Tuesday, September 27, 2011

Suppliers: A look inside the component markets of Shenzhen

Welcome to my "office".
(A bird's eye view of where I spend my time, just one of many floors of many such buildings covering several city blocks)
The markets in Shenzhen, or at least the most visible part, consist of thousands upon thousands of individual stallholders.  The markets fill multiple floors, and take up several city blocks.  Each stall is only a couple of square metres, and may hold one or two people jammed in at impossible angles.  Stallholders are generally of two types:
  • Factory showroom.
    Those that represent a factory and the outputs of the factory.  The factory is usually within 50km.  A common example of this is companies that make switches and sockets.  Look under a glass-topped counter of a stall of a seller in this category,q and you'll see somewhere between 400-2000 different products, all made by the one factory, glued onto a display card using double sided tape.  You can point at an interesting switch, and they'll fish it out and you can inspect it.  In essence, the stall is acting as a showroom.  The idea is that if you're manufacturing  product, you pick a switch you like the look of, and order 10,000 of them.  These guys will happily gives you samples, but the expectation is that you're trying them out in your design with a view to buying, rather than freeloading for a 1-off project.
  • Good place to buy passives by the reel.
    Those that represent the end of a long supply "food chain" from the manufacturer to the market.  The manufacturers could be anywhere in the world, especially with ICs.  Typically, the manufacturers produce items in the 100,000-1,000,000s of items.  The items are fed into a tree-shaped distribution structure, with the distributors in each downstream level handling an order of magnitude's less parts than the level above.  Where you buy in the food chain depends on the quantity you're buying.  Typically, the sellers in the Shenzhen market like to handle sales in the 500-5000 range, and the items are often passive components and ICs.  (The office buildings around the markets contain the larger upstream distributors).  These sellers typically don't have sample tables because the parts are standard, and well, chips just look like chips.  But they do have reels and reels and bags and bags of stuff.  I've seen one stall that sells just one value of one kind of capacitor.  And the fact that the stallholder is still there shows that it's economically viable for the stallholder to do this.
These suppliers are interesting creatures.  For a start, 80% of them come from a region about 300km up the coast called 潮州 (Cháo​zhōu, loosly pronounced as "Chowjoe").  There is a strong correlation between this regional group, and the electronics trade, just as Hasidic Jews in New York have monopolised diamond trading.  Coming from the same region makes it easier for them to do business with each other, because there's the implicit assumption that you wouldn't "cheat your neighbour".

Because of this, it's hard getting a trusted relationship if you're a non-Cháo​zhōu Chinese, and even harder if you're a Westerner like me.  Symptoms of a trust issue is sellers who won't look at you, or give you outrageously inflated prices (I was offered a switch for 15x it's nominal trading price, and it was the best I could do), or they'll trade with you but it's an opportunity to shift some stock to you that's been sitting there for years, and is hence terribly oxidised.

Sellers generally only want to do business if you've done business with them before, so it's a chicken-and-egg situation.  The reason is the Chinese concept of 关系 (guān​xì​, loosely pronounced as "gwunshee", and even more loosely translated as "relationship").  I'll write another blog post about that soon.

One way to overcome this is to get an introduction from someone already doing business with them.  The sociological theory is that neither side is unlikely to do anything stupid (like cheat) to the other, because it would reflect poorly on the introducing friend.  And to put someone in a situation which makes them look bad is something you just don't do in Chinese culture.  Alternatively, an alternative explanation based on economics is that suppliers run on reputation: If I'm a big buyer and a seller just shipped some bad stuff to my small time friend, I'll now start worrying about whether the seller is going to do the same to me.  That may be enough to encourage me to look elsewhere for supplies.  A seller can't afford to lose that relationship.

About six weeks ago I started talking with the founder of a PCB manufacturer here in Shenzhen.  He has graciously allowed me to go along with his buyers to the component markets.  I was introduced to the sellers by the buyers as "a friend of the boss", and each time I'd collect the business card of the seller.  By the suppliers seeing me several times a week, and being introduced in this way, the suppliers have come to recognise me.  The plan has been for me to become familiar to them.

With only one more week left in Shenzhen, the time has come for me to line up those suppliers as my own suppliers, and bring them in on what I want to do. To help me, I had the help of "T", a Westerner friend of mine who may well play a big part in Hackvana's future, and "C" a lady friend of his who can speak 闽南语 (Mǐn​nán​yǔ​, roughly pronounced as "Min nun you"). Mǐn​nán​yǔ is the language of Cháo​zhōu.  The idea was for me to pitch the basic idea to them in Mandarin, then C would follow up in Mandarin or Mǐn​nán​yǔ as appropriate with the operational aspects.  T was introduced as the guy who would be there to do the face-to-face work, especially in the coming month.

These sellers all work in a certain way, which usually involves a good deal of face-to-face business.  This system has evolved to where it is today because it represents an economic maximum.  That economic maximum however, maybe just a local maximum - by working differently, they may be able to find an economic maximum that is higher than what they have at present.  I hope in the future to find a way to migrate sellers to a new maximum, one which is of benefit to both me and them.  However the difficulty is in making it compelling enough for sellers to do business in a new way.  If it's too much of a departure from what's already done, they won't do it.

Yesterday I broke out my ever-growing contact book, and we went to all of those suppliers in turn, and told them my plan - to start my own business.  I told each one, "Using instant messaging, I will tell you what I want, then you take the goods to a certain nearby address, and I will give you cash".  (I must say here that QQ, an instant messaging network, is huge in China.  Everyone uses it, so there's no acceptance risk in having it as part of our plan).

In this case, the departure from standard practice that I'm asking of them is to not do face-to-face business for everything.  Rather, I want them to take the goods to a certain place, and they will receive payment on the spot: Cash-on-delivery.  Cash really is king here.

The three of us all worked pretty hard and we were all exhausted at the end.  I am happy to report though, that of the thirty or so suppliers we talked with yesterday, only one wasn't prepared to do business our way.  (Curiously enough, that supplier doesn't sell regularly to my PCB making friend, doesn't have a catalog, and doesn't have a website.  That supplier can consider themselves dropped from my list).

I put the success of our day down to being able to present to the suppliers an easy-to-understand plan for operation that wasn't too different to what they already do, the goodwill I've inherited from being introduced as my PCB making friend's friend (thank you, you know who you are), and having a local to help out who could speak both Mandarin and Mǐn​nán​yǔ, in order to convey the message.

The reason I want the suppliers to do CoD is because I want to do purchasing in a way that involves no physical effort on my part.  Physical effort on my part takes time (and therefore has an effective money cost), and I don't scale. Ok, in order to deliver the purchases, the buyers may well have to use a courier, and I would expect that cost to be added to the price.  That's ok, because they are much better at sourcing cheap local labour to do the task than I'll ever be, and I'm better off spending the time I'd take in collecting stuff on something else.

What I hope for is to end up with a system where the QQ messages we send to suppliers are not sent by a human, but by our automation systems.  We want to take humans out of the loop (our loop) as much as we possibly can, except in a QC/validation role.  That's how we can scale in the future.  And I want to do it in a way where suppliers don't have to radically change the way they do things, at least not at the moment, because otherwise they won't work with me.  I consider getting all the suppliers on board with an agreement to supply via QQ and using CoD to be a vitally important part of my future plans, and I am so very happy that yesterday went so well.

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