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Lessons learned from visiting China electronics factories [VIDEO]

Posted: July 24, 2017

Presented by Neale O’Connor (Co-founder, China Sourcing Academy)

Neale has spent 18 years in Hong Kong where he researches the modernization processes of Chinese firms, examining issues such as performance measurement, order qualification, and innovation. His ‘China 1000’ project is the largest ever survey of operational risk issues for foreign buyers and Chinese suppliers. He is also the Cofounder of China Sourcing Academy, a complete training system for professional buyers seeking to source from China.

For more useful info about selling online, check out Global Sources Summit, a conference for online & Amazon sellers held every April and October in Hong Kong. Learn more:


Presentation title: Lessons learned from visiting China electronics factories

…come on. The relationship. Okay? All right. And Renaud talks about the relationship. Mike has talked about the relationship. [I think] Here’s a hack for you immediately.

Develop a relationship with a third-party inspection company. Don’t rely on just a relationship with the supplier. That takes a lot of time. It’s faster to get involved with third-party inspection company because they’re going to be your eyes and ears on the ground. Am I right? Right. So you can do them immediately. Don’t just say oh third-party inspection company, I pay them, they do all the work for me, I don’t have to do anything. No, it’s very important that you get to know because not all third party inspection companies are good. Okay? You’ve got to monitor the monitors, all right. So, and if you haven’t got time to go in China and live with a factory, then I would say develop a relationship with a third-party inspection company. Know who they are, know who the person is that’s going into the factory. Okay, let’s get on with that.

That’s another area of relationship that you need. Do not discount the third party inspection. There’s my CS1000 Study. I’m going to talk about three things. There’s four here, but that’s for a one-day talk so we’re going to put the first three.

  1. Challenges for innovation—mind of the supplier
  2. What to look for when selecting your factory
  3. The factory audit

[where] I’m going to give you a case study, real live case study and the ending you will not believe. So let’s have a look at that.

Here is what I do now is, it’s very hard to go into suppliers, actually take photos and videos. But because I’m a professor, I actually go in, and I go in, I video end-to-end. Even might do the factory audit. And I won’t do it if I can’t go in with the video to video everything. So my audits are on steroids. You get a lot of, [let me just, turn the volume down, okay].

What do we have here? What are they making?

Hoverboards! Yes, we all love them! The US government loves them but suddenly last year they banned hoverboards all together. No more.

Until the UL like they’ve got the UL standard in the US to start certifying factories that make hoverboards to bring them across the US. So now there are a limited number of factories in China that make hoverboards.

One of these factories is UL certified so you can buy a hoverboard technically from one of these factories, ship it to the US and be legal. So which one is it? Hands up for this one? Hands up for this one?

Don’t ever go to a factory like this is a workshop. Alright. This is the bottom part of what Renaud talked about. Remember, there are three types of factories. This is a workshop. On this day this factory this was last year when I visited them, they were making 600 hoverboards.

Actually, this workman here is probably 10 times more experienced and knowledgeable than each of these workman here because this workman is making the hoverboard from scratch, so he knows every little part/detail.

This is a proper assembly line that you need to see in a top certified factory. This factory on top is DBK, they are UL-certified. The first to actually ship in the USA. I talked to this factory, are you worried about US has banned hoverboards? And they said, no. So what you doing? We’re shipping to the Middle East, we’re shipping to Europe, we’re shipping everywhere else. The US isn’t the only country in the world to sell to. And they were making 600 hoverboards that day for a client in France. [So let’s keep moving here]

As Mike mentioned the relationship, legal documentation, measurement and verification—the whole idea that I came from with this is normally get sourcing agents/distributors to take care of the top circle. You get lawyers to take care of this circle and you get auditors/factory auditors, I was an accounting auditor, too. Factory auditors take care of this circle here. You need to know a little bit of each. You need to monitor if you outsource any of these, you should pick the brains of each of those three groups of people. Learn from them, use them to teach you so you don’t you’re not the same position in 12 months’ time as you are today. [Let’s keep moving]

The mind of your supplier

There’s two things I’m going to take you through in the next 20 minutes. The mind of your supplier. I’m going to show you some analysis that I’ve done that I’ve been very fortunate to get data from the as a researcher and so then I’ve packaged it to present to you so you can see some trends/ideas because Renaud and Mike talked to, actually, Renaud talked about the things that scared you. Mike said, well, I’ve got the good news. I’m going to show you some bad news now, all right.

So let’s, all right. There are 940 complaints against China’s suppliers, and 622 of them were scams and other unethical activities, 309 contract violations, 185 due to lack of labor, 171 missed lead times, 52 compromised Intellectual Property.

Let us skip through this. Just to show you that, you just got to be careful. It’s still alive and well, they change to scam you if you are not dotting the Is and crossing the Ts. Always get that wrong from around sometimes.

What products does this affect? I’m talking to you to you about my experience of electronics factories. Is that right? Well, that makes sense because electronics is a huge area to be scammed on. [Okay? alright]

So if you don’t want to be scammed, maybe if assuming that this data is representative, maybe just stick to sports, maybe just stick, maybe stick to household, which probably most of you are doing, anyway. So just be careful. A lot of the scams that are, this is a voluntary information given to SupplierBlackList. So, electronics nearly 40 percent.

What do we learn from that? Top scamming areas—Shenzhen, of course, because Shenzhen and Guangzhou are the biggest areas in China for electronics.

You know there’s nothing unusual about this data. I just want to show you that there’s suppliers in a lot of provinces right down the eastern seaboard where scams are taking place.

What about, where are the buyers coming from? Are buyers from the US more intelligent at working with China than buyers from Australia? I’m from Australia, or from Africa or the UK? Well now, some, of course, these are totals and you know maybe there’s more sourcing done from the US so therefore there’s more scares in the US.

Understand now, I just want to show you that there’s data in that BlackList that a myriad of countries where scams are taking place. Like people from Nigeria are being scammed, from Spain, Malaysia, Afghanistan, okay? So it’s all over the place. They’re not just targeting just white person like me with the long nose. [Okay? Alright]

So let’s have a look at stage of the relationship. We have initial order, it more likely to be scammed. What about experience? More than three years and you still could be scammed. So be careful on that.

Formal contract. Yes, and you still can be scammed. Here’s the big thing you need to take away is did you visit the production site within a year? Majority, no. So I think many of you know now that. Look, you’re in this region, you go visit, anyway.

The heck I want to give to you is see if you can visit with a third-party inspection company for that factory that you are serious with. Because that third-party inspection company but you’ve got to pay them US$500 for the data come with you. But it’s worth it because they can be your education, especially going to a factory that you’re serious with for the first time. [Okay ]

When you go on your own, how do you know what’s good or bad? Just go after and watch my videos.

But third-party inspection company can teach you more and they’re on site with you.

I’ve never, ever told/mentioned that that’s a goodie. That’s a good idea. [Yeah] Third-party inspection company. Pay them for one day to accompany you. Often, you’re paying a translator to go with you. Is that right? Well, get a third party inspection person to go with you. They got knowledge—China knowledge, but also factory knowledge. [Okay, yeah] Heard of that? Say? It’s the same in Chinese. [Okay] Two meals with one chicken. [Okay; alright, so okay]

Now, before we before I go any further and bore you to death, how are we going, so far? Is this interesting? Yes or no? [yeah? okay] So I’ll keep going, okay. So just hold back on the drinks at the back. [Okay; alright; alright ]

Information on the business license was accurate? No.

Level of independent quality control. No independent QC took place. [Okay ]

International commercial terms. FOB is in here, but B port, this is scammers saying it oh we can ship to your port. Where is your country? Don’t do that. Don’t do that, that’s scary. [Okay ]The traditional approach or the safest approach is to FOB, getting inspection up until the FOB–that is Free On Board of the port. It’s in Shenzhen or Hong Kong or other parts in China. And then, you arrange the logistics after that whether it’s fulfillment by Amazon and all that sort of stuff. [Okay? What? Okay .]

What to look for when selecting your factory

Let’s shift over to the factory. [Okay ] So what I’m going to show you now is a series of videos taken in factories and we’re going to look at good ones, bad ones, and you decide. And I’ll show you what you can look for in that factory. Here are all the factories I’ve been to. I can tell you that all of these are well-known brands and factories that are existing today. Their products exist today whether the factory exists is another story. [Okay ]But I would source from most of these factories.

What is going to happen now? I’m going to show you videos and then I’ll point out this is not good, look for this/look for that, right? That’s not to say that that factory is bad, okay? It’s just to show what to look for, make you a little bit more intelligent, okay? When you’re going through the factory and not just wow, look at the factory! [Alright, so ]

My first time I went to a factory, I thought, okay, I’ll go to Shenzhen Technology over here, and I’ll go to Blah Gifts China Ltd. Well, I realized that just killed half my day. Could took three hours to get from here to over here. [Okay ]It’s better to actually get factories in a… When you go to the trade show, if you’re really, really serious about visiting factories in the same week, take a map of Shenzhen with you. They’ll tell you the address, ask them to the pen, where on this map are you? Just to give you an idea, just to see them pinpoint a few factories that close by. [Okay ]When you go Lok Ma Chau, you organize with a private company, it’s less than 700 yuan. So we’ll what we’re talking about? Less than US$100. Is it right?

A driver can take you around for the whole day. You can go to one factory, two factories, three factories. Of course, the factories down the show tomorrow going to say we’ll pick you up, don’t worry. [Okay ]But you know, then you’re stuck with going where they want to go. [Alright] So just get this driver it’ll take you around. You go to this factory, or no we’ll go to this one. It will just wait for you. It’s your car for the day. It’s actually a van. You can set your computer and do work as you are in China. [Okay ]So just there’s another option that you can use to help facilitate your factory visits.

Receiving inspection

[Okay ]Let’s have a look at receiving inspection. This is a big thing for a lot of electronics factories. Remember those two hoverboard manufacturers I showed you earlier, remember that? Here are the two again.

So what is the difference? Why do hoverboards explode? Because of the battery. This DBK, see this? They are checking every one of those 20 little cells that go together to make that 4.4Ah battery that goes in the hoverboard that could explode. [Alright ]

Here’s the 20 pieces put together, they are delivered to this factory by another supplier. It’s got a sticker, Samsung, on the outside. It must be Samsung on the outside. I don’t know, you don’t know either. But this is what you get in the hoverboard that comes out of this workshop here.

This one here, look, they are checking every single cell. They’ve got a machine. Before, they actually put the cells together. Now, by rightly, the Japanese are very smart putting batteries together. They’ll charge them up, they’ll discharge them, charge them again, find out the impedance level because perfect assembly of batteries requires that every one of those 20 cells have the same impedance level that is the same resistance. So when they charge, they all charge together and discharge together.

This factory I didn’t see that they were doing that, but this is the closest I’ve got to total battery assembly as all the factories I’ve been to. [Okay ]The Japanese probably do it the best but then it’s very, very expensive. [Okay ]This one wasn’t doing it. [Okay ]

Receiving inspection. That’s the first thing that a lot of factories when they’re short on margin, they’ll cut receiving inspection immediately. Not just electronics, but a lot of things. They’ll cut that. I’ll show you a video of another factory that does that. [Okay ]


Outsourcing or OEM – Tale of two smartwatch manufacturers

Now, Mike was very nice to have my watch. Actually, it’s very popular today. Our little uhm…it’s not a Fitbit. Yes, it is. It’s a smartwatch. No advertising here. [Okay ] We’ve got a smartwatch. We need to go visit, let’s go visit some smartwatch factories. Shall we? [Okay ]

So we’re in the smartwatch factory. They asked me to put on coat on here. I didn’t have to put on coat on here. Your job is to choose which factory would you buy from. [Okay ]It’s your job next three minutes, so pay attention. [Okay ]

That’s our receiving, that’s the store room area. [Come on, get on with it. Yeah, well professors like talking. [Alright; okay. Just oh so, okay] Now, in the assembly line. And so you’ve got workers here. They’re wearing what they like. Their T-shirts are the same. No uniform. They’ve got uniform here. What I notice here at the top here is that there was anti-static. They have anti-static lines. But there was one at the top here where it was just hanging, and one of the workers didn’t have it on. Any study is very, very critical with electronics. Now, you know. Will that affect the final product? Maybe not. But it just shows how much attention they pay into detail and that’s what you want to look for in a factory. Are they paying attention to detail? [Alright]

Notice here the documentation above every work area there must be a document that says what that worker has to do. Not all factories have that. They still could make a good product without that but not over and over and over and over again. [Okay ] So there’s the detail of what that worker has to do here.

We go on at the end here and the ladies are touching the outside of the watches but they don’t have gloves on. No gloves. So the moisture from your hands, where moisture coming out of our hands all the time, and it goes onto the product. And so that moisture picks up dust and it becomes dirty then you have to clean it. And the factory has to employ someone else to clean that. That costs labor, that costs money, that eats into their margin. And that’s something that you can actually, well, I told this I told the factory here get gloves on that girl at the end. Put gloves on or even fingertip gloves so that moisture doesn’t get onto that product. [Okay ; okay]

I’m not here to criticize factories. I want to help the suppliers. Every one of these factories I talked, the owner I give them advice I showed in this video. But I want to show them areas that they can improve. [Okay ]

Now, which of these factories would you buy from? [Okay ; yeah] I gave you three minutes. Three minutes, right? [Yeah, alright ]So hands up for the top one? right To the simple smartwatch. alright Hands up for this one here? [Okay ] See that?

That top one, that factory. It’s gone, it’s gone! Three months after, that was it. Gone. [Alright] They knew how to put all the uniform, it looks nice and clean here. Why would you buy from this one? Why would this one be better? It’s something you’re not seeing. I’m not showing you. I’m tricking you. I did give you a hint in the documentation. Actually, I mentioned it twice. Didn’t I not mention that? Documentation. There’s a hint there.

It’s very hard for the average factory to get all of its documentation correct without some help. Where do they get their help from? Where do you think? Do you think they learn it from other factories that are trying to learn, too? They learn from customers. And the best customers for these factories are large brand name OEM customers. [Okay]

This company here made videos soft set-top boxes for Sharp. Japanese. Do you think Japanese are high quality? Hands up if you think Japanese are? [Alright] So immediately, I realize that there’s a signal here. This factory. There’s a sign. You gotta look for signs. [Okay] Look for a factory that is actually if they’ve supplied to a Japanese customer, wow, they must be a certain level. [Okay]And they’re nice. Then I can verify that by actually seeing the documentation in the assembly area.

Now, this factory here at the top, they’re still selling smartwatches. What are they doing now? They’re outsourcing. That’s not a bad thing. You just got to know that’s happening and if you can verify the outsource assembly. [Okay, yes; okay. Brent] They closed down the assembly, but there’s still some smartwatches. [Okay; okay, alright]

Attention to detail

Let’s have a look. One more thing, when we’re in this factory. Now, we’re in the administration. This lady, bless her, bless her heart. She comes out with a tray full of smartwatches. Not then, what are you doing? Don’t come near the administration with this dust and there’s no clean area, with all these smartwatches.

And so, we stopped there and wanted to find out what’s happening. They’re all lined up together, no protective, no protection between all the smartwatches. It could be scratched, get moisture, dust, all that sort of stuff. [Alright and] Anyway so the reason why they went into the other admin area is they want to test the Bluetooth in the smartwatch and they didn’t want that to interfere on the assembly line. Wireless signals are going on on the assembly line so they want to separate. [Okay] That’s fine. But take it to a clean area, not to the administration area. [Okay] So you know there’s a clean room in the assembly area and they take it out to test the Bluetooth. I like that. [Okay]

Now we’ve got a QC form here that’s being used to test/check where someone is actually checking where they are on the QC. And so, documentation on this one. Again, documentation. Very, very good documentation. So look out for that when you’re going through the factory. [Let’s keep going here. Just keep going. Alright .]

Tale of two speaker manufacturers – Factory visit preparation

Now, I’m going to show you two factories where one of them I helped a lot. One of them is very well-established. You could buy from both of these. But I would encourage you to spend more money on third-party inspection on one factory more than the other. [Alright]

So when factories need help or that a low-level, spend more money on third-party QC. That’s another way. It doesn’t, you don’t have to go. You go to a very good factory. Sometimes they’ll price you out of the market. So you’ve got to figure, think about that. How you can get quality into your website? So let’s have a look at all these very quickly. [Alright]

You can buy Bluetooth speakers. Bluetooth, you know Bluetooth speakers? Very popular. Everyone’s got Bluetooth speakers. [Okay] So we’re talking with a… They are, they’ve asked me to put this on issue. How many of you have been asked to do that when you go to the factory? Like, how do you know they do that after you leave? That’s the big question, isn’t it? It looks good. It looks good. [Alright; okay]

This one here, this is dirty. This factory is so dirty. And we get to the end of this assembly line and we find that they have rejects. The volume is not working, and the charger unit is not working. And anyway, they realize that. Oh, that’s because of the cue of the chip that we received from another supplier is not working. Not functioning. Malfunctioning. Do you have receiving inspection? Oh, no. Why not? Too expensive. This is only a US$4 FOB unit. Why would I spend money on receiving inspection? [Okay]

So, you all understand they gotta think of their margins, too. And receiving inspection is probably even more critical in electrical products manufacturing because that you’ve got to hit the quality where it’s received. You’ve got to test the quality and receive it before it’s assembled, or it’s too late.

And so how do we know that? Of course, this factory at the top they are now making high-end audio MP3 players. You know that’s a new segment out there where you know you’ll pay several thousand US dollars even more for an audio player. It plays MP3. Well, my ears wouldn’t know the difference. But this factory has gone into that business now. That’s been around for a long time. This one here, struggling. But I spoke to the owner and that’s why he told me about receiving materials inspection. [Let’s keep moving here. Okay, so we’ve got that] I told this owner here, why don’t you spend 20 to 30 minutes every morning, managers to just cleaning up the factory, make the factory look more presentable for the buyers. [Okay]

Example of automation in leading factories

Some of them are doing automation. I got automation clip here. The one at the top, this is a supplier for Microsoft. This supplier at the top is making the buttons for the Xbox. You know the gamepad for the Xbox? That’s the supplier. That’s the supplier for Microsoft. [Okay] And this one here. Again, this one is, one of the smart, making Smartphones. So these are two high-end suppliers here. Like, this is you know, top of the top, ‘right? And this one is subject to a factory audit I did last year. [So we’re going to have a look at that. Let’s have a look. Alright]

So I was down, you’re going to go down the trade show tomorrow or the next day and you’re going to find a company like Aoni. No, they don’t pay me. Don’t worry. But they’re a public company. So it’s alright for me to show a photo like doing this Indian stock market. [Okay, so] The factory you’re buying from is actually a publicly listed company. Maybe there’s some assurance there. Right, Mike? Yeah, that helps a little bit. [Alright; so] They had about 30 headphones. There’s a video of me on Facebook, actually. I picked out the best four headphones ranging from—I picked out two Bluetooth headphones. How many of you are interested in headphones? Sourcing headphones? Probably not, maybe in the future. But that’s hot now. Very hot. So I thought I’d go in a trade show and find headphones. [Okay] The two Bluetooth ones were US$18 FOB and there was another one for US$23 FOB. Then there were two noise cancelling headphones. I like noise cancelling headphones. One US$35, and US$38.50. And so, this company was making those headphones, anyway.

Even the best need help

So, Aoni. How do I, why do I go to this booth? Because I first went to their factory even before I knew that they’re making headphones. Because at the time when I went to their factory last year, they were making the DVR players. They were making, sorry, they were making the DVR players that go into the front of your cars so you can record the accident after you, before you have the accident. So you can see what the accident looks like. [Yes, alright ]

So when you go to this factory, there’s your dust-off area before you go into the surface-mounted chip room where the machines are mounting all the components together onto the PCB board and all the things like that. [Alright]

So this is the first time I made to go through this. so This is very high-end quality control in terms of the dust, three dust-free zone. [okay] So now this has got five levels of production. Aoni, they have the design area and I saw a foreigner there doing the design for a product and doing tweaking and things like that, and sampling all that. At the other level, there was the injection molding machines, then those assembly machines. Then there was the SMT level, and everything all-in-one building.

Most of the factories that are probably going to be representing the trade show do not do all of those five things together. They’re really good at doing one of those things or two of those things. They don’t have the resources to do all five. So you need to trade that off with the fact that well if you buy from Aoni, you may have to pay a higher FOB, like the headphones, Bluetooth headphones. What was the minimum one did I say? How much did I say? 18? 16? Did I say 16? 18? 18 dollars, FOB. I go to another supplier last week and I found a Bluetooth headphones for US$6.50 FOB. Wow! And it was very nice. And there’s another one I went to.

Sometimes, there may not be much difference in the headphones but there’s a big difference in the factory quality pedigree. [Okay] You’re paying for that factory. The factory is more powerful. So it’s going to start at a higher level, the FOB price.

And so this day, they just started a new production run. They’re making the VCR. Cameras are going at the front of the car. On that first production line that day, they had a 10% rejection rate. 10 percent. But that’s probably normal on the first run. But what’s important when you go to the factory is do they count? Do they have a clipboard that says all the rejections and then the reasons for the different rejections? Are they documenting the rejections? Which is important because they learn from that. And fortunately, they are.

Look at that. Isn’t it amazing? Look, there’s a documentation and there’s a run for 11:30 to 12, 12:30 to 1, and so forth. And there’s all the different reasons. And so they’re active. They’re active in actually monitoring their quality and finding out what are the reasons for the quality. So that’s probably why you pay more FOB from this factory here than you would from another factory that doesn’t have such systems in place. [Okay, so what’s]

Factory visit—What to look for?

Here are some takeaways. [Okay, you like the bird? Oh yeah, that makes you look twice in it. Alright]

  1. Receiving inspection. You go into a factory. What can you look for? [Okay] Do you have receiving inspection?
  2. Anti-static / Gloves. Do they have anti-static wires? There’s a new idea out that or we can have wireless anti-static. So its wireless. That is not as stable as wired anti-static. ok
  3. Documentation / OEM Relationship. Does the factory have an OEM relationship? I think that is so critical. If they’ve had an OEM relationship, that is their source of learning. You don’t want to be the only teacher to the factory. You don’t want to be the… [Okay] But you need to be a teacher. Somehow be a teacher in terms of having the passion to actually help them. And actually, one of the big things I want you to take away from my talk is, because the big question in everyone’s mind. Mike mentioned about negotiation. How do you negotiate? Where do you start? The big thing I want you to take away from what I’m saying is you start with having an interest in how the supplier can improve. And give an advice. Giving before taking. [Okay] How do you do that? How’d you like, do you fake being a factory smart? I just gave you some ideas. It’s very easy to find areas where factories can improve. Give some tips. That doesn’t hurt. Doesn’t hurt to help your supplier. [Right] That doesn’t cost you. [Okay]
  4. Clean / Dust free
  5. Rejects / Rework area
  6. Mind of the supplier [Okay]

The factory audit (Choosing the right factory)

Case Study – Problems on ordering from a good factory

So I just, there’s some things to take away. Let me finish off with a real case study where I did a factory audit. And the product in question was… What is this? Yeah, anyone interested in sourcing that? No one. uh okay. We’ll go to, stop here. Then no. Alright, we’ll just show you this one.

Website comparison

Digital frame. And here are our two factories. Both of them are good. There’s not a good and bad one.

[Alright] So let’s go through this story, shall we? And so I went to audit both of these. This is basically a simple factory audit. [Okay] It’s simple factory audit. Can the factory make what the client wants to get made? [Alright] And so both of them are really good. They’re A-star suppliers on Global Sources website. One’s a blue, and one’s a red. [Okay] That’s all good. [Alright] And then you can check out the business registration profile. They’re both, they say in the business registration that they do production. So then you know that they make something. Okay? So by rights, if they got production in the business description, that means they make something. They’re not a trading agent. And both of these, they are in production. [Okay]

So we go to one factory, the blue one. That’s what the blue one looks like. This is before you go visit the factory.

And then we can look at the red one. [Okay]

So, hands up who likes the blue one, so far? Who likes the red one? Like the red one?

Well, you see all the certificates here? Didn’t you learn anything from what Mike and Renaud said? [Alright ; okay] Don’t pay attention to certificates. [Alright, you are] See what they can do, not what they can copy. Look, they’re probably [what they’re probably] good certificates. How can you verify them? You can actually go to the sites of those certificates. You go UL, CE, and things like that. And actually find that factory listed. [Okay] The name of the factory listed on their sites. Verify that. [Okay, so let’s keep moving here. Alright ]

We’ve got the red and the blue, right? They’re both good, you can buy from both. You go negotiate from one and the other. Let’s go in and see what they can do. So let’s have a look, shall we?

Factory comparison – General conditions of assembly

Operation standard

There’s our blue one, and here’s our red one. So we’ve got real factory audit now. It’s real. [alright] And this one I had to go upstairs. So immediately, I didn’t like this factory. [okay] I like the red’s, on ground floor. I go immediately in this office into this factory.

Now, one thing that Renaud taught me—Neale, if you want to help the supplier, there’s three things that you can help, write this down, three things that you can help save money immediately. [Alright] Two things immediately is cut inventory. Number two, cut frontline staff/administration staff. Look at all those people. Cut that. That will actually help save the factory money. The third thing is to help improve their processes. [okay] These are three things that any consultant going to a factory turnaround would do. Three things immediately. [okay; so anyways so]

We’re going into the two. [that are here that] The blue one here, they’re making the little… It’s kind of like set-top box…, plug into your phone so you can actually send a signal to your TV set and play things from your phone. [okay]

Over here, we’re seeing them making something. They’re making smartphone. Immediately when I saw that, I think there’s no hope. [this] Like in 2010 and/to 2013, I’ve done some work with HTC. Do you know HTC? [alright] so I had the privilege of actually going, actually watching their operations in Taiwan. Actually, the owner of Foxconn went across the HTC to find out how to automate Foxconn operations. And I noticed in HTC, though they had an assembly line just like this, and I realized wow this factory, this is state-of-the-art, this is state of the art, they’re making smartphones. Very few factories can make smartphones consistently, good quality, and survive. [alright and] And I’m going to order picture frames from this factory? Wow! [Okay]

This one here, it looks pretty good, so they’re both pretty good factories. They’re both looking good except for when we go, let’s say, conditions of assembly. [Let’s go; that’s further, okay] This one, look, never got automation. [okay] So this is pretty good here. We’ve got documentation on the top one. And so, now here’s [the] at the top, there isn’t received, there’s inspection or bad quality. It looks a little bit unorganized. I’d like to see a little bit more documentation in this area. [okay] How many defective units have come in and how many have been checked? How many can be opened and replaced? How many are..? No hope. [okay] Some documentation, there’s no documentation. So worry about that. Look, what can you question about this? You just going to pay a higher FOB. Sometimes that’s the way it is. Some of these factories have so much power because they are so good. [Let’s just keep moving here alright]

Factory comparison – Product testing


What’s another thing that you need to see in electronics factory? [let’s wrap this up alright?] This is the burning room. What do you mean by burn-in room? They’ve got it plug and charge everyone 100% of their products. Charge them up—over four hours, over eight hours, discharged, and the really good ones are actually charging up again. [okay] Ready for packaging. [okay] And then full documentation of that charge up and discharge. [alright, okay] So these factories are doing both very, very good. [alright so let’s keep moving here]

Factory comparison – Management quality

Attention to detail

Look, I love [this fact that] the red factory because look, I don’t have to bend down to put this shoes on. [alright; alright] First time, I love that. [alright] <laughter> Exactly. <laughter> This one here, we go into the SMT machine area and, there’s no doorway to stop all the dust. Nothing. And then we see this lady playing with a smartphone. Look! She’s holding the smartphone while she’s playing around with the chip and doing the testing. Like, please don’t do that, all right? So I give them advice. Can you just help and you know just stop doing some of these little things? It’s so easy. Doesn’t a smart…like that one-handed operation? [okay]

And this one here is a cleanroom. Inside the cleanroom. And it just, I was privileged to go inside here and it’s just like bit you know, you take on anesthesia before an operation, and the oxygen how clear it was? It tasted and smelled just like that. It was beautiful. So we’re able to go in there and just a lovely, lovely, great area. [alright so we go to the end]

Factory comparison – Showroom & Prototype make up area


And here’s the show rooms are both, and I’m thinking, all right, we just want the picture frame like you’ve just seen two great factories. How you going? What’s the deal now? You know FOB of one is going to be higher than the other. Which one do you think will have the higher FOB? You’re right. But how much higher? Probably. Pretty close. [alright] Where do we start? What’s the FOB for this?

Let’s get some price range here very quickly. Can we start at 17? Can we have $17? 17? 17? 17? $12? No. We’re going high. This red one’s a pretty good one. You’re not going to get it for $12, all right? We start at $17. Anyone like to go higher? $22? Very, very close. $23? $23 is the FOB for this one. [alright]

By the way, that was their latest product and I told them, I told my client don’t buy that because that’s too hot. I was touching it myself. It’s too hot. Maybe let’s say, 60 degrees? It’s safe and it’s on a marble mantelpiece in the house of someone that buys it. But what if they put it on something that’s flammable? Poof! House fire. Liability. Lawyers love that sort of stuff. [Alright]

So you want to be careful. You want to be careful, careful, careful about heat of your product. So I just told my client, look, buy the old one where you actually stick a pencil out the back to hold it up because all the IC units at the back is spread out over about four times the area. The new one they got a very short area. Little space. So it gets hot. So I don’t know if I would have seen that had I’ve gone to that, had I not gone to the factory actually touched it myself. You with me here? Visiting the factory is so critical especially for areas that you might be liable for. [alright]

How much would you pay for the FOB from this one? We’re gonna negotiate now. Remember, going to the factory is about finding points of negotiation. If you can find a way of helping the supplier, then that starts the negotiation process.

Not about price, but room at $23 for this one. Where are you going to start with this one here? Can we have $18? $17? Oh, come on. Give us quick. $15? Can we bid higher? A bit higher. $15. Yeah. Would you pay more? Can we have $17? $17? $17? $17? $18? Can we have $18? At about $18? We’ve got $19 over here. Anyone for $20? Can we have $20? $20? $20? $20? Yes, about $20. This one here, one at $20. Okay? MOQ was 2,000? MOQ I think was 2,000. This one at $23.

So, which one are you going to go from? You saw both. We’ve just did an audit. Hands up if you go for the red? Remember, you are Amazon seller, so you need to make money. Am I right? [alright] No good having the perfect product that you don’t make any money. How many of you go from the blue? Anyone? Some of you. Okay. All right. Good.

Think about this because this is what happened in the end. The first order, 2,000 units, US$23, we went with the red. We went with the red. I said they’re both good, but red is better. Red is better because the quality was just perfect, and there was no third-party inspection company used in this case. So you just buy directly to the factory, straight in Amazon. Wow! Very few factories who could do that. I think. In electrics. But you saw it for yourself. $20.

On the second order US$26. And the third order US$28. Suddenly, I can certainly, Neale, what do I do? What do I do? I’m priced out now, I’m not making money. So we’ve got that perfect factory but the price is not perfect. Ah! So I said, okay. Let’s repivot now. Maybe we go back to the old factory. Maybe we go back to the blue factory. This blue one, and we do that $20, but now you spend US1 per unit. Okay? So it’s 2,000 per order, paying a third-party inspection company to inspect say 50 or 60%, if not even more, of the product. And so, when you do the second order, it slightly is still going to be $20. The third order is still likely going to be $20 because the blue factory doesn’t have the power. So another takeaway, when you’re negotiating, you go think about what the power, factory is perfect, but also it means the factory has power and you may get a good price on that first order. But what happens on the second order once they can’t get you in? So be careful about that. [right]

So let me just finish here. I think we’ve got a few takeaways from that. Just finished up a project with KPMG, so that’s excited. That’s for another day.

Key takeaways

  1. Factory visit checklist
  2. Know exactly the specs and standards of your products
  3. Where are the IP risks?
  4. Monitor your factory
  5. Check out these resources

I think, what are the hacks that you can take away from the last 40 minutes? Number one: third-party inspectors can help you. You’re paying them money. Why don’t you get them to educate you as well as do their work? You with me? Get them to accompany you to the factory. [okay] Get to know the inspector. Do you know the third-party inspector that you’re paying money to? [okay] Maybe it’s not critical for household products…in more critical for electrical products. [okay]

Number two: perfect factory means perfect power. Means your negotiation ability after the first order may diminish considerably, and you’re locked in. Because they know that well it’s a bit more effort for you to go to another factory. We’re going to put the price up. [okay]

So these are some of the challenges that fit into negotiation. And the last theme I want to remind you of and it’s something I’m passionate about helping suppliers, if 1 percent, if you can just find 1 percent passion to think, oh, I want to help this factory I’m buying from. If you can just think of that 1 percent, find 1 percent passion, it will help your negotiation process, your relationship building process considerably. With that, I thank you very much.


Okay. We have a few minutes for questions. Saw one already. I can see the drinks.

G’day, Neale. Hi! I’m from Australia. Welcome. Thank you. Last week, we saw quite a few inspectors and they’re all round the factory, are all around the Expo. Is there a proof list for these guys? Is there one for the dodgies, ones that are not? Certification. Uh..I don’t think there’s a black list of inspectors. yeah They came from everywhere. yeah I think there’s about four companies. yes and yeah

There are, you know, Asia Quality Focus, Asia Inspection, and then there’s some French companies. And you know, you see them advertise and the airport carts going out. I don’t have anything to do with any of them directly, but I would ask some more questions. Get to know them. How much? [and] Interview the inspector. Just, or can you teach me something about my product? [Right.] I think, one thing that you need, even though you find a good inspector, you still need to know the product that you’re getting inspected.

I’m a manufacturer, have moved to over here. yeah I do most inspections at the moment. There are only two of us. So we’re getting tired doing a little time. yeah So we want to re-invest.

Yeah I would. There’s a selector inspection process you probably need to go through. Expect this. Interview them. Get to know them and work with, what, like they’re all good. But get to know the one that you feel that you can learn from. You know, they’re happy to help you and they’re all happy to help you. But you just feel the vibes with, okay? Okay. Thank you. Okay.

Any other questions? All the way to the back…all the way to the back yet today. So, why not?

[I have] a very simple question. What was the name of the good manufacturer for hoverboards?

The good manufacturer? Oh, the really good one? Yeah. In the presentation. DBK. So, Doctor Boy King/DBK. That’s the parent company. [okay] And then, there’s another. There’s a brand that’s under that, okay?

Question over here, Neale. Okay.

What was the most shocking thing you saw while you’re doing all the inspections?

Uh, it was that other hoverboard company, that they were in full flight, full production. One month after, you know, there was 73 fires worldwide on hoverboards. They were so excited in making this product. And the quality, I didn’t show them the video, that’s in the video, the quality inspector of the hoverboard was, uh, he just rides around everyone and round the inventory and he had the Bluetooth going full board, just listening to his favorite music as he’s just going around. And I thought, wow, that’s QC! He’s loving it. [Yeah] That was, that was most interesting.

And the second one was that factory that closed down. It just, well, one month after I left? Gone. It’s the last video you see of that factory. <laughter> It looked perfect, uniforms and everything. Now it doesn’t mean that bad quality of the reason while it closed down. You know, maybe it’s a pivot of the owner and maybe it’s a reflection of the owner and maybe they found another factory that they could outsource to or maybe the landlord put up the leasing space. You know, there’s lots of reasons why they’re gone. [okay]

Do you have any comments on Samsung, of the Note, and the blowing up phones?

That’s critical. Any electrical product that has a battery in it, that’s probably the most critical area. Does the factory pay attention to where they’re sourcing that? How much they know about the battery? Where are they getting the battery from? [okay] And is it reputable? Like one hoverboard factory, it’s just getting the battery and the package. That’s got the Samsung on the outside that said Samsung sells inside. How do you know? They don’t know. They’re just trusting that. The other one, they’re checking it for themselves. That’s a big thing you learn and I saw that even before what happened with Samsung. [alright ]

You’re going to be importer of record as Mike says. So that’s a huge liability if something goes wrong in the US. [okay] Just associated with that is…okay. There’s all these standards around the world, you know. The CE from the Europe, and then there’s FCC and there’s UL. You have to pay more attention to those standards once you get into electrical products because they have their own. If you want to get liability insurance for electrical product that you’re sending into the US, they’ll say, oh you need to have a UL standard or suddenly you’re gonna have to pay maybe up to US$10,000 to get your product UL-certified. Wow! Do you need to do that? No, you don’t. But you won’t have liability insurance cover. So sometimes the insurance is actually driving what certifications you need to have in the market they are selling into. But, worst case scenario, have a company that is importer of record. Don’t have your person, importer of record. [okay] So the lawyers will sue the company and make sure there’s no money in it, you know. [okay; alright]

There’s a question here.

I really enjoyed that. Thanks. I’m in electronics. I’m not currently manufacturing my own products right now but I’d like to. And I found that it’s a little bit difficult for me because I’m not technical. Like, I don’t know how to program or anything like that. And I was wondering if you had any thoughts because I’ve gone, I’ve done the trade show thing, I’ve gone booth to booth, and I don’t know if it’s just because the R&D people aren’t there or there’s just changes that I know need to be made. But… Got it. I don’t know exactly. They get confused when I tell them, oh but can you do this, can you do this? Okay. Let me.. Can you change the app for me? That sort of thing.

All right. I’m very big on education hacks, right? It’s just something that can speed up, getting from A to B to C, right? Inspectors can speed up, you getting up to speed with your factory. If you, the inspector goes with you, that’s a hack. A hack for you is go down to the startup Launchpad tomorrow and you’ll see a hundred plus internet-of-things entrepreneurs. Cause I interviewed 50 of them last year for a KPMG report and I found that they are amazing at figuring out how they can get the electronics done when they don’t know about that. They’ve done this, they’ve got this product and Kickstarter has all this demand. Then they just figure out how to do the engineering and then work with the factory in China.

And so I’ve already been through that. I got more information I can share with you after, but that is the best hack. If you’re anyone interested in that so you’re tweaking, you’re making something new, go and have a talk to some of these startups. They are hardware startups. Most of them are hardware startups. So they’re the real deal like they’re trying to make something that is real. Not just the digital economy type thing, all right? And they will teach you so much. So talk to them. They will help you because they’ve had trouble with finding engineers. It’s for the firmware or for the electronics or for the actual final shell of the casing. Those three things are part of every IOT hardware device. yeah Tomorrow, Launchpad. And goes for the next three days, right? Four days. Four days and they’re there. So anybody interested in electronics and finding out a little bit more about the challenges of putting stuff together, go to that Launchpad. <audio not loud enough> No, not limited to Shenzhen. yeah Tomorrow, Hall 11. Thank you for your questions.

Actually, the guided tour will end at the Startup Launchpad for anybody who’s joining.

Any more questions?… I will in just a minute. Yes? No more questions? Then, let’s say thank you to Neale again.

Thank you. Thank you very much. <applause>


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