On a Fast Boat to China

JANUARY 1, 2006

Doing Business in China

When an entrepreneur with a line of luxury dog-carrier accoutrements had to cut

costs, outsourcing was the answer

Annette Grignard's shih tzu, Bijoux, once slept in the kind of metal crate many

dog-owners use to haul their hounds while traveling. But Grignard thought Bijoux looked mighty uncomfortable curled up against the cold wire mesh of the box. So she sewed a mattress, bumper, and three-sided cover that gave the crate the feel of the dens dogs seek out in nature.

Bijoux loved her cozy new accommodations. And so did Grignard's dog-owning

friends. So in 2001, Grignard -- a former pharmaceutical sales representative

who had studied interior design -- established a company called Pet Dreams to sell her three-piece sets of cratewear.

The padding and covers were a success, and Grignard sold about $50,000 worth in her first year. Problem was, she was having a tough time turning a profit due to the high cost of making the sets in the U.S. So last year Grignard decided to move production to China from the factories in Brooklyn and New Jersey she had hired to make the padding and covers.

The change cut her manufacturing costs by 61%, even after factoring in the

greater expense of shipping the goods across the Pacific. This year, she sold

more than $500,000 worth of crate-wear despite halving prices following the move to China. She recently spoke with Business Week's Rebecca Reisner about the transition. Edited excerpts from their conversation follow.

How has outsourcing to China helped the business?

Things turned around so fast once I switched. I got a better product, and I cut

the retail price from $69.99 to $29.99. Sales went up by more than 300%.

It saves a great deal of time, too. With the U.S. factories, I had to visit almost every day to keep an eye on things. Sometimes a factory would get an order from another company and try to bump my stuff until later. I had to be there to stop things like that from happening.

But flying to China and getting a hotel must cost a lot more than driving to New Jersey. Believe me, in the long run, the cost of going to China is negligible. The time I had to spend in the U.S. factories meant less time for me to get out there and sell my products.

What first gave you the idea about outsourcing? From speaking to everybody I knew, it became clear I had to go to China. If you want to be big, your product has to go down in price so it appeals to a wider audience.

How did you find a good factory in China?

It was word of mouth. Of course, your competitors aren't going to reveal where

they go for outsourcing. You need to find noncompeting companies that use

similar materials and ask them to refer you.

They gave me the names of agents. I would tell them what I needed and give them a sample of my product. They would take it to a Chinese factory, have it make my product, and then bring it back to me to inspect before we would make a deal.

Was there a big difference in quality of the work? Not all the samples they sent back were great. Or sometimes the sample would look perfect but when the whole order came in, the bags were too big or the quality wasn't there. I had to shop around before picking the right factory.

How are the agents compensated?

There's really no typical amount. They do it by volume. The more you buy, the

less they take. It could be as little as a couple hundred dollars for a container of your products. I eventually started going to the factories myself, instead of going through a third party.

Is communication a problem?

No. Factory management speaks English well. But you do have the same kind of communications problems you have with anyone in a long-distance relationship. Things are lost in translation, even though they speak English so well.

How about the time difference?

No problem. I have the factory rep's home phone number. So if it's 9:20 a.m.

here -- which is 9:20 p.m. there -- I can call the rep. And we exchange e-mails

every day.

Do Chinese factories offer advantages other than cost?

Many. When I worked with U.S. factories, I had to take charge of ordering all

the materials -- fabric, Velcro, vinyl bags, labels. I had to arrange for fabric

dyeing. The U.S. factories didn't care about waste. I'd visit factories and see

Velcro on the floor. Workers would walk on it.

I've never seen that happen in China. They take care of ordering all the

materials and paying for them. They own it, so they're careful with it. And in

the U.S., if a seam wasn't straight, that was no big deal to workers. In China,

the workers are paid by the piece, so if it's damaged, they don't get paid for

it.

Are you concerned about taking away U.S. manufacturing jobs?

I don't think Americans really want factory jobs. It can be hard to even find

factories here! A lot of them are partially abandoned. I went to one in New

Jersey that was 80% abandoned. It's scary walking in those places!

So the Chinese factories are nicer?

Yes, it's like night and day. In China, equipment is new. You could eat off the

floor. In one case, what involved two days of mechanical adjustments at my U.S. factory was just a matter of pushing a button at the Chinese factory.

How do you finance your Chinese orders?

At the beginning, I had to get a letter of credit from the bank and

collateralize it myself. The money didn't get released to the factory until it

had fulfilled the order with the right specs -- your agent inspects the products

for you. The letters of credit protect the factories, too. They're not going to

make 1,000 units for you unless they know they're getting paid.

But today, I've built up enough trust with the factory that they put the product

on the water and, when it gets here, I wire the money.

Is there a downside to outsourcing to China?

Turnaround time is longer. It takes about three months there, vs. two weeks for

U.S. factories. If clients want products, I don't want to have to wait for a new

Chinese order, so I keep a lot of inventory here in the U.S. That means paying

for more warehouse space.