Inside Source: How the technology sausage is made in Hong Kong

The 2013 Hong Kong Electronics Fair (Autumn Edition) was held in early October on the small island off mainland China. Bringing together more than 4,000 exhibitors from 30 countries with importers and sourcing agents from suppliers, wholesalers and retailers around the globe, this Fair is the biggest of its type in the world.

As you walk around the labyrinthine convention centre housing the stalls, stands and booths, you see the full array of what Hong Kong trading agents and Chinese factories have to offer. There are the everyday electronics and appliances — toasters, kettles, mixers, blenders and juicers — many of which are eerily similar to models currently on the market from name brand vendors.

Then there are the emerging products — the fantastically different ideas that you’re never quite sure will become popular in a market like Australia: head massagers, waterproof speakers for the pool, an air conditioner for the head aimed at golfers and universal remote controls built into couch cushions.

This Fair provides a mix of the practical and the crazy, all under one enormous roof.

What sort of people attend these shows and what do they get out of them? Appliance Retailer joined three very different visitors to find out ‘how the sausage is made’ — it was an enlightening experience.

John* has been coming to Hong Kong shows for almost 20 years, starting before the handover from the British to the Chinese in 1997. He currently owns his own brand and has several retailers on his books, as well as some small export markets and the ability to OEM certain consumer electronics for other vendors.

John has a well-worked strategy for negotiating the show, which manages to fit a stand into every corridor, nook and stairwell of the Convention Centre: he only visits the main hall (the ‘Hall of Fame’), starting at one corner and briskly snaking his way past every booth.

To make it through the Hall of Fame in this manner in under a few hours, you must be swift and brutal: give no more than a sideways glance to irrelevant stands, dodge the booth touts who will overwhelm you with marketing collateral and, if you do stop to inspect and stand, dispense with the niceties.

Although John is not actively interested in striking a deal with an exhibitor to bring in a new line of products, he does keep a keen eye out for anything that might work in the local market.

He’s not interested in Bluetooth speakers (“Australians are only buying name brands”), headphones (“The market is too crowded and I don’t know any rappers”), digital radios (“that market has been destroyed”) or action cams (“you need a brand for that”).

What does catch his eye, however, are turntables: the ones that combine vinyl playback with recording to MP3 via a USB output. John says this will make for a good ‘event product’. This means you bring in a small shipment, sell it into a mass market retailer and then put it in a catalogue; preferably before Christmas, though not necessarily.

Essentially, turntables are not something he sees any long-term future in, but he does think that with the product and the right retail partner, everyone can make some money.

The price per unit of these turntables is US $12. John has a rudimentary equation to work out whether this product can be sourced, imported, sold to a retailer and then sold to an end user at a viable RRP. He starts by exchanging that cost into Australia dollars (*1.05 = AUD $12.60) and then he factors in warranty and shipping costs (*1.1 = AUD $13.86), plus the GST (*1.1 = AUD $15.25).

From this base cost, he needs to factor in his own margin and the retailer’s margin, giving him an RRP of around $50 — if it eventually sells for $40 there is still profit to spare. John takes down the details of the SKU he likes and collects a brochure from the supplier.

One of the biggest issues John faces when he is at these shows is accurate forward planning.

“You’ll see a product that you think will work in Australia but it will be a production sample — these shows are famous for prototypes — and when you start to ask questions, you find out a working model is months away.”

John is also wary of dealing with trading companies. Exhibitors at the show can loosely be broken down into two groups: factories and trading companies. The latter will have an arrangement with several factories to promote their wares and handle orders as a middleman.

John says you can tell which booths are trading companies because they will have a much wider range of products on show — sandwich presses next to hair dryers next to slow cookers — while a factory will normally have several varieties of the same appliances.

In addition to adding an extra layer of margin to the process, these trading companies deflect responsibility, John says, for quality control, warranty issues and timeliness. I ask what the advantages are to dealing with one, and he says they are good for small orders, as a factory only wants bulk purchasing, or if you want to bring in a variety of goods without being weighed down with red tape.

Trading companies can also be good if you are having trouble communicating with a factory. However, this problem is receding due to globalisation, according to Susan, a buyer from the United States.

Susan is the import sourcing and sales manager for a grocery retailer based on the West Coast — similar to Woolworths or Coles. In addition to its own branded stores, this retailer also provides sourcing and logistics for other retailers. In total, Susan is representing over 3,300 outlets at this Fair.

“I am here looking at smartphone and tablet accessories for the Christmas market; stuff you can put on the shelves near the check-out counter,” she says. “I need low logistics costs so I like small packaging so I fit more in a container, and I need to know the factory understands US regulations.”

Susan is insistent that she will only work directly with factories. She says middlemen are not timely enough and “just charge a commission and won’t step in if there is a problem”.

It has been a good show for Susan, who spotted several cases and Bluetooth accessories in the i-World hall, which is dedicated to the types of accessories and knock-off tablets she is interested in.

(John, the Australian importer, said the standard of clone tablets and smartphones is amazing: “they do really good ripoffs now”.)

Having found a product she liked from a factory she is prepared to deal with, Susan is hoping to get her accessories in US stores by Christmas.

“Good luck with that,” said a dismissive Thomas when I relayed this story later at the Fair.

Thomas is currently having difficulty negotiating with an air purifier manufacturer and he knows from past experience that there is no smooth sailing in this business.

Not as experienced as John or Susan, Thomas looks after product marketing and sales at an Australian company dealing primarily in small and medium appliances.

He already has one factory for his purifiers but he is interested in an attractive product being shown by a Shanghai-based factory. This is somewhat unusual for this industry, as nearly all seasonal appliances are manufactured in Shunde or Guangzhou.

The product Thomas likes has a multi-colour LED display — blue for clean air, red for dirty air — but the sensor that measures dust and allergens in the room is malfunctioning, much to everyone’s frustration.

Eventually Thomas becomes weary and departs the booth with around 20 different product fliers, each bearing a handwritten note of the unit price. Thomas says his system is to multiply this price by three to get the RRP, then he works out if the product will be saleable at that price.

The model he wants is US $70 but Thomas wants it for US $60.

“I give them too much information about me and about the market,” he laments, “they are excellent negotiators.”

I spend three hours walking the home appliances halls with Thomas. Unlike John, he has a very open mind to new products and new ideas. He is interested in Sous Vide and vacuum sealing, steam mops and table grills. But most of all, he wants to bring in a rival to Thermomix.

The real Thermomix is being sold person-to-person through the demonstration channel, and is being marketed under licence by a Perth company. With units selling for around $1,900, this is a market several suppliers are trying to crack, though it is hard to replicate the demonstration required at store level and avoid any patent or trademark infringement.

The first option is a European company that makes a unit similar to the Thermomix but it is very expensive; around US $500 per unit. In addition to this, the director of this company tells Thomas that company policy dictates he only sign with one supplier per territory, and other Australians have already visited him, though of course he won’t reveal who. This is an obvious and common tactic, Thomas says.

Thomas seems quite enamoured with this model despite his worries over the price, and agrees with the manufacturer that it is technically a better cooker than the Thermomix.

Next up is another supplier of home cookers. This gentleman is clearly in an agitated state and digresses from his normal sales pitch by sharing an anecdote about sourcing show politics.

“I will not be at the Canton Fair next week,” he says. “The organisers emailed me last night to cancel my stand.”

He says he paid US $20,000 for the stand and that he will not get it all back due to administration fees. I ask him why they have done this and he hints at rival manufacturers slipping money under the table to keep his products out of sight.

Regardless of this man’s misfortune, his product is not up to Thomas’ requirements, although the US $200 price does hold some appeal.

Finally, Thomas visits a third home cooker supplier, but he was too late.

“I would like to talk about your Thermomix product; what’s the unit price?” he asks the lady at the booth.

“No, you cannot have that product,” she replies.

“Why not?”

“Kogan has exclusive in Australia.”

Later that evening, Thomas is taken out to dinner by the Hong Kong-based executives of his humidifier factory in China. This is the company that already has his business, rivals to the earlier company that can’t get the sensor right.

It is a festive night with seemingly endless supply of amazing Chinese specialties. At the end of the evening, Thomas and his Hong Kong business partners toast each other and toast to a long relationship.

“The thing is,” he leans in and whispers in my ear, “when you get a good factory that you can trust, you stick with them forever.”

*Due to the sensitive nature of information in this article, names and companies have been disguised.

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