In part three of our China Series, Murray Painter, CEO of the Export Academy of New Zealand and GoGroup NZ, delivers some hands-on practical advice on exporting to China.
There is no doubt about it, the signing of the Free Trade Agreement (FTA) with China by Helen Clark’s Labour Government has provided a boom for New Zealand businesses.
Export trade to China has doubled between 2009 and 2014 since the agreement was signed.
Currently the Government is pushing to review the agreement to try and ramp up the benefits for New Zealand exports, particularly dairy which still has many products on tariffs.
As I’m involved in both export advisory and operational work I’ve also become heavily involved with China trade (both import and export). I’ve seen many success stories and business growth into what is really a myriad of Chinese market segments, rather than one single market.
Equally, I’ve seen as many unsuccessful stories and some of these are quite terminal.
The most worrying trend is that many of these examples are carbon copies of trade issues I’ve just dealt with.
The two main issues brought to my attention are:
- Lack of import knowledge by Chinese buyers and accordingly failure by New Zealand companies to do due diligence on that buyer or to limit the damage with subsequent orders.
- The growth of huge Free Trade Zones throughout different provinces that promise large volume sales, but the cost of meeting the terms and conditions are greater than any early returns.
The best way to illustrate this is to use real examples.
Trading outside a buyer’s normal channels
I was asked to assist with an enquiry for 300 pallets of apples (about 14 x 40-foot containers) for shipment. The Chinese buyer appeared quite knowledgeable about the product and the demand in China. The product was to be delivered deep into inland China. However, the buyer wanted it delivered by air!
With a little bit of research, we ascertained that the buyer is an import/export manager of an electrical engineering company. They wanted us to ship apples in November which means only last season’s apples (the peak harvest period usually runs March–June).
They also wanted the New Zealand party’s owners to go to China and sit down with the buyer’s owners, see the facilities, agree price and terms, sign an agreement for supply and then for shipments to commence. They also wanted other products like Manuka honey, wine, meat, infant formula, green lipped mussels and Pinus Radiata logs.
This is a typical example of the enquiries received on almost a weekly basis.
The intent may be real but the likelihood of this being successful is marginal. Why?
- An engineering company may know about importing but is unlikely to know about importing foodstuffs.
- Import permit and phytosanitary procedures are not in place in China.
- It is unlikely (although possible) that apples, which are always in demand, are held in stock in such volume in November.
- With a few questions the buyer seems unaware of INCOTERMS, which define an international trade deal. So each party is unclear on what their responsibilities are and who pays for what!
- Airports are not Chinese Government approved entry ports for fresh apples so the order could only go by sea.
Following the realisation of the competitive advantage New Zealand food and beverage items were given into China after the FTA came into force, many Chinese businesses and entrepreneurs in trade and local government saw an opportunity to exploit that advantage.
Some New Zealand companies were prepared to send the goods because they had received most of the payment and stated, well, “if it doesn’t get through official channels on arrival that is the buyer’s problem, we have done everything correctly”.
This attitude was fine for one-off sales but repeat business was unlikely.
This opportunistic “market” was also exacerbated by the tradition of inter-company gifts or the gifting of sought-after items like Manuka honey and fine wine to officialdom by business. This was a big and lucrative market also involving high end fashion items like watches.
In more recent times the Chinese Government has firmly discouraged the practice and sales into this market channel have dropped dramatically.
The Free Trade Zone or World Food City concept
I have in my office a very professional DVD of a World Food City being built in a large province of China. It commenced construction in 2013.
There are several of these hubs springing up throughout China. They vary in processes but basically are hub centres for (usually) food and beverages which are held in volume in warehouses under bond (no duty payable) and displayed in huge exhibition sites to which buyers and agents visit and set up purchasing contracts for distribution of imported lines throughout China.
Of course, under the China-NZ FTA most of our products are duty free, so why use a Free Trade Zone for under bond purposes?
By the time I was involved in this deal, the exporter had visited the centre’s promoters twice, had sent several thousands of dollars worth of products as samples for approval, and had drawn up a contract for supply which involved delivering the goods DAP (delivered into the Free Trade Zone) and receiving payment 60 days after arrival of the goods.
Details of the proposals reveal a need to rent space in the Food City and arrange consignment stock into the bonded warehouses, or make a sale with impossibly long payment terms for food and beverage products.
Two years down the track and the first decent sale has not eventuated. The exporter has run out of money and can’t even pay his local bills.
Too often we are called in as the ambulance at the bottom of the cliff and it is just too late.
Have a go but be wary!
I would certainly not recommend that a new exporter’s first export order should go to China. A market which is more akin to New Zealand (i.e. Australia) would be better to ‘cut your teeth’ on.
Many marketing experts advise not to start trading with China until you have visited the market on multiple occasions.
I agree. If you have a marketing plan for a specific channel of business into China then visit the market regularly and establish working relationships with buyers. However, there is certainly nothing wrong with concluding an initial shipment remotely and spending time and effort making sure that you have the basics correct:
- Incoterms – be very clear on the terms of sale. For initial orders CFR (Cost and Freight) is ideal).
- Payment Terms – offer no credit for initial orders. If you are importing from China, you will know that the payment terms are usually deposit on placing order and balance before shipment. There is no reason that cannot work for New Zealand exports too.
- Customs, Health and Phytosanitary requirements – make sure your processes are approved by NZ Customs and Ministry of Primary Industries and are suitable for Chinese requirements.
- Label approvals and import permits – ask the questions of the buyer, are these in place?
- Export documentation must be correct and in the prescribed format to be entered with FTA preference.
- An initial shipment (say a container load) will be a test on your buyer to demonstrate that they have all their “ducks in a row” in China to allow smooth entry of your product.
There is no real need, in my opinion, to commit to a visit to the market prior to the first order being shipped and imported.
Chinese buyers will tell you they prefer to do business face to face; however, they are the largest online buyers in the world and there are very few companies who will send their owners to New Zealand for the first couple of orders they export here – those will certainly all be concluded by email.
There is plenty of help available to you if you are thinking of exporting to China.
New Zealand Trade and Enterprise have a recommended group of China Business Trainers,
Freight Forwarders and Customs Brokers are a reliable source of knowledge on international logistics and there are several export mentors and advisors available nationally.