The scale and size of Chinese manufacturing is extraordinary – and the bi-annual Canton Trade Fair currently taking place in Guangzhou, the hub of Chinese manufacturing, is just a taste.
As an example, last year alone some 390,000 businesses attended the fair, and more than 11,000 were Australian. The reason is simple: importing to Australia is no longer simply the domain of multi-nationals, but SMEs can now too take a piece of the pie. From pharmaceuticals to furniture, clothing to electronics – you name it, and a factory in Guangzhou can make it.
Speaking to Dynamic Business, Craig Michie, Head of Trade Finance at Scottish Pacific says that while the rewards can be great, there are many risks for first time importers.
One element of equation, is to understand when the importer is actually responsible for the goods.
International commercial terms, known colloquially as ‘incoterms’ include FOB – Free On Board, CIF – Cost Insurance Freight, and EXW – Ex Works. These terms determine the tasks, costs, and risks for the buyer and the seller associated with the transportation and delivery of goods. The incoterm will determine when the importer is responsible for the goods and accordingly what insurances are required.
“So a classic example with the incoterm Ex Works, shown as EXW on the invoice. What that would mean, would be that if a company was importing from China, as soon as the goods left the factory gates, that company would be responsible for those goods – so they actually own them at that point in time. That would mean that if anything happened, like the truck breaking down, or catching fire, or anything like that, that business would need to have those goods covered through insurance, and if they don’t then there’s an opportunity to lose significantly,” Mr Michie says.
“We’ve seen many examples of clients inadvertently not being aware of that term, and the truck has broken down in between the factory and the port, and there’s been a problem with the goods not being on the truck when they came back to fix it,” he added, with that particular business losing $45,000 in goods.
Another key element of the equation is to be present in China for the first shipment.
“One of the most important things in the beginning is to actually be there for the first occasion. So you need to know exactly who you’re dealing with, and exactly where the goods are being manufactured. The other tricky part is negotiating terms. So it’s really important to make sure you’ve got somebody that speaks mandarin, and is culturally familiar with the export environment,” Mr Michie says.
5 tips for first time importers from China
Scottish Pacific Tradeline offers these five tips to prevent first time importers from making costly business mistakes:
1. Understand when you are responsible for the goods. (Insist on the appropriate Incoterm) Incoterms (such as FOB – Free On Board, CIF – Cost Insurance Freight, EXW – Ex Works) determine the tasks, costs, and risks for the buyer and the seller associated with the transportation and delivery of goods. The incoterm will determine when the importer is responsible for the goods and accordingly what insurances are required.
2. Take out adequate insurance. Once the importer knows when they are responsible for the goods (via the Incoterm), it is important to ensure they have the cargo covered. A common myth is that the Freight Forwarder engaged to facilitate the import will carry insurance. They don’t! Unfortunately marine shipping containers do get lost. As recently as February, 500 shipping containers were unaccounted for when the vessel Svendborg Maersk was struck by high wind and waves off the coast of France. “Quite often people just assume that the freight company has insurance for them, but they don’t own the goods – so they can’t insure an asset that’s not there’s. They’re just a facilitator of the transport process, it’s not that hard to arrange marine cargo insurance – it’s just about knowing to do it,” Mr Michie says.
3. Hedge currency risk. Most import transactions with China are completed in US dollars. Value fluctuations in AUD versus USD have the potential to seriously harm gross profit margins. To avoid this risk, importers should work with currency providers to set up Forward Exchange Contracts that lock in an exchange rate.
4. Complete a pre-shipment inspection. Ideally an inspection of the goods should be completed on all shipments. This is even more important when dealing with a new supplier. Once the goods are shipped, it is difficult to arrange for return and obtaining a credit or a refund can be even more difficult.
5. Understand the impact on cash flow. Buying from overseas suppliers can sometimes deliver exceptionally strong gross margins. However the impact on cash flow is very different to buying from a domestic supplier. Significantly longer cash cycles are involved, requiring much greater levels of working capital.