Recently LearnChineseBusiness.com sat down for an interview with Brian Hager, an American entrepreneur based in Shanghai. Hager, who has many years of experience in sourcing and international trade, talked with us about how his new enterprise, TradeSparq, his new service that allows its users to integrate their own social networks into the supplier search verification process. Hager hopes to revolutionize how American buyers interact and do business with Chinese suppliers and factories.
Interview by Sean Upton-McLaughlin
So Brian, what is TradeSparq?
Basically, TradeSparq is a social network for global trade, with the product architecture and products of B2B marketplaces, like Alibaba, merged with the features of social networks. This merging allows buyers and suppliers to more efficiently find and match themselves to potential trade partners, making supplier verification all the more reliable. For example, if you go on Alibaba.com and you search for kitchen sinks, you might get 60,000 different search results for kitchen sinks and 2,000 potential suppliers to choose from. What the social network function of TradeSparq does is to allow you to do that same search while incorporating your existing social network into the process. So you can filter the search so that the results displayed first are those that you are connected to directly, or indirectly through someone else in your network. And TradeSparq is basically just on one single platform. We now have about 100,000 suppliers and over 1,000,000 products, and we did 3.4 million inquiries last year from overseas buyers to predominantly China-based suppliers.
Back to the example that I gave with the kitchen sinks, with 60,000 potential products and 2,000 suppliers. There is no way that a buyer in the USA can visit 2,000 factories in China. It’s not possible. So the buyer needs to find some way to narrow down that list to a smaller number of suppliers that he thinks can deliver the product that he wants. On a general directory site (similar to the yellow pages), that’s very difficult to do. But through TradeSparq’s integration of social networks, the buyer can more easily filter that list of suppliers. In addition to smoother information gathering, the buyer also has the opportunity to do some supplier verification – they can ask people in their network (who are connected to a particular supplier), “what’s this person’s quality like?” This type of supplier verification is not possible anywhere else on the Internet except for TradeSparq. Being able to reduce your risk by verifying a particular supplier through your network puts you ahead of the game in terms of trading securely and safely.
In regards to supplier verification, we have recently launched a new supplier ratings function. Now in a traditional Web 1.0 format with Yelp-style ratings, once a supplier or vendor is rated, everyone on the Internet can see that. But the problem that we previously had with that was that a lot of our buyers viewed the ratings they gave as proprietary information. Many buyers put a lot of time and effort into identifying and vetting reliable and high quality suppliers and don’t want to make that type of competitive advantage easily available to other companies. So although our users they did not want every other buyer on the Internet to be able to view suppliers that they have previously verified, at the same time they wanted to be able to share their ratings across their organizations and networks. So as a social network, we’ve developed a way for TradeSparq members to be able to share their ratings with just the people they want to share them with. Think of the circles function on Google+; you can parcel off a group of friends and share specific things with those friends. So this is what a social network is great at, and that’s what we allow our members (buyers and suppliers) to do. And this helps with the verification process as well.
What made you decide to found Tradesparq?
I previously worked as a senior executive at a B2B marketplace and media company called Global Sources. One of the things that struck me during my time with Global Sources, which involved visiting a lot of suppliers and buyers, was that there were still inefficiencies in how the buyers and suppliers could match up and form relationships. With the traditional Web 1.0 approach to this problem, which is basically a directory of names, the problem is that the buyers and suppliers aren’t able to get anything more than basic information from their potential trade partners – just basic information on the product and the company. Some of the most important information, such as the product quality, or the service quality, is very difficult to get, because that’s not listed in a traditional directory-type format and it can be hard to verify independently. And of course every single supplier or service provider is going to say that their quality and service are both excellent.
But trade revolves on trust, and a social network allows trust to form, or at the very least allow things to become more transparent. So while I was at Global Sources, my partner Michael and I began to see the rise of the social network, and we saw social networks could be very valuable in trade. So in 2010 we founded TradeSparq. We’ve found that there’s been a lot of interest in the differentiated and disruptive nature of our model from a variety of companies from Fortune 500’s to small trading companies.
Does Tradesparq help create relationships, Guanxi, with Chinese suppliers?
That’s a good question. I would say there are two levels or meanings of Guanxi. The first is when you know someone, or can obtain an introduction to a particular supplier, businessman or official. There is no doubt that for this type of Guanxi, TradeSparq is able to digitize it, show how you are connected to a particular person, make that connection visible, and makes it possible for you to take the next step toward getting introduced to that particular person or supplier.
A deeper and more powerful version of Guanxi, such as when you have strong connections to government officials and industry power players – that’s built over months and years of interfacing and talking with a particular individual. So while TradeSparq can provide the “who” that you should be talking to, the actual relationship with a company or individual needs to be personally developed.
Does being introduced through TradeSparq reduce the risk of being cheated?
First and foremost, I think that if you are buying from a factory that is fraudulent in their practices, and there are a million ways to get connected with that factory, then you haven’t done the proper due diligence. Now the way that Tradesparq reduces the risk behind that, is that you have already vetted a particular trade partner through someone you know, and preferably through someone you know well, who has maybe worked with the supplier in question in the past. Simply, TradeSparq’s supplier discovery and verification functions are both much more robust than other systems (e.g. Alibaba, Globalsources.com, Made-in-China.com) that are available to buyers.
Another function we are adding to Tradesparq is the ability to review customs data for specific buyers or suppliers. Now it will be possible for users to see the feedback received from their network along with data on the buyer and supplier activities with regard to imports and exports. So viewing the actual number of shipments received or sold by a company and how that tracks over time, will serve as an additional point of verification for our users.
I would also like to mention that there are actually a lot of Chinese companies that have been cheated by “so called” overseas buyers as well. For example, a Chinese factory might receive an order from an overseas buyer who pays maybe 30% or 50% on a product up front and refuses to pay the remaining amount after the product has been shipped. It’s well known within the industry that there are a lot of criminals that pose as overseas buyers to try and cheat manufacturers. And I think a lot of this actually goes under-reported in the western media. My personal impression of Chinese suppliers is that that the vast majority of them are honest, out to build their businesses and of course to make money. And so from that standpoint TradeSparq also functions as a way for Chinese suppliers to verify overseas buyers.
How easy was it to start your own business in China?
So obviously starting a business in China isn’t as easy as it would be in the United States. Things tend to be a lot slower and more expensive in China. We first had to set up a parent company in Hong Kong, which turned out to be very easy. Later on we needed to set up a wholly owned foreign enterprise (WOFE), and that’s usually about a four or five-month process. Some of the accounting can be a little bit problematic, but actually its quite easy to find a partner to help you with all of the accounting and reporting issues, and those are relatively inexpensive, say a couple thousand RMB per month, which is simple. And for any entrepreneur, if you view the actual starting of the business, the paperwork, and the hoops that you have to go through to start the business as a major obstacle, then you probably aren’t ready to start the business.
There were also issues with how the workforce and labor markets work differently, but through our previous experiences in China we were already prepared or that.
I would say that there are definitely drawbacks to starting a business in China, but there are also a lot of important elements to what’s happening in China right now which makes growing a business so much easier and simpler. Currently income levels are rising for most people in China at an amazing clip, and growing a business in that environment, as opposed to an environment where there might be 1% or half a percent of GDP growth in a year, it’s two totally different things. Some of the potential difficulties depend on industry as well, but in general there are a lot of reasons to start a business in China that have nothing to do with bureaucracy or filing paperwork, but actually have to do with the market, and those elements can’t be replicated anywhere else.
One interesting thing we faced was the attitude of Chinese people of: “Why are you starting a business in China? You’re a foreigner. You don’t know the Chinese market.” And this actually kind of bothers me a little bit. I think it’s true obviously that as a whole Chinese people are able to understand the market more than foreigners. But to say that foreign companies are not able to succeed in China is absolutely ridiculous.
So I might be sitting in a foreign restaurant with a potential business partner, with German, Japanese and American cars driving by outside, and stores for international brands everywhere. And initially it was a bit shocking to see potential Chinese partners or investors look at us and say “you’re a foreigner, you can’t succeed in this country, because you don’t understand the market.” And all while this guy is sipping on a Starbucks coffee or whatever.
Are foreigners always going to be viewed as outsiders by the Chinese, or can this be overcome?
So what you are talking about is basically: are the Chinese xenophobic? Well to first offer a comparison, from my previous experience in Japan, I know that in that country you’re always a foreigner. I think the Chinese are much more practical, much more welcoming, and I think they are less racist than other countries might be. I have personally heard of many success stories of foreigners who have started their careers or businesses in China and gone very far. The ability to speak the language can also serve as a great advantage because it allows you to understand things at a much deeper level, in terms of the culture, the country and in your relationships. The disadvantages a foreigner might face can become less and less the more fluent you become in the language and the culture. Maybe even then you might still have a small disadvantage, but I think it’s marginal. I think that as long as you are smart in your business, smart in your industry, you know what you’re doing, you’re good at what you do, then you’re going to prosper in China, just like you would anywhere.
Do you have any tips for foreigners on doing business in China?
1) Communicate clear expectations
Over-communicate to the point that everyone is very clear on everything. You shouldn’t walk into any situation, in China or anywhere else, and be disorganized, not know what your product specs are, and not know the industry. Because it doesn’t matter where you are sourcing from, if you are disorganized you’re just asking for issues later on down the road. When working with a Chinese vendor, you need to clearly state your requirements for the project or product. The Chinese are very good at driving product and services based on clear requirements. It’s part of the education and culture. But you have to be specific and make sure you communicate and repeat that information. And if those requirements aren’t met, then you need to pull the plug on the project.
2) Do your homework
When working with Chinese suppliers, do you homework, and don’t leave anything to chance. Get reports on the financial health of the company or supplier. Check as much data as you can. If you can, especially for large orders, visit the factory and watch what they are doing in the factory. When you are doing your test production, make sure that you have an inspection engineer on site that’s testing the product, and make sure that the product is ready, based on that report, for you to make the purchase.
3) Allow your suppliers/partners to profit
I think that the Chinese are very clever business people. And while you need to use your information to get the best deals, profit-wise you also need to leave something on the table for your suppliers. If the supplier isn’t profitable, later on they may decide that they don’t want to do business with you, which means you have to go back and find another supplier from scratch. An unprofitable supplier is also likely to cut corners, and you don’t want them to cut corners on your product. Now how do you know what the right balance is between the supplier being profitable and you meeting your goals? Well the price of the product in the marketplace is what it is, but if they are coming back to you and saying they cant make any money, and that’s legitimate, then you know you’ve cut it too thin. But the other side of that is that they are clever, suppliers are clever and they always want to make more money. So you need to get as many quotes as possible and as much data as possible to find out where the sweet spot is between quality and price, that will allow both your suppliers and you to profit.
4) Respect your employees
Most of the expats that come to Shanghai don’t speak Chinese, and if you are bilingual you can listen to the conversations on both sides, between the western managers and the Chinese workers, and you will often find that there are feelings of frustration on both sides. It’s very difficult for a regular Chinese worker to explain the inner workings of a problem in English at the foreign manager’s level so that he or she can understand. And I think there is a lot of resentment by the Chinese employees – “Why is this guy getting paid so much? Why does he have a car and a driver? Is my contribution to the company 1/20 of what his is? I’m the one battling in the trenches.” At the end of the day if you develop your team correctly in china, then the guys under you will be able to do a lot of your job, if you’re a foreigner. You may be good at setting strategy and what not, but you want those people to be able to do part of your job, because that makes the company more efficient, and it allows you to be able to move on to other things. I guess my point is that in China you have to be really careful with salary related issues, because there is a premium that companies tend to pay for foreigners, and a lot of times that premium may not be completely justified.