Case study eight

Company Eight – import textiles, clothing and household goods and export wool

Introduction

Company Eight imports textiles, clothing and household goods from China, and exports wool and other products to China. This case study focuses on the company’s inter-firm business problems and solutions, as well as its business success factors. Following completion of the questionnaire and an interview with the director of the company, findings were analysed and collated with information from the company website to provide evidence with which to answer the research questions.

Background information

Company Eight is an import and export company established in 1978 and located in Geelong, Victoria. Its primary businesses include the sourcing of labour intensive finished products, and exporting Australian products to companies in China, India and elsewhere. Company Eight also conducts its own research and market development in China, Southeast Asia, Eastern Europe and India. However, this case study is limited to its dealings with companies in China.

Import business with China

Although Company Eight started with only two per cent of its total business dealings with companies in China, it has now grown to 71 per cent. During the past 21 years of business, Company Eight has imported textiles, clothing and household goods from China, and built up its business networks. In 1988, Company Eight extended its networks by becoming a member of the Australia China Business Council (ACBC). The director of the company is a board member of the ACBC. In

addition, the company also works with banks and law firms in China to develop new markets, and research. Despite China’s imposition of restrictions on importing in 1988 and a major political event in Beijing in 1989 that reduced trade at the time, Company Eight’s business has continued to expand when China’s trade opened more from 1995.

Business problems of importing

During its many years of importing from China, Company Eight has faced several business problems as follows (solutions follow after problems are enumerated).

Contract enforcement

When importing textiles, clothing and household goods from China, one main problem that Company Eight has faced when dealing with Chinese companies has been that some contracts have not been enforceable. For example, if raw material costs have risen, some suppliers in China are likely to demand increased payments from Company Eight for the same products, even after contracts have been signed. The suppliers frequently do not want to be bound by signed contracts. If extra payments are not made, these suppliers refuse to make and ship out the agreed products.

Poor management

The poor management systems of suppliers in China are also a problem. This often results in inconsistent responses, not performing as promised, lack of replies to emails or letters, providing incorrect data in transactions, misunderstanding purchase orders, and delaying production. As many contact persons of the company in China either cannot speak enough English or do not understand international business protocols, misunderstandings frequently occur. Furthermore, paperwork processing often takes a longer time than expected, and often contains mistakes.

Delays in shipment

Company Eight finds that delays in shipments from China are also a problem. The before-mentioned pricing problem frequently results in unacceptable delays in shipments. Other delays are caused by ineffective equipment and slow working attitudes. For example, some Chinese companies lack shipping facilities and

experience in the efficiency of international trade. For these reasons, Company Eight has found that doing business in China can take longer than doing the same in Australia.

Communication problems

Company Eight has found that the language and cultural differences create many forms of communication problems when doing business with companies in China. This means that expectations of quality, price and timelines for performance may be different. For example, many business people in China think that everything is negotiable even after contracts have been signed. This is because they are used to relying on short-term trade and results. In addition, their timelines for performance are longer than those in Australia. Many misunderstandings can arise due to the different language and cultural expectations.

Other problems

As Company Eight does not have its own office or hire staff in China other problems such as the higher levels of networking required in the Chinese context are significant. Without having established valuable networks, Company Eight finds it difficult doing business in China, which is the main reason they have not expanded further.

Solutions for the importing problems

Over time, Company Eight has developed a workable ‘framework’ for its import/export business. This includes contract performance, payment terms, open L/C, quality inspections, enforcement of contracts and arbitration for contract disputes. This effective plan has been introduced to its suppliers, and works well in most outsourcing relationships to improve performance.

Export business to China

Other than importing, Company Eight also exports products to China. Its major export is wool, having exported more than 3,000 tons to China since 1995. However, despite achieving good results from this trade, some business problems have arisen.

Contract enforcement

When Australian products such as wool attract low prices, companies in China purchase more regardless of other factors including quality, with most companies being seen to focus only on product prices. When exporting goods to China, Company Eight finds that even after contracts are signed, if commodity prices decline, Chinese buyers want to buy the previously agreed-upon goods at new lower prices. For example, on one occasion Company Eight shipped out lower-quality wool than originally agreed in order to maintain the same profits. Surprisingly, the import agents in China were unconcerned about the quality being lowered as they could resell it to factories in China anyway. Furthermore, when resale market prices in China are found to decline, profit for resale reduces, causing Chinese companies to want to buy Australian products at even lower prices.

Risk of non-payment

When doing business with companies in China, Company Eight has found that some buyers in China are not willing to apply for letters of credit (L/C) because these involve bank costs and paperwork for both buyers and sellers. For this reason, buyers in China prefer to use telegraphic transfers (T/T) which have no banking guarantees. However, even though T/Ts are less reliable, due to competition Company Eight now accepts T/T payment terms in order to sell their products even though there is a risk of non-payment. This has meant that Company Eight has experienced several delays in receiving payments.

Product test standard

Business partners in China have problems with testing standards for wool because their own hand-testing standards differ from international standards. However, Australian companies use machines to test wool, and can provide certificates showing international standards, whereas the Chinese still use the less accurate hand-tests. Company Eight believes that Chinese companies should have an obligation to have quality testing that matches domestic standards with international standards. Company Eight believes that because Chinese quality standards do not meet international standards, their quality control of products is limited.

China’s import quota

Another problem facing Company Eight is that China has a quota for importing wool from other countries. The quota is allocated to different countries and companies, meaning that the wool export business is hard to expand. Company Eight believes that the quota constitutes a trade barrier between countries, and as China is a member of the World Trade Organization, it should eliminate all import quotas to match the current trends of international business.

Solutions for exporting problems

Although it took Company Eight three years to develop a business framework, there are still some companies in China that refuse to accept it, or if they do, fail to implement it. In these cases, Company Eight resorts to accepting only sight drafts or short payment terms that have less non-payment risk for export to these companies in China. In addition, Company Eight usually requires a 30 per cent deposit when exporting to China, with contracts being signed prior to shipment. As some other supply companies in Australia do not ask for upfront deposits for export contracts, Company Eight signs some contracts without collecting deposits. This brings the risk of non-payment, and on one occasion it had to resort to arbitration in Beijing City for payment. Nevertheless, since 1999 Company Eight has improved its agreements with its business partners in China in specific areas including technological understanding, quality claims, non-payment prevention, and arbitration in Beijing for contract disputes. Therefore, although L/C is sometimes used, the more convenient T/T has become more frequently used.

Business success factors and future plans

Company Eight believes that contracts are not weapons for punishment, but blue prints for projects. As contracts are tools for business frameworks, they need to be both fair and specific. At the micro level, clear specifications, terms and conditions are necessary. These are not just about prices, but also about quality and service. Inconsistency of data needs to be avoided and should include dispute resolution and arbitration clauses. In the case of disputes, court decisions must always be enforceable.

In dealing with companies in China, Company Eight insists that both sides need to understand and respect cultural differences. They need to have the ability to address difficult issues and be willing to work together, not just to work out purchases and sales. As a follow-up to ensure good performance is necessary, correct language translations and a good understanding of culture and expectations are very important.

Company Eight also believes that Australian companies need to go into China’s market with their own company level communication systems – not just use third party agents in the country. Australians need to be the principals who are in control, doing enough homework to understand how Chinese businesses, courts and arbitration systems work. They need to have enough trustworthy personal relationships, and if possible, have their own offices and hire their own staff in order to get into the local market, build up trust and have a good reputation. Although Company Eight did not have enough understanding of these issues before 1999, after building up business networks in China, reaching an understanding on contracts and performance, and finding ways to deal with problems, Company Eight has mainly contracted companies in China, despite maintaining its businesses in other countries, including Japan and India.

Analysis and summary

From its location in Victoria, Company Eight imports textiles, clothing and household goods from China, and exports wool and other commodities to China. With more than 30 years experience dealing with companies in China, this company has built good business connections through developing trust and cultural understanding that have led to strong supportive networks. This company has grown because it not only does trade, but also conducts business research and market development to develop its own business framework in the context of the import/export business with China.

One of the main problems that Company Eight has faced when dealing with some companies in China has been that some contracts have not been enforceable. Other problems have included poor management systems, delays in shipment, delays in receiving payments, different testing standards, quota requirements for exporting

wool to China, and communication problems. In solving these problems, Company Eight has developed a workable framework for import/export processing. As a result, its agreements in regard to specific technological understanding, quality claims, non-payment prevention, and arbitration for contract disputes have been improved. This company believes that contracts are work tools that provide clear specifications, terms and conditions. Furthermore, both parties need to understand their cultural differences and ensure correct language translations. Australian companies need to go into China’s market with their own communication systems at company levels, preferably setting up their own offices and hiring staff in China in order to build up trust and a good reputation.

6.4 Summary

This chapter has presented the case studies and within-case analysis of six manufacturing companies and two import/export companies that engage in merchandise trading with companies in China. The case studies mainly include background information, company objectives and achievements, manufacturing restructuring and outsourcing, business with China, results of outsourcing, business problems and solutions, and analysis and summary. The cases show in detail how each of the companies carries out its outsourcing to China. Each case delineates the relationship between the company and the problems and successes in its outsourcing.

The following chapter presents the findings of a cross-case analysis. It uses interview records and compares results from the questionnaire survey and interview records in order to find evidence to answer the research questions, verify the propositions and support the thesis arguments.

Chapter 7

Comparative analysis of cases (comprises questionnaire