Earlier this week while meeting with a friend about their expansion throughout China, and their need to find a logistics provider who could support them, it was clear that many of the same issue I was working with 5 years ago are still found in many ways.

At the very basic level, it is important to think about logistics not simply as the process by which goods are moved, but buy which they are moved safely.  It is the control of goods from one point to another, and while there may be a few stops inbetween, it is the role of a provider to ensure that the level and pricing of services match the market.

An equation that foreign and Chinese firms perform at vastly different levels.

For those firms who are operating within China, and are looking to expend beyond an export platform, the need to move from their global providers will enter.  yes, DHL and FedEx have established networks within China that can support customers, but 95% of the time that I have supported firms here, they are looking for the local option.. an option made attractive by pricing more than anything else.

When speaking to my friend, there were two issues that I felt he needed to consider as first steps when choosing his providers that I think are important for readers to understand.

1) Location, location, location:

Much like a retail store needs to be in the middle of high foot traffic paths, the path by which a product is transported should be the moset efficient.  that while many may consider China to be a single market, it is in fact logistically split into three primary zones: north, west, and south, and that developing a positioning strategy that fully respects these zones will save money.

to illustrate this point, I have included a slide of a pricing study I conducted last year of express firms in China.  Using Shanghai as the point of origin, we looked at roughly 15 cities around Shanghai, and you can see three clear pricing levels.

the cheapest ring is of cities within about 250km of Shanghai, cities where regular truck/ rail service can allow for a 24 hour delivery, a second ring that is rougly 1500km – too far for an overnight train or truck in many cases, and a third level that is further 1500km.

So, for a firm whose markets are 70% in the south and 30% in the north the decision to place the main warehouse and point of distribution would be Shanghai, and vice versa.

2) China’s logistics industry is fragmented in ways you do not understand, and cannot predict.

5 years ago when working on my first indepth study, and in writing my white paper on China’s logistics industry, there was one single truth that explained all logsitics firms.

No one had “China” covered.

Some firms were stronger in the south vs. the north.  some were strong in Chengdu, but had to have partners to get outside the city.

However, over the last 5 years, as stronger firms have been able to grow (organically and through M&A), this has begun to change.  HK based firm Kerry Logistics was one that grew quite fast through M&A, while others like JHJ International grew their regional presence and sold out to an international, and other formed coalitions that crossed China and allowed each to cover “China”.

In some cases, as the adjacent slide highights, it was now more important than ever to carefully understand whose network was real vs. which was an illusion built on a 95% outsourcing arrangement.  It was only through sheer luck and a bit of careful analysis that through the same pricing study we found where one firm was actually selling another’s service as their own.. and adding 10% on top for good measure.

An arrangement that besides being wasteful, significantly comprises shipment security as well.

3) It only counts if it arrives in one piece

Which brings us back to square one, control, and the importance of ensuring that the firm you chose are actually in control of the shipments as agreed upon.

There are more than a few firms in China that have tried and failed to build a successful sales structure, but AMWAY is not one of them.

Even with their model being lumped in with pyramid scams for a long time, and thus being restricted in China up until a few years ago, AMWAY has successfully built a grassroots network of agents.

This is really brought out in the Journeyman clip below.

It should be said, that their primary competitors, Mary Kay and NuSkin, have also developed large platforms in China as well… and it should also be pointed out that all three have won AMCHAM CSR Awards for their innovative programs.

Focusing on the difficulties of transparency within the supply chain, Melissa Brown of Association for Responsible and Sustainable Investment in Asia (ASRiA) sat down for an interview covering a lot of the angles surrounding the integrity of supply chains in China.

I highly suggest taking your lunch break to watch the 15 minute clip, and then think about some areas you feel may be at risk within your supply chain. I have listed the 7 questions she was asked along with a few bullets on what she said… and added a few thoughts of my own in italics

Questions asked during this clip are:

1) How easy is it to get details about Asian companies?
- Need to have a sense about what is know and how to compare
- Need to use different tools – policies are not set the same way, available resources can be limited

Getting information about Chinese firms is not terribly difficulty, it is about time and the amount of money one is willing to spend. One can approach firms from different angles, as a buyer, as a supplier, through a friend, through Alibaba.. you can even stake a factory out for a week. But it all comes down to how much time you want to spend, and the budget you are willing to allocate

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According to a premarket release on The Street, Apple is reportedly in talks with China Mobile to bring the iPhone to China (a lot of people already have one).

First, as an investor in Apple all I can say is BUY BUY BUY.  give one to your friends, collegues, and don’t forget your boss!

Next, I am actually quite surprised China was behind the E.U. in the cycle.  Now, for my E.U. readers, I apologize but for me China just makes more sense.  First, they are being produced here (see  iPhone: Made In Shenzhen, Assembled by Foxconn), and their partner Foxconn (see Foxconn: Behind the Scenes) is fully capable of producing for the China market.  Second, China is a MUCH larger market than any of the E.U. markets on their own.

Sure, I have no doubt that negotiating this deal has been interesting to say the least, and I am being a bit selffish by saying they should have released here first… but all that being said, Apple has a “bright future” in China once China Mobile gets the servers in place.

oh.. one tip for the Folks at Apple.  my my friend’s iPhone can read Chinese, but I cannot write. I understand this is a “simple” thing to correct, but if you want to hit the mass market, I highly suggest you fix that.

oh #2… the abilty to write a Chinese character on the screen and have it be recognized would also improve the overall functionality for the Chinese users as well (and for us foreigners using electronic dictionaries).

For those that don’t believe… you have no idea how many iPhones are already here!

2 years back a foreigner names Randy Gutherie was made headlines when he was arrested for his part in the company 2 Dollar DVDs. It was an operation run from his apartment in Shanghai… and he was making bank!

We’ll, just 2 years later, it appears that Paramount and Warner Brothers are now going to be offering legal copies of DVDs in China for just 3 USD. 3 USD ….

according to the article, the studios will be working together because their common goal is to defeat DVD pirates

Both Warner Bros. and Paramount say that this will be the earliest release date and lowest price that their movies have ever been sold for, worldwide. And their reason for teaming up with one another is strategic: they are competing against piracy in China, not each other. The more legit movies that are available in one spot, the more attractive the outlets will become to prospective buyers. “We’re committed to developing a legitimate market in China, and having two more Hollywood studios gives us more critical mass,” Warner Bros. managing director of China distribution, Tony Vaughan, said in a news conference, according to the Associated Press.

one question running through my head is how wide the selection will be.

Because if it is across the board, I have a new business in mind to satisfy the market in the US full of 8 USD DVD… half the price of a DVD in the US market right now.

Sure, firms need to realize that to compete in a global market they need to have a global pricing structure, but having 15~20 USD per disc in one country and 3 USD in another is not a strategy. It is an arbitrage opportunity that someone with too much time on their hands is going to exploit.

“he believes holds the key to his fortune in China…” That is the end of the sentence started in Part 3 that is finished in Part 4.

so.. the entire statement “Peter has found a man he believes holds the key to his fortune in China..”… and boy oh boy does the next scene say it all (Run Peter RUN!!) .. this man (Cecil Pih) is going to steal your money.. and your product

According to Cecil.. “Doing business in China is like the wild wild west… except they know how to shot better than the cowboys” (By the way, Cecil moved into the lead on best quotes with that)..

Cut to Peter and Cecil describing their partnership and their strategy… starting with Shanghai on the whiteboard, and then moving from there through his “connections, clout, cash, and cultural understanding”

To close the deals .. you need wining, dining, and wenching (I am guessing he means going to KTV and saunas?) – Peter is up for the first two, but uses his age to get out of the third

Bank to Vance who has decided the adventure is something his 9 year old son should be witness to the fact that his partner is ripping Vance off (money, product, and even his land). Following his manager being roughed up, Vance decides to make a surprise visit… and it is clear from the minute he pulls into the driveway just where his money went (new Audi A6 … new office block fully kitted with panoramic windows and leather couches… and a new house with a swimming pool)

and so it is off to dinner where at the end of end of part 4, Vance’s bug fails..

Best Quote:
Cecil – “everything is hot. money is hot. food is hot. the girls are hot.. you really could use your shirt in the wild wild west”

Color Commentary:
Peter – Peter just jumped into a pool that is way beyond his depth. He now has a partner that has “connections to the right people”, says Shanghai is the hardest nut to crack in China, and is unable to pronounce many of the cities he will visit massage parlors in… yikes.. nice choice Peter, but I really think you would have been better off with Ms. Dai’s sister’s father in law.

Vance – I have a feeling Vance is going to force feed his partner over dinner. He has been outright ripped off, and product is not moving. While I am sure Vance knows better than to hit a man while his is down, he might just kick him cause it is easier. Note to Vance – next time you want to build a factory in China (close to wood forests), remember that 97% of all pine enters via the Russian border… not the DPRK. Go to Haierbin, Houhot, or Suifenhe

Tony – No update in part 4… I wonder how the new site manager is working out.

This series has yet to fail me. I am sure that in the end all three are going to come out of this richer than all get out simply because the stage is being set for Vance going to jail, Peter being kidnapped, and Tony crying in the corner of a half built factory. the warning bells could not get any louder, there are bogies in the perimeter, we are going to DEFCON 4.

See you in a few days for Part 5… Hopefully Tony will enter the picture cause I really want to see the factory.

Part 3 starts off with Peter pitching, and it comes out that he has failed to make a single sale after one month – Time to fish or cut bait for Peter. Cut to Tony who has set up a mansion of a store at the SNIEC Cushion Show in Shanghai. .. who is trying to figure out who wants to buy his cushions… or steal his patterns.

“If you want a quarter of a million cushions in 10 weeks, you will get your cushions in ten weeks”

Cut to Tony inspecting the site… which is uh.. way behind schedule. fortunately Tony’s business partner has a family member (her sister’s father in law) who can manage the job (That was convenient…). Tony is scared, and the entire staff goes to lunch at 11am.

Cut to Vance on the Huangpu river and a bit more background on his business. 100+ suppliers for 50,000 bathrooms (a large supply chain for a single person). So… of to the border of North Korea where Vance looks to set up his own operation, and he has a warehouse of equipment that he got on the cheap from bankruptcy auctions (this guy is a true vulture). This scene wraps with Vance driving on top of what should be the foundation of his new factory (he paid 2.7 million RMB for it) and I must say that he took it well. (so did his assistance who got ripped into)….

PArt 3 wraps up with Peter strutting through Shanghai’s Thames town, sitting down for a port, and putting on a strong face… man… I would be freaking at this point (not a single sale in site)

I can’t wait to part 4 … cause the last line was “Peter has found a man…”

Best Quote of the scene:
Vance – “I like to stay here one night (Shanghai). TO get me myself into the spirit and give me that kick up the ass. Look at it (Grand Hyatt) – If someone can build an 88 floor hotel, then why can’t I develop a new bath

Color commentary:
Vance is still going strong even with the fact that his foundation has yet to be poured (really… worse things could have happened).

Tony.. ah Tony. The sister’s father in law of your site manager? Are you kidding? Has it occurred to you to call someone at Jones Lange LaSalle or CM2Hill for help? BEsides having his product designs stolen by 21 year old mobile phone carriers… he has now put all his hopes of China based manufacturing into the hands of his site manager’s sister’s father in law.

Peter – Well, he has at least found himself in Shanghai, and has his feet on the ground. But I am worried given the last line was “he has met a man…”. Asking for a port, waiting for a man, and in his finest suit. I think my premonitions of a shady distributor are coming true.

Honestly, I could not get entertainment like this on satellite.  This series is priceless!  I t is like three blind mice for China.. and I just can’t wait to see how these guys stat putting it all together (at this point, I still think all have a legitimate shot… but no doubt there is more fun to come!)

Stay tuned for part 4… I think it is going to be better than the first 3.

Part 2 jumps straight into the action with Vance making an inspection of product. while Vance is a real A$#hole and I am not a fan of his attitude, I must say that it is clear that Vance’s experience in doing business in China has taught him that onsite inspections are the only way to go… and that when possible, one must buy a quarry to get things done right…

Following his purchase of a quarry, we ride along with a singing Vance through as he drives through toilet bowl city and tap fixture city to meet his man on the ground (Black Horse) who will apparently undercut anyone. This section is interesting is topped off when Vance feels a piece is too expensive and to bring the pricing down he strips the product down into pieces and then deconstructs the pricing piece by piece.. and saves 40%…

Before he leaves though, he gets Black Horse to copy a product sold in Europe, and explains how he (read others) get around IP – just gotta change it a little bit.

Cut to Peter in HK getting a hand mate suit and making his first pitch in his new suit.

Best quotes of the segment:
Vance (edited)- “The think I have cruised in off the banana boat that has just strolled out me 5 star hotel with a hangover. the last thing I want to be doing is strolling around the old dirty yard in my Armani suit and Gucci shoes”

Peter – “To be born British is to win the first prize in the lottery of life” – something I am sure all his customers would agree to..

Color Commentary:
A lack of moral fiber aside, Vance has all the makings for a successful buyer. While perhaps a bit rough around the edges, he takes no one at their word until he sees the product for himself, he waits the other side out, he looks at things closely, and in negotiations he bargains on individual product costs.

Peter on the other hand is in la la land and is probably going to have a tough time seeing his customer with his nose so high in the air. Risking everything at the age of 70 on a new product and new country with a trophy in hand just smells of disaster. At this point, I am betting he finds someone to partner with who is shady, and who he trusts wholly cause desperation will blind him from logic. It is still early in the game, but I am not holding high hopes for Peter

Part 3 on Friday

Perhaps the funniest thing I have found on Youtube…. a 7 part series entitled Brits Get Rich in China.

If you have read Mr China, this is a must see. If you have not read Mr. China, watch the series, then read the book, and then re-watch this series.

The premise is simply. China is BOOMING, there is gold at the end of the Great Wall (perhaps behind it) , and three business men are sucked in by the promises of riches (fortunately for us, there were 3 camera crews ready to tape all this!)

Perhaps a spin off the Survivor series, these three men are all from differnt backgrounds:

Tony Caldeira’s once-thriving Merseyside cushion business has been ruined by cheap Chinese imports. In a desperate bid to save his company, he’s borrowed two million pounds and flown out to China in an attempt to build a cushion factory in a paddy field.

“For me.. its China or bust”

Dapper ex-colonel Peter Williams has spent his life savings on an energy-saving device that he thinks he can sell throughout China. If he pulls it off, he’ll make hundreds of millions of pounds. But to many Chinese businessmen, he’s just an English plum ripe for the picking. Will they rip off his device and send him home with his tail between his legs?

And controversial kitchen retailer Vance Miller has built a huge business buying cheap products in China. But along the way, he says he has suffered a deluge of scams at the hands of his equally ruthless Chinese suppliers. On his fake “Olympic Inspection Committee” bus, he’s on a tour of the country determined to crack down on those he says have crossed him.

all three are in different product categories (plumbing, cushions, and energy efficiency), all have different strategies (manufacture direct sourcing, China based manufacturing, HK based JV distribution) , each has different levels of China experience (very experienced, market killed by the Chinese, and not sure where it is on a map)… and for added pleasure none of them speak a word of Chinese.

With each segment being 10 minutes in length, I will post 1-2 a week (I don’t want to get blamed for my readers being unproductive). You can find the entire series online here.. but trust me, you will not get the same commentary from Youtube as you will here…. I nearly cried twice from laughing so hard…

Best Quotes so far

Tony – “If your gonna do business in China, you need a good Chinaese business partner, and I have got one. This LAdy (Ms. Dai) started life in a rice field and in theory, when this project is finished, she is gonna be a MILLIONAIRE…. and who can argue with that?”

Peter – “If you look at the buildings that are around you (in HK), and you look at the units hanging off the walls. If you imagine those buildings to be trees, it really is like money hanging on trees for us to harvest”

Vance – ” I have been to Tibet. Into the mountains. Into the Jungle. Into the Mines. I have been everywhere…. I ain’t going through no middleman. I ain’t going to no wholesaler. I’ve got to go right to where it begins like. How can you get it any cheaper? If I want a kitchen, I’d chop down a tree”

It has only been a few days since Dell announced its partnership with Gome, and they are wasting no time at all before stirring up the rumor mill once again.

According to the Digitimes article Dell and Haier Group reportedly interested in Founder-acquisition for China market boost, Dell and Haier are looking at the possibility of joining forces to rollup Founder. you may remember last year I mentioned Haier taking a stake in Founder.. and how I thought from a supply chain and distribution perspective this deal made a lot of sense.

Well, if Dell and Haeir come together on Founder, and both Dell and Founder computers can reach consumers through Haier’s distribution network and GOME’s network.. all using Haier’s world class logistics infrastructure.. well, I would say you have the makings for a potentially big deal.

One that Legend/ Lenovo – IBM are going to follow very closely.