Sofeast, and accounting to companies like Hongda.

In the past foreign businesses often used China solely for manufacturing and export, but now they’re increasingly trying to sell into the Chinese market and take advantage of the 1.4 billion population and the large purchasing power of the growing middle class there. (02:21)

The Chinese economy is less vibrant than before now. What is the government doing to encourage foreign investment?

Everyone has heard about the post-Covid struggles of the Chinese economy. This has perhaps had a dampening effect on foreign investment in the country. What are the government’s policies to help combat this?

Now we are in post-Covid times the Chinese government has sent delegations worldwide to introduce the Chinese market and encourage foreign investment by demonstrating the infrastructure, investment environment, supply chain, etc, available there.

In August ’23 the government introduced 24 methods of support for foreign investors, and then soon after in October ’23 they introduced a policy for manufacturers allowing investment into previously restricted markets such as book printing and traditional medicine manufacturing…this shows that their attitude towards manufacturing has changed and is more relaxed towards foreign businesses now.

On a provincial level, certain provinces seek to attract foreign manufacturing investment and are offering generous tax refunds and grants to businesses that set up operations there.

So, from a business perspective, despite the economy, the government is taking a lot of positive steps to encourage and support foreign investment. (07:40)

How easy is it to hire foreigners in China today?

China has three foreign work permit categories, A, B, and C given on a points-based assessment. A and B are given to workers with experience and are the easiest to obtain, whereas C is for workers with less experience and is harder (as China prefers better-qualified foreigners to come in to work). Unlike other Asian countries, China doesn’t have an actual quota for businesses to hire a number of local staff per foreign staff member. The nature of your business is related to the number of foreigners you can hire and this will be considered by the authorities. Hongda has helped companies hire up to 40 foreign staff locally in China which is a reasonably large number for one business.

The visa application process is now ‘back to normal,’ but during the pandemic, some foreigners had to set up a business and hire themselves as an entrepreneur in order to have a work permit and remain in China because not many foreigners were granted work permits during this time. (11:55)

If a Western company wants to start their own manufacturing company in China, what’s the process?

There are different steps for a foreign business in this situation:

Investigation. China is a huge country, so you need to visit different areas to decide on the best location not only for your manufacturing facility but also for access to the components and materials you need to buy.
Discuss the project with the local government. This is especially relevant if your investment is very large as by building a relationship with local authorities you may be able to get government support on the land and tax relief, etc, as they will obviously welcome a new employer in town.
Compliance and company formation. You will need to provide a notarized copy of your head office’s business license and this will also be used when leasing the premises and obtaining the business license for China to open the company – this only takes around 5 working days.
Local business bank account. This takes around 2 weeks to open once you can provide the company formation articles to the bank.
Environmental protection license. You will need to provide your manufacturing processes, how you handle waste, etc, to the authorities and it takes about a month to issue this license and then you can start operating.

The whole process should take up to around 3 months from start to finish. Of course, you will also need to decorate and equip the facility, hire staff, purchase machinery and equipment, purchase materials and components, start using an ERP, manage stock, etc. Some of these activities could be done during the process above in order to be able to start manufacturing without delay.

SMEs usually prefer to find an existing commercial building and move into it rather than building their own factory from scratch, and that’s an efficient way to handle the process if you want to be able to set up the business promptly. (16:41)

Selecting the right area and getting government support for manufacturers.

You may get more generous government support if you are prepared to set up your operations away from the coastal cities inland in provinces like Hunan and Jiangxi because local governments there are hungry for investment and job creation, but choosing areas like this depends on if they’re advantageous to your business.

For many electronics brands, there is no better alternative than the ‘Greater Bay Area’ of the Pearl River Delta and Hong Kong in Guangdong province (where Sofeast is headquartered), even though labor and property rental costs are high because this area has so many of the suppliers. However, for other products like cut & sew manufacturing of apparel and textiles, inland areas with a lower labor cost will be more suitable as the labor cost forms a large proportion of the product cost.

It may be better to select smaller cities near to larger more high-profile ones if you appreciate lower costs and space to grow. For instance, instead of Shenzhen in Guangdong, you may look at places like Zhongshan or Huizhou which are nearby, but less costly in terms of rent and salaries required as they’re still developing. You may also get more support from local government in these smaller cities. (21:30)

7 Common mistakes foreign businesses make when setting up a manufacturing facility in China.

Not registering the company with the right capital investment. In the West, it might be common to register a business with, say, just a $1 investment. But China is a foreign capital control environment and you can only invest the amount of money that you state when forming the company. So for a manufacturer, you probably need to register the amount of capital needed to set up the business and run it for a couple of years. That could be millions of dollars in some cases, but you do not need to invest it all immediately. In the company formation documents, you can state that it is to be invested over, say, a 20-year period, so there is no reason to be worried about stating that your initial investment is a high number. More capital investment can be better as it will give you the funding you need to grow the business and get it running smoothly. It is also not taxed in China, so it makes more sense financially to use the investment on startup costs, etc, rather than raising revenue in China which is also taxable to spend on the same thing.
Choosing to be based near to a port you export from instead of your suppliers. For manufacturers in China, it is important to be based near where your supply chain is located so you can communicate with suppliers, send back defective components, etc, but it is not so important to be based near a port where you can export products from. For example, you can produce products in Guangdong and export them from Shanghai’s port, that’s not an issue at all.
Making the wrong hires for your first staff. You need to be very careful to hire really capable staff as your first hires, as your production manager, etc, will shape your company culture in China quite heavily.
Letting cliques form. Some manufacturers had groups of people from different countries form into cliques and fight against each other, leading to a lack of harmony in the organization that prevented progress and normal operations. This needs to be discouraged, so maybe it’s better to discourage a manager from hiring a bunch of staff from his own country or even city.
Choosing the wrong area or even building. You need to do your research and make sure that you don’t end up in, say, a flood plain and be affected by extreme weather in future.
Not laying out the processes properly. You need to consider the workflows at all times and not start small and add equipment in a haphazard way as this will affect productivity. This will require experienced process engineers to work on the manufacturing processes in a professional way and they will also be involved in making sure that staff are properly trained to do the job well.
Going for a big bang production launch. Not ramping up production incrementally is a common mistake because by going all in with multiple lines at full speed immediately you increase the risks of things going wrong. Better to start slowly with just one line and stress test the processes, going faster and introducing more lines over time. (25:55)

Introducing the component selection process

The electronic component selection process is essential for any electronic device and is more involved than many people think. Proper electronic component selection is not actually as simple as going to Radio Shack, buying a part, and just using it as long as it works. Today’s manufacturers need to make sure that their components to be used in mass production meet certain criteria. There are around 18 steps or tasks that make up electronic component selection, and each step for selecting components could take weeks, it’s a slow process. (01:17)

The theoretical part of electronic component selection

1. Define your Requirements

To define your requirements you need to understand your product, project, and use case environment/s, its functions, the users’ needs, reliability requirements, etc, and consider all of those points when sourcing each component. You’ll be thinking about what the product does and how the component helps it achieve its goals. The key point here is that you need to do this for all of the parts you’re purchasing. You will consider the specifications, cost, etc, per part at this point.

2. Select the Key Components

Your product’s key components are the ones that are most important and provide critical functions, aesthetics, etc. For example, it may be that your product needs to use one very specific type of chip, so you’d select this chip and build the product around it as there are no other alternatives. Key components may especially be CTQ components, high-value components, those that have a long lead time, single-source components, and others that are considered to be ‘critical’ as these are, naturally, the most important for your product to perform correctly and be able to be mass-produced.

3. Analyze the Operating Environment/s

Where will your product be used? You will need to consider if the components you’re selecting will be able to cope with the intended operating environments. For example, is the product only meant for cold environments, for example, a snowmobile? If so, the components’ abilities to withstand the high temperatures of a desert environment probably aren’t a key consideration for you in comparison to their ability to function correctly in the cold. If the wrong component is chosen, you can bet that reliability issues will occur later when the product is used in an environment that the component isn’t fit for.

4. Identify Critical Parameters per component

Think about the range of parameters required by each component, such as voltage, frequency range, tolerances, etc. You should take your needs into account when identifying parameters so you only select components that perform as needed. For example, selecting a resistor with tight tolerances when you don’t need tolerances in that range will cost you a lot more than any average resistor. (04:20)

The practical part of electronic component selection

5. Source the Components

Now you know what kinds of components you need and how they need to perform, it’s time to go out and do the electronic component selection for real. Online distributor websites like Digikey and Alibaba are helpful sources of components that you can buy in small quantities to try out in prototypes. You can also go directly to component supplier websites as many have them now. Don’t forget to download the datasheets at the same time so you can compare the specifications of your components. If your product is very exciting for the manufacturer, they may send you free samples of the parts and even an application engineer who will help you design it into your product. (10:04)

6. Consider the Supply Chain

Let’s say you’ve selected two components. Pay attention to the suppliers themselves. Are they well-established and do they have experience and professional operations? Or are they new to the business, or even just a trading company or distributor? Dealing directly with an experienced manufacturer is the best option for long-term stability and availability of the parts. Also, consider finding a second-source supplier, especially for key components, so you can turn to them if there is an issue with the main supplier that could disrupt your supply. (15:26)

7. Check for Obsolescence

You do not want to go to the trouble of designing a new product with a specific component only to find that that component is now obsolete when it’s time to launch. Design engineers need to check on the lifecycle of the part during the sourcing process and confirm that selected components will be available for the longer term. (16:53)

8. Analyze costs

Component costs will be lower when you purchase in larger quantities so you need to analyze the cost structure of different suppliers so you can select one that provides you with an acceptable price for the quantity you require. If your supplier’s cost is too high, this will impact your ability to offer the product at an affordable price. (17:34)

9. Selecting Components of the right Reliability and Quality

Finding a part that works as you need it to is step one, but you also need to make sure that it will be reliable for the expected lifetime of the product. The design engineers need to know what your reliability needs are. Without performing reliability testing, you may not know that the part can’t handle changes in temperature or humidity well over time, or fluctuations in electricity. Ideally, you’ll select parts that have some reliability margin, for example, they can handle temperatures above what you reasonably expect the product to be used in. (21:01)

10. Purchase Second-Source Components

Be sure that the purchasing department also has second-source components in the BOM that you can buy if your primary components aren’t available. It’s a common mistake that the design engineers forget to inform purchasing that they need a second-source component during the electronic component selection process and then, when things go wrong and one is required, everything has to be delayed while they go about their business of sourcing and validating one. (24:53)

11. Component Database

Most manufacturers set up a component database which is updated with up-to-date datasheets, version numbers, etc. Version control is important so people have access to the right information and select the right parts as and when needed. (26:28)

12. Design for Excellence, especially DFM

DfX helps to derisk the product before it goes into manufacturing because the product is designed with certain principles in mind, for example, design for reliability places an emphasis on designing the product in such a way that it is more durable and reliable. If DFR is not done, you will find more reliability issues occurring in the products either during manufacturing or, worse, in the field. You can apply DfX principles that suit your needs to your product design. Design for Manufacturing, or DFM , is a key choice because you design the product to be more easily manufacturable and at a lower cost. (29:08)

13. Compliance and Standards

During sourcing, you need to check the component’s datasheet to confirm if it complies with your market’s relevant safety standards and regulations. Let’s say you manufacture a toy and it’s later found that you used non-compliant paint with lead in it. That toy is almost certainly going to be banned from sale which would be a disaster for your business. Someone needs to be responsible for researching and checking the compliance requirements, as they keep changing as time progresses. (30:54)

14. Simulating and Prototyping the Product

At this point, you’re ready to start putting everything together and create samples which are also known as prototypes. For new and unique technologies, getting a first prototype in hand could take years, but as long as you have done the other steps carefully, you should be able to make a prototype that doesn’t suffer from many problems likely to slow you down. Once the first prototype is made, subsequent iterations where you add more features, aesthetics, etc, will be easier as you learn from what came before and use a lot of the same components, techniques, etc. (33:49)

15. Documentation and Record-Keeping

This is a difficult task for design engineers as they make a lot of changes over the course of working on the product, but if they don’t document and record them clearly this can lead to problems as anyone joining the company, for example, won’t necessarily know what the most up-to-date changes were. The lessons-learnt database may be useful here for tracking changes, fixes, and learnings, along with dates, and who made a change or fix, etc. (35:14)

16. Design Reviews

You should now have a prototype in hand that has been tested for reliability and is getting towards being complete and ready to manufacture, but before that can happen a design review (which is a type of milestone review) should occur. In the meeting, all engineers involved with the product and the management will go through all aspects of the design and product to focus on each goal and requirement. If it is deemed to have met a requirement, that is ticked off. Ultimately, we want to validate and verify that the product is reaching our requirements or goals for performance, reliability, quality, etc, and that the product appears to be working as expected. (38:12)

17. Lock the Bill of Materials (BOM)

If the product has passed the design review it’s ready to go to manufacturing, but before then you need to lock the BOM. The purchasing team will call component vendors to confirm costs, inform them of the order and quantity, and confirm that the parts are also available. Everyone needs to be coordinated at this point to make sure that the process of going into manufacturing runs smoothly, for example, the purchasing team need to make sure that all of the components are ordered and will be delivered by a certain date when manufacturing is planned to start. Then the wheels start turning to set up the manufacturing assembly line/s and test those processes as well, hire operators, write work instructions, etc, in order to be prepared to go into mass-production. (41:13)

18. Pilot Run

Your fully tested and validated component samples that will be used in mass production need to be provided to production who will perform a pilot run with them to test the production processes but also confirm that the components can be assembled and manufactured into the product correctly. This will pick up production issues, packaging problems, and many more things that you can then fix before too many products start coming off the production line. (44:45)

Where did the TRL framework originate?

Frameworks and tools like EVT, DVT, PVT, usually originate from a certain industry or company. In this case, from Motorola. Technology Readiness Levels, or TRL, is no different, as this framework originated from NASA in the 1970s. It was created as a framework to help them make sure that each stage of the development of a spacecraft was correct before they moved on to the next (and has been more recently adopted by the European Space Agency (ESA). TRL was not used for mass production at that time, because spacecraft were highly specialized, hand-built, items that were only made in small quantities. In many cases, parts or modules were outsourced to contractors like Lockheed Martin or Boeing who would be building them over long periods of time, so the TRL was used to check on their progress at each stage and release funding accordingly when validated. That’s why the development process was codified in this way, as it helped NASA to plan ahead for and control what was happening, have visibility over progress, and know when to release funding for these very lengthy and complex projects. (01:08)

The 9 Technology Readiness Levels

You can see the 9 original NASA TRL here (you can also see our corresponding NPI process phases next to them that incorporate the TRL and go further, and we’ll come on to that in more detail later):

Bear in mind that for the following levels, we are talking about spacecraft and their components, systems, etc, that are only made in small quantities throughout.

BASIC RESEARCH

1. Basic principles observed and reported – specifications, creating reports and documentation that support the product. Very specific on the directions of each element and component. We have to document design principles in a report that provides a signoff on the technology and your goals.

2. Technology concept and/or application formulated – looking at calculations and materials that may be used for building components. Looks more deeply at the technology behind your product concept. This backs up the initial report with calculations.

PRODUCT DEVELOPMENT (Until the design is frozen)

3. Analytical and experimental critical function and/or characteristic proof-of-concept – start working on a proof-of-concept prototype, particularly for validating the critical functions within the system itself. Breaking it down and looking at it experimentally, checking that critical functions are covered, looking at risks, and validating through a continuous proof-of-concept cycle. Prototype testing is done to provide you with some learnings about if the theory is working in practice.

4. Component and/or breadboard validation in a laboratory environment – the critical functions have been theorised and tested, so now, from an engineering point-of-view, this is when we start putting the components together properly in a simple way, which might be a prototype PCB or components on a breadboard, to see if we can get them to work and testing them in the lab together as more of a complete system. This may be just a sub-assembly or a scale model of a much larger assembly or system.

5. Component and/or breadboard validation in a relevant environment – now we move out of the controlled environment of the lab and validate components, subassemblies, etc, in the real environments they’re meant to be used in. This will not be a full prototype spacecraft at this point, we’re still validating individual modules, subassemblies and components.

6. System/subsystem model or prototype demonstration in a relevant environment (ground or space) – a scale or 1:1 prototype of the final product is made to demonstrate that it works and that the various systems communicate as required, etc. This level would probably require a lot of funding, therefore TRL 1-5 should be clear and approved by stakeholders first, and getting from TRL 5 to 6 could actually take years in real-time.

7. System prototype demonstration in a space environment – now the prototype needs to be tested in actual space, and every system, component, subsystem, etc, will be monitored and measured to check that they are working as expected.

8. Actual system completed and “flight qualified” through test and demonstration (ground or space) – stakeholders qualify a more final ‘engineering build’ of the spacecraft for flight by confirming that all of its systems etc have worked correctly and it is reaching performance standards.

9. Actual system “flight proven” through successful mission operations – all prior levels have been passed and the product is qualified and proven, so at this point, the spacecraft is built and will be used for real missions. The higher we get in the levels the more reliable the product is, as in TRL 7 and 8 it has been tested and used in space. (04:37)

Does this framework make sense in the context of mass production?

In its original NASA form, not really. If we look at cutting-edge 2023 rocket manufacturing by SpaceX and Blue Origin, they’re focusing on size and reusability, and the way they’re developing these products is how today’s manufacturers develop products for mass production because, at least in the case of SpaceX, the plan is to be manufacturing one rocket per month since a large number will be required for Musk’s planned mission/s to Mars. So the original TRL framework is limited and doesn’t even mention manufacturing in quantities, since the process was only ever meant to lead to a handful of hand-built spacecraft. (20:02)

26:09 – What is missing from the TRL in order to manufacture products in large quantities?

By TRL 9 you have a looks-like works-like prototype that has been validated and works as expected in the environment it will be used in. For mainstream electronic products, for example, what would the next logical steps be? For this, we’ll explore the crossover between NASA’s TRL framework and Sofeast’s NPI process.

Feasibility study – confirm on the technical side that your product concept is manufacturable at the right level of quality and reliability, will be compliant, etc, and that there actually is a market for it. This is all a part of the feasibility step and feeds into prototype phases when we answer the question, can and should we manufacture this product or component? Going straight to the prototype leads to risks for mass-produced products of producing a product that can’t be sold or is a danger for users, or one that you can never get into production at all. Certain industries and markets (such as automotive or medical devices) demand or have regulations requiring that you go through the feasibility process and confirm your production processes are capable at an early stage, in any case, so skipping it is really not an option (although consumer electronics doesn’t have these demands, hence the risk of skipping early NPI phases).
Mindset – historically for most spacecraft it was only realistic to build maybe a handful of prototypes and final products due to the cost and because they were their own customer, but for today’s consumer electronics a large number of samples are needed for testing and validation in order to sell them in large quantities of millions in global markets while still being compliant and safe for consumers.
Tooling – this is a large consideration and investment for electronics manufacturers because it needs to be capable of producing maybe millions of units, whereas in the TRL framework tooling isn’t really mentioned because it was one-and-done and they didn’t need to consider that it would need to be reused so often. Even SpaceX is only planning to make rockets in the thousands; that’s a minuscule number in mass production terms.
Development of manufacturing and testing processes – DfX principles are missing from the TRL framework because designing products to be manufactured in large numbers, assembled efficiently, tested for quality and reliability where appropriate, etc, are required for mass production.
Transfer to manufacturing – from TRL 7 onwards you need to be thinking about transferring to manufacturing (which NASA never needed to do) where the manufacturing process is worked on, kinks are ironed out, tooling and testing are ready, etc, so you know that the factory is ready to start work and ramp up the numbers.

Using the TRL framework alone puts you at risk of creating a great prototype, but not being able to get into production…a failure to launch, as it were. For that, you need a thorough NPI process that will provide gated step-by-step validation that shows that you’re going in the right direction and provides you with solid ground on which to go into mass production. (26:09)

Elon Musk: A great contributor to humanity?

Musk is a modern captain of industry but is he one of humanity’s great contributors? Maybe not. Arguably, he neglects to make our planet better with his wealth and influence in favor of exploring Mars. Also, with Tesla, he didn’t revolutionize the EV industry, he merely kept the USA in the race when compared with the state-backed might of the Chinese EV industry. In fact, the famous ‘Dieselgate’ scandal involving VW cars also probably did as much as Tesla to move the world towards widespread EV adoption as it caused the European Commission to alter its stance on internal combustion engine cars perhaps sooner than expected. One thing is for sure, he created a very important space enterprise, SpaceX, and also took Tesla from a failing business to a prominent auto manufacturer. (06:25)

Automation then de-automation

Perhaps around 5 or 6 years Musk became quite obsessed with automation and he ignored the normal automation phases in some of his manufacturing facilities. Experts at the time said that ditching effective manual processes for full automation was a mistake and it turned out that they were right because his robot workforce ended up causing delays and quality issues, and was less reliable than production operators.
He learned from this mistake to the point where at his battery gigafactory in Nevada he opened a new large door in a wall in order to get the automating equipment out as fast as possible so human operators could take its place. His mantra now is that humans are undervalued — in many cases they can do the work faster and more reliably. (09:21)

Making design engineers responsible for the manufacturing process + other improvements.

At SpaceX, instead of separate departments, Musk made product design engineers responsible for the production process, in terms of making the product easier and cheaper to manufacture. He also located them as closely as possible to the production lines so they could actually observe what was happening on the shop floor in real-time and devise ways to improve things. SpaceX and Tesla make a lot of their parts and write their software themselves and Musk considers this a strong competitive advantage. Tesla is quite unique among automakers in writing software itself and SpaceX is unique in the airspace industry for producing its own parts. The latter is beneficial because they can iterate parts to have improvements and then produce them a lot faster than their competition because they control it all in-house. (11:26)

Musk’s 5-point algorithm for success developed through learning from mistakes.

Musk’s willingness to learn from mistakes is an admirable quality, but it’s odd that he didn’t at first try to avoid mistakes by learning how the elite manufacturers of the world’s most advanced and competitive industries did things successfully. Anyway, having learned from his mistakes he developed a 5-point algorithm for success:

Question every requirement – Musk doesn’t blindly follow rules as he does not want a proliferation of rules that can bog down innovation over time, especially when you have layers of rules, such as older ones and those that have superseded them. Even where regulations are involved, he likes to push their boundaries and ask for forgiveness later if found to have broken them in the name of progress rather than asking for permission in advance.
Internally he has made a culture of questioning requirements, too. Each requirement (which could be a part or specification) needs to have an actual person’s name (they could be a designer, legal counsel, etc) assigned to it so they can be questioned on why it is needed in a particular design, what would happen if it was omitted, and if that scenario has been tested. Musk says: “You should never accept that a requirement came from a department, such as from ‘the legal department’ or ‘the safety department.’ Then you should question it, no matter how smart that person is. Requirements from smart people are the most dangerous because people are less likely to question them. Always do so, even if the requirement came from me. Then make the requirements less dumb.”
Delete any part or process you can – “You may have to add them back later. In fact, if you do not end up adding back at least 10% of them, then you didn’t delete enough.”
Removing parts from a product is great DFM as you keep it cheaper, make it simpler, and reduce some quality risks. The same for processes, as fewer equal manufacturing that is easier, faster, and cheaper. Aggressively cutting parts and processes like this without doing thorough testing each time will lead to catastrophic failures, so Musk’s attitude probably increases those risks, but it also spurs improvements, too.
Simplify and optimize – “This should come after step two. A common mistake is to simplify and optimize a part or a process that should not exist.”
This is not a new concept, merely one that he has learned over the years. It’s an established practice for manufacturers to map the steps of a process and find ways to remove, streamline, and merge steps, and then to improve the remaining ones.
Accelerate cycle time – “Every process can be speeded up. But only do this after you have followed the first three steps. In the Tesla factory, I mistakenly spent a lot of time accelerating processes that I later realized should have been deleted.”
Toyota has been working this way for 50 years so it isn’t a new concept, and it’s proven to be effective in auto manufacturing. Musk eventually followed the right path with this point.
Automate – “That comes last. The big mistake in Nevada and at Fremont was that I began by trying to automate every step. We should have waited until all the requirements had been questioned, parts and processes deleted, and the bugs were shaken out.” There are logical phases for automating over time: First, try to get the machines to do part transformation and automatic unloading, the latter is usually not very high-tech. Then implement, automatic loading which is a lot higher tech because it requires more ‘intelligence’ from the machine that needs to recognise and grab parts and position them accurately. It’s evident that jumping to the higher-tech process before mastering the lower-tech one, as Musk did, doesn’t make sense. (13:24)

The ‘Idiot Index’.

This might be less provocatively named as ‘the waste index’ and in it, Musk looks at the full design of a product and compares the full cost of the BOM to the cost of the raw materials that go into the product. In aerospace, the cost of parts vs raw materials might be 1-100 because the parts are specially made. He used the idiot index to approximate the amount of waste and then this figure is used in steps 2 and 3 of the algorithm, where they decide if the part is needed at all or if it can be simplified or made better somehow. For example, the production method of a part might be found to be somewhat wasteful and it could be made in a different way to save on costs while providing the same results. If a part has a high idiot index, Musk will challenge his designers to make it 10x cheaper, for example, and this forces them to consider new ways to do things. (23:44)

Using knowledge of material science to make revolutionary decisions.

Musk is well-educated in material science and, using point one of his algorithm questioned the use of certain materials in order to drive improvements. For example, at SpaceX, carbon fiber was used for some parts, but it’s expensive and difficult to work with. Musk suggested replacing it with stainless steel, but people were surprised because that’s a heavier material. He challenged engineers to ‘run the numbers.’ Even fairly thin stainless steel is strong at low temperatures, such as the storage temperature for the rocket fuel, and it also perhaps didn’t need a heat shield for re-entry, so his engineers built and tested prototypes to confirm that in this case it could be used as a replacement for carbon fiber, even though using carbon fiber was considered the norm for the industry. His determination to question requirements leads to revolutionary choices being made like this that fly in the face of industry norms. (25:44)

The cyber truck’s stainless steel body.

Musk determined that the new cyber truck’s body could be made from stainless steel which provides all of its structural strength without the need for an internal chassis, etc, that are traditionally used to keep a vehicle together and give it strength.
Because the body was providing the vehicle’s strength it had to be angular (as a traditional chassis that you don’t see under external shaped panels is), which is a revolutionary (and very much a love-hate) vehicle design. Most of the Tesla design studio did not like the new design, but a portion of the market is asking for it, and even 5-10% of the market who like your truck design and is calling for it, plus some other interested customers, is enough to sustain an automotive factory and make a lot of money (plus interested customers must put down a deposit which is a lot of money upfront to get production going). You don’t need half of the market, so a risky design that strongly appeals to a select few is workable. (27:31)

Changing how die casting is used in automotive manufacturing perhaps forever.

Musk examined a toy version of a Tesla car, pulled it apart, and discovered that the underbody was all die-cast in one piece. True to form, he questioned if that could be done for full-size vehicles as it would reduce the number of parts required, reduce the welding required thereby simplifying processes, and also reduce waste. Plans are in place to create 6,000 and 9,000-ton dies that can be used to cast underbodies for Tesla cars and trucks, and this could revolutionize the way automakers do things. This is great DFM as the product is being simplified and providing cost and other benefits and is also typical of Musk’s approach of challenging the usual way of things. (30:30)

What is test to failure?

A lot of the products we rely on today need to be reliable and durable, be that a pacemaker, mobile phone, laptop, automobile, etc. Most electronics firms do test to failure these days for their hardware (and software) in order to investigate what the product’s limits are.

There are usually 2 goals for this kind of testing:

To assess and confirm the product’s limits – i.e. if a product needs to handle 100 volts, how do you know if it is able to handle it if you do not test it above and beyond this voltage?
To give yourself a margin of failure – this is your product’s reliability, and in this case, if the product can handle up to 120 volts even if it’s going to be used with 100 volts, then you are giving yourself a 20% margin of failure.

Testing the engineering of electronic products in this way is common to provide peace of mind that if there are changes in voltage, for example, the product will survive and not short out. Therefore, to simulate, say, a lightning strike, the product will be subjected to a brief burst of high voltage and the results will determine how well it can cope. By necessity, a number of product samples may be damaged or destroyed while doing these tests.

The product is then designed to be able to handle similar conditions outside of its normal usage to add a layer of ruggedness or reliability (your margin of failure), and that may involve higher-rated components being selected, for instance. (01:28)

5 reasons why test to failure matters

People rely on electronic products these days and we can’t afford to have them break down on us. Cars are an obvious example. If the electronics on your vehicle fail, you’re going to break down which will be inconvenient and may even be dangerous! The same can be said for your cellphone or laptop.

There are 5 reasons why test to failure is so important:

To find the product’s weaknesses in the design and then eliminate them until we have gained an adequate margin of reliability (this may be through different components, materials, etc)
To enhance product safety as you cannot afford to put consumers in danger with, say, a battery that may catch fire or explode if the product is under extreme conditions.
It helps with quality control because you can test the product within its operational limits which you will know thanks to test to failure. Then when testing is done in the factory, staff are not put in danger.
Cost reduction may be achieved because if you know your product’s limits, you can tweak the design to be ‘durable enough’ without being excessively rugged which usually translates into more costly. The latter may be required for a moon landing, but if you use components that are a little lower-rated and less costly, you may find that the product works fine and still reaches a reasonable lifetime for your consumers. On the other hand, you may also find areas where better materials or components need to be used. While these items may cost more to purchase, reducing the cost of product returns will be a large cost reduction overall for your business.
It spurs innovation because you may find new ways of doing things or new materials or components during testing that have not been used before, perhaps by combining different materials to see if they do a job well. Patent these and you could have a lucrative invention on your hands or, at least, you have a really great way to make your product more reliable. (05:33)

Some examples where weaknesses were found in products which allowed them to be fixed.

A major refrigerator manufacturer in the USA suffered from massive and expensive product warranty claims when a key component like a motor was burning out in fridges sold in hot states. This was found to be because the component was not able to cope with the higher temperatures and/or humidity in comparison to milder states.

Andrew also dealt with a company where the products were getting so hot and the internal fans were failing leading to product breakdowns. Although the product engineers had selected a fan that was able to withstand far hotter temperatures than the usual usage environment of room temperature, they failed to take into account that the transistors ran very hot and pushed the product’s temperature to over what the fans could operate in leading to them shutting down and the device overheating and failing. By finding what the product’s internal maximum internal temperature reached without a fan, it was possible to select a new fan that could operate at an even higher level (with some reliability margin) and then the issue was fixed. (14:30)

What kinds of methodologies can we follow to do test to failure?

Here are a few methodologies that might be used:

Doing a room temperature test and pushing the limits of the design just to see what happens. This can be done during the product design phase and you may choose to push the current and voltage higher than it’s meant to be which could give you an indication of possible failures.
Do Accelerated Life Testing (ALT) with humid, higher, and lower temperature conditions and you’ll learn what happens to the product under these environmental conditions. If no issues are found, more possible variables can be added to the same test such as lower or higher voltages that are increased or decreased incrementally.
High-stress testing helps you focus on the ability of the components to cope with excessive environments which could be too much voltage, current, high temperatures, high humidity, etc. If individual components fail it affects product reliability. In the aerospace industry, this kind of testing is critical because airplane components need to be able to handle repeated temperature and pressure changes for example, going from ambient ground temperatures to -50C at altitude, without failing.
Environmental testing provides peace of mind that the product has enough durability so it can handle extremes of temperature, humidity, vibration (during transport, for example), and more. This testing would be useful in the case of the defective refrigerators in hotter states example mentioned earlier.
Cyclical loading is when the product is tested under load and no load repeatedly and teaches you a lot about how components deal with stress. If these conditions aren’t tested by you, it will happen in the field. If components don’t stand up to the punishment, the result will be damaging and costly product returns and warranty claims.
Continuous monitoring of improvements shouldn’t be forgotten about, because if testing finds a problem and it’s fixed by engineers, but then they are too busy to monitor if the fix is truly stopping the same failures from occurring again over time by checking product returns for the issues in question, you won’t actually know if the fix has ‘stuck’ and is effective. Adding the testing and fix information to a ‘lessons learnt database’ could be useful here when monitoring improvements, as the database can be referred to easily and information is collected in one place. (19:56)

Products and industries where this is a very useful kind of testing to do.

Test to failure is commonly used in aerospace, automotive, consumer electronics, medical devices, and industrial equipment. If these tests are not done on products from these industries reliability risks would be very serious, for example, aircraft or cars crashing if components failed, or consumer electronics catching fire due to faulty batteries.

It must be mentioned that the company doing the testing needs to invest in samples that will be destroyed, but this cost is very likely to be lower than the cost of poor reliability which includes product warranty claims, returns, scrap, reputational damage, lawsuits, and more. (32:31)

Is test to failure wasteful?

As we’ve established, test to failure will result in scrap parts and products that are damaged and cannot be resold. But is this actually ‘waste?’ Waste has too many negative connotations for this testing and ‘useful’ is a better word, because it results in more reliable and durable products which will not need to be fixed, replaced, or cause more scrap due to repairs. This has a net result of fewer emissions, fewer resources needing to be used to make more components or products, fewer shipments of product returns, and less scrap going to landfills.

Another benefit is that once you have done this a few times you probably don’t need to do test to failure on future product iterations because you’re using components and designs that you know are going to be durable enough to result in a reliable product in customers’ hands, again leading to less waste. (37:20)

What are manufacturing organizational charts?

The org chart shows the lines of responsibility in a business from senior management downwards and it will be clear who is responsible for key functions like sales and marketing, production, HR, finances, IT, legal, etc. Each department will cascade down including who is responsible within that area of the business, such as COO, production manager, individual department managers, team leaders, workers, etc. Usually, a clear hierarchy will be evident, like the army or the church, and everyone should know who they report to. (02:03)

1. No Quality Dept.

A supplier that has no one responsible for quality and/or no staff doing inspections is probably only interested in pushing materials and products out of the door. This is particularly common in very small companies because in larger businesses that often claim to be ISO 9001 certified, the standard pushes them to clarify the structure of the business and include whoever is responsible for quality. (06:39)

2. Putting the production manager in charge of the quality team.

If a company has highly sophisticated management systems placing the quality department under the control of the production manager may make sense, but in most factories you’re likely to work with in China this is a red flag. Traditionally production managers will be driving on production to hit targets and will be blamed if there are delays. This is a conflict of interest with checking quality because if an inspector says there is a problem production has to be slowed down while something is fixed or reworked, they are likely to push back on this decision and will want to ship finished goods even if they have defects rather than unpacking them all and checking them. They might agree to pay more attention moving forward, but that doesn’t address the problem with the goods that have been made. (10:26)

3. Putting the production manager in charge of the planning department.

The production department is chiefly measured on labor productivity and the planning team will monitor the efficiency so resources can be managed and planned for future weeks and orders. Again, if a production manager is in charge of the team that is monitoring the efficiency of their production lines, it’s too easy to dilute standards in order to improve efficiency statistics and ‘look better.’ With a good ERP system in place, this is not such a problem as information can’t be manipulated as easily. (14:44)

4. No planning dept. in place.

A supplier that does not control planning might be an issue for you and could be problematic when it comes to getting your products out on time and sticking to an agreed production plan. Understanding how the supplier plans is good for benchmarking if they are reliable and well organised. They are also less likely to drop bad news on you at the last minute, because they will see ahead that, say, a container is going to be shipped out late and can provide advance warning and reasons why. If they are forever firefighting with supplier issues, machine breakdowns, etc, you’re dealing with an unstable supplier that probably can’t plan ahead anyway. (17:45)

5. No team of manufacturing engineers.

Manufacturing engineers (also known as process/industrial engineers) don’t work on product design and development but focus on systems and processes. If a manufacturer doesn’t have these engineers on staff, who plans for production to run smoothly with line balancing and who follows up on manufacturing issues like bottlenecks and puts them right? Again, if this is the remit of the production manager, they perhaps have different priorities. Without them, a manufacturer is likely to be very reactive, constantly firefighting, and unstable in terms of quality issues, cost rises, and delays which are the hallmarks of bad manufacturing processes. (20:35)

6. No dedicated HR department or the HR staff are at a junior level.

All but the smallest businesses need a dedicated HR manager or department. The HR department has 2 roles:

Hiring talent and fostering the company’s culture.
Compliance with employment laws and conditions.

Therefore, if your supplier doesn’t have HR staff, they could be a risk to you of being a link in your supply chain where social compliance is lacking and can affect your company’s reputation if it’s found that they flout labor laws, use child labor, etc.

If the HR staff are fairly junior employees with little authority, they’re likely to be more clerical only and don’t have a say in who is hired and if they fit into a cohesive company culture. This can lead to the wrong kinds of staff being hired who soon leave for one reason or another. This leads to instability which, again, has a knock-on effect on you the customer in terms of quality, delays, costs, etc. (24:16)

7. Job titles are unclear on the manufacturing organizational charts and sometimes inappropriate for the person.

If the org chart is confusing to you, it’s confusing for people working at the company. This can lead to misunderstandings about who is in charge of what. Also, some staff occasionally have inflated job titles that are not appropriate for their actual work. For example, in China, the GM’s assistant is sometimes known as the ‘Vice GM.’ But if you question this person about their authority and responsibilities, it turns out that they really are simply an assistant and cannot make decisions if the GM is away. (27:08)

What is the intent of the directive?

What does this directive change for economic operators on the distribution/retail side of things?

Transparency in the supply chain.

Even if a factory in China can now be held liable for product problems as a supply chain actor under this new legislation, realistically, can an importer obtain compensation from them?

How the burden of proof for manufacturers is changing.

Product labelling must make it easier for any parties, especially consumers, to bring a case against a product’s seller.

Foreign manufacturers are going to be under a lot of pressure to change the way they do things.

Why the product safety’s burden of proof is on the party who brings the product into the EU.

Will this directive even be possible to enforce in manufacturing in China?

Related content…

Why is supplier quality important?

When should you start being concerned with supplier’s quality and what should you do to mitigate risks of poor quality?

Why the quality team must help to include your quality standards in the PRD (product requirement document).

Why small businesses may benefit from working with a supplier who has in-house engineering resources.

Doing due diligence to qualify that a supplier’s quality is good.

Initial due diligence

More advanced due diligence

Checking the supplier’s QMS.

Audits can also uncover helpful information about suppliers.

Formalize approved suppliers.

Related content…

Follow this link to download these slides for yourself.

What is a T/T payment?

How to make a T/T payment to China?

What is the most common payment term requested by Chinese suppliers?

What is another common, and better, payment term for paying your Chinese supplier?

Why is this payment term a better choice for importers from China?

How to negotiate better payment terms from a supplier in China?

How to get help from a financial institution?

Frequently Asked Questions for making a T/T payment to China

Tips and tricks about the T/T payment process

What are some mistakes we should never make?

The supplier says they need a deposit earlier to buy one of the components, which needs to be ordered 3 months in advance. Is it true?

What to do when an Alibaba supplier asks for payment by TT?

Should we issue a purchase order? It is considered as a contract?

Should we pay suppliers in USD or in RMB (China’s currency)?

My bank tells me sending money in CNY (RMB) to a supplier in China is cheaper than sending it in USD. Do YOU advise doing that?

Do you advise using the FOB incoterm, when the shipment is by sea?

When should the “deposit” (or “advance payment”) be sent to the supplier?

Our bank charges us a lot for an international wire. Is there a cheaper alternative?

What about payments to service providers?

Can a bank wire transfer get “lost” in the system?

Why is this process (SWIFT) so inefficient?

Is it risky to send a T/T payment to China?

Frequent issues

Are there common scams that we should be aware of?

The supplier says they got a smaller amount than we wired. How is it possible?

Our supplier asks for payments to be wired on a personal account. Is it a problem?

Our supplier asks for payments to be sent to a different company. Is it a problem?

About negotiations

Why do suppliers in China, Vietnam, or India always want payment before we get our products?

Can the amount of the deposit (before production) be negotiated down?

Do all component suppliers need payment in advance?

Our supplier asks us to pay all the remaining 70% before they ship the goods. Is it dangerous?

Can we negotiate for 100% to be paid after we receive the goods?

*Editor’s note: This post was originally published in 2012, and has since been updated to include new information and formatting.

Need help setting the right terms with your suppliers or have any questions about T/T payments?

1. Use platforms to find suppliers.

Alibaba

1688

Others

2. Pay attention to these points when selecting a supplier

3. Check their certifications

4. Collect and verify each supplier’s contact info

5. Use these tricks to get better quotations

6. Select the right incoterms for your needs

7. Source yourself or use a third party?

A sad example of what can go wrong if you’ve sourced suppliers yourself without doing enough due diligence

Related content…

What’s the general business environment in China after ‘Zero-Covid’ really like for foreign businesses now?

The Chinese economy is less vibrant than before now. What is the government doing to encourage foreign investment?

How easy is it to hire foreigners in China today?

If a Western company wants to start their own manufacturing company in China, what’s the process?

Selecting the right area and getting government support for manufacturers.

7 Common mistakes foreign businesses make when setting up a manufacturing facility in China.

Related content…

Introducing the component selection process

The theoretical part of electronic component selection

1. Define your Requirements

2. Select the Key Components