The first clue that told me we were arriving at our destination was the fleet of worn-out vehicles driving past like a single-file caravan of ants without interruption.  The second cluetwo dozen young men lingering outside a factory, some squatting and others pacing, holding a cigarette in one hand and thumbing their cell phone with the otherindicated we had arrived. They are a fraternity of middlemen found throughout China, aggregating orders for masks from all over the world, whereas many as seven layers of brokers negotiate prices. As COVID-19 resurges in the United States and around the world, several healthcare systems are still short of personal protective equipment (PPE) for health workers and the general public, and the scramble for masks is still very much alive.

 

Steps for procuring masks

The playbook to acquire masks is fairly straightforward but laden with pitfalls. For starters, customers or their buying agents must be willing to provide a purchase order and a proof of funds letter from a bank. These documents demonstrate serious buying intent, without which most factories will not even want to take your phone call, let alone provide a price quote.

With these documents in hand, the next move is to fan out across a broad network of agents with contacts at dozens of factories. Their task is to not only find the lowest cost producer, but also a reputable company that does not issue fake  certifications, deal in counterfeit products, and is in good standing with the local authorities. To provide a sense of how difficult that task is, consider that since the beginning of 2020 over 38,000 firms have registered to make or trade in masks compared to just over 8,500 that produced PPE last year.

Within an hour of receiving an order, agents relay back indicative prices. These estimates are merely a snapshot in time and will likely change once an order is official. Prices are accompanied by a production run and a delivery schedule.  For a 10 million KN95 mask order, a factory can provide 1 to 2 million masks a day for a week until the order is complete.  Delivery occurs within 48 hours of final payment. And as part of the information request, factories will provide full documentation including their business license, export certificates, copies of Food and Drug Administration (FDA) certifications for the United States or “CE” certifications for the European Union, test results, and photos and videos of the product. This information packet allows for product verification on the United States’ FDA and CDC websites  as well as China’s National Medical Products Administration database.

 

Leverage local partners

Once price quotes, production runs, and schedules are made available, a trading company steps into the fold. These firms sit in the middle, between the manufacturer on one side and the customer on the other, coordinate product pickup from various factories, and collate documentation for customs. Partnering with a trading company provides an added layer of protection. First, the firm can provide an escrow account into which client funds are wired to, a preferable option for customers as it is not advisable to send money directly to the manufacturer. Furthermore, a trading company has access to databases that can discover if a manufacturer is out of compliance with local rules.  For this particular 10 million mask order, two factories that had been selected and had passed a due diligence review had to be ditched. Why? The trading company discovered possible tax issues and pending lawsuits.  Fortunately, with the help of local partners, alternate manufacturers can be identified and vetted within a few hours.

 

Customers need to decide quickly – buy or don’t buy

With price quotes, delivery schedules, a due diligence package in hand, and a sales contract drafted by the trading company, the client has 24 hours to “fill or kill” the order.  In this free-for-all marketplace, customers must decide at breakneck speed or else new bids nudge prices upward and supply evaporates. If instant decisionmaking leaves customers light-headed, it is the harsh payment terms that cause  deep-seated anguisha wire transfer for 50 percent down payment to reserve a production slot and 50 percent final payment before goods leave the factory floorforces many to bow out of the game. In a previous article, we argued that buyers in the United States need to accept that it is a seller’s market and recalibrate their expectations.

Brave souls who effect a wire transfer are rewarded with a production schedule.  But other details, such as shipping rates and transit routes, need to be settled. Even when close to the finish line, unexpected events such as a government order for masks that hits the factory floor will immediately cut to the front of the production line, delaying all other orders, much to the chagrin of customers anxiously awaiting their goods. There is also the inevitable logjam at customs as officials meticulously inspect cargo that frays customers’ nerves.

Unexpected regulations can unravel everything

Yet, as cumbersome as these steps may be, the one area that can completely unravel the  process is the ever-shifting regulatory landscape.  In mid-April, China’s Ministry of Commerce announced “window guidance” that PPE products not intended for medical use had to remove any label that referred to a medical standard or organization such as FDA or CE certifications. Factories that did not switch to neutral labeling found their shipment stuck at customs. This announcement came on the heels of a previous regulation at the end of March banning exports unless a manufacturer had a domestic license. Most recently, yet another rule was introduced that requires a joint declaration signed by both the factory and the importing client that the products are not being imported for medical use. This document removes the channel where companies and importers were declaring products as non-medical use and then turning around and using them for medical purposes only for the end-customer to reject them.

While these circumstances make a Black Friday sale in the United States seem tame by comparison, part of the chaos is self-imposed by buyers, as they wait until the last possible moment to place an order, resulting in fire drills from a rushed schedule. But it does not have to be that way. Careful planning of delivery schedules, relying on air freight to deliver product at the beginning, but then transitioning to shipping by sea, results in a lower cost of transport.  This facilitates a sustainable logistical model that is conducive for a consistent and cost-effective flow of goods.

 

Joel A. Gallo is the CEO of Columbia China League Business Advisory Co. a Guangzhou-based management consulting firm, and a former executive at Deloitte, E&Y, PwC, and EMC Corp.

Cameron Johnson is a Partner at Tidalwave Solutions, a Shanghai-based management consulting firm, a former executive at a leading global carbon fiber manufacturer, and Vice-Chair of the Manufacturers Business Council at AmCham Shanghai. 

Posted by Joel A. Gallo and Cameron Johnson