Securing profits when sourcing from China

HOW A HONG KONG STRUCTURE CAN HELP FOREIGN SOURCING OPERATIONS MINIMISE RISK AND MAXIMISE PROFITS.

As many foreign companies continue to source from China via Hong Kong (HK), it is worthwhile to take a closer look as to why this model enjoys ongoing popularity and how to implement an efficient set-up. There are many good reasons for companies to manage their supply chain from HK: a good infrastructure, a legal framework based on British law, a transparent and efficient banking system, fair taxation, a fully convertible currency and a qualified workforce. But with all these advantages come the downsides of high office rental prices, increased salaries and rising material and production costs across the board. So how does the HK sourcing model remain competitive?

No storage costs and less financial risk

The option of selling goods ‘Free On Board' (FOB) from China has become a huge success factor for foreign companies that have set up shop in HK. The big retailers in US & Europe who are a major customer group of many toy, textile and hard goods trading companies are increasingly
asking for this option which also helps the traders avoid many of the former risks associated with selling big numbers of merchandise. By opening a letter of credit to the HK Limited Company which is then passed on to the China supplier, the danger of non-payment by the customer can be easily eliminated. This has particular significance if the order is customised specifically according to the customer's needs: special brand name, colour, functionality or simply the packaging make it impossible to sell goods to another customer. Apart from smaller financial risks, the cost of logistics and expensive storing �which often make up 3-5% of a transaction �can be saved. Thus, direct FOB business leads to a faster time to market and to lower prices both of which can boost competitiveness in times of rising sourcing costs throughout the region.

HK Limited Company as a black box

Sourcing operations in HK that serve European and American customers often need to walk a tightrope to meet demands. With product life cycles getting shorter and disloyal customers merely looking at the price tag, these customers might try doing direct business with the respective Chinese
suppliers. Therefore, many buyers have found it very useful that by channelling business via a HK company the risk of disclosing their Chinese suppliers can be avoided. When the final goods are shipped, all related documents, labels, addresses and other hints are rewritten in HK so that customers as well as suppliers only know the HK Limited Company, but do not know each other.

Streamlining sourcing operations

Outsourcing the functions of order processing, re-invoicing and logistics arrangements proves to be an additional factor that can streamline operations. As many goods are seasonal, a lot of buyers don't require full time staff. They work with service companies that efficiently handle the administrative side of the business according to the often cyclical demands. Additionally, this separation of important functions provides a second set of eyes that controls payment streams and reduces the risks that are often associated with China sourcing: unclear money streams, shady book- keeping practices and bribery.

If you are interested in incorporation-related topics in HK, please contact at info@fiducia-china.com.

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