3. Research Methodology
3.1. Most frequent Risks: Online survey
The online survey method was chosen because the quality of the responses in online surveys can be the same as paper-based surveys (Gordon and McNew, 2008) and, with the advent of social networks, it is easier to reach many people from around the world than other methods, which in result made the scope of the research broader (Vasconcellos and Guedes, 2007; Wright, 2005). Other reasons include the availability of online lists of
companies/communities and forums of the sample population of the study (individual from companies that outsource manufacturing activities to China), low cost, easy tabulation and formatting of the questionnaire.
The questionnaire was composed based on the literature review presented in the last chapter and was written using the software Google Docs. A copy is available at the appendix of this research. The questionnaire was separated in two parts:
1- The first part is designed to measure what is the frequency of each risk presented (total of 13 sourcing risks of China, taken from the literature and often quoted as frequent when doing business in China), in accordance to the perception of the survey participants.
The use of five point Likert scale was chosen to measure the frequency, in which 1
21 represented “Never” (meaning the variable never occurred) and 5 represented “Very
frequently”.
2- The second part was designed to measure the profile of the professionals that outsource to Mainland China, including their industry/area of occupation, type of outsourcing (based on Nassimbeni & Sartor ,2006), location of their outsourced company in China, their company’s country of origin, company’s size (by number of employees) and an email for contact.
The criteria to classify the size of the companies were taken from SEBRAE –BR (Serviço Brasileiro de Apoio às Micro e Pequenas Empresas) (2013):
Table 3.1
Criteria for company size classification from SEBRAE Classification number of
employees
Using the results from the survey, the research presented the most frequent risks of sourcing in China, and made a few comparisons between the perception of companies of different industries, sizes, sourcing method and of Chinese partners of diverse locations.
The survey was mostly conducted in website “Linkedin”(www.linkedin.com), which is aimed at providing connections between professionals and it was believed to be best suited for this research, because would allow professionals in China to participate (Linkedin does not have its access blocked in China, whereas other social media such as Facebook are).
Other methods of online survey were also attempted (sending the questionnaire to prospected
22 participants, publishing it in forums and websites about the subject) but were not as
successful, as most of the replies were received from the online questionnaire was sent through the social network Linkedin, through international communities of professionals that were associated with and participated in communities about in doing business with Chinese companies.
A topic of discussion was created in these communities urging its participants to answer the questionnaire about the frequency of the risks of sourcing in China. The questionnaire was also presented in 2 business online forums.
Table 3.2
Communities and website in which the survey was published Linkedin Community
Analista de Comércio Exterior China Guanxi Network China Import & Export China Law Blog
China Sourcing Forum China Trade Group Comércio Exterior BR Global Sourcing
Import - Export / Global Trading Group Profissionais Brasileiros na China Sino-Brazilian Studies (SBS) Sourcing Forum
The China Sourcing Information Center Online forums
Global Risk Community Alibaba Buyer Forum
23 3.2. The most Important Risks Of Sourcing In China And The Management Tools To Mitigate it
The in-depth interview method for studying the most important risks was chosen because of the availability of the participants for interview and was a suitable approach to understand how the managers view and mitigate sourcing risk from China.
The in-depth in person interviews were conducted with 2 Brazilian managers that worked with sourcing in China, from different backgrounds and years of experience in China.
The reason for choosing Brazilian professionals was convenience and their willingness of the participants, as well as their experience in sourcing from China. The interviews were made in persona and conducted in Foshan, China, between 15/04/2013 until 25/04/2013.
The interview were semi-structured, which they were asked: “which are the most important risks that new companies that want to source in China need to be aware of?”, and discussion of which of the risks from sourcing in China are the most important, according to their opinion and experience. The risks presented were the same as the questionnaire about risk frequency.
The first person interviewed (A) was a business owner in the construction business, specialized in welding machinery and has sourced products and parts from China since 2006.
His company is a retailer as well as a manufacturer of machines in Brasil.
The second interviewee (B) was a sourcing consulter that has worked in the
construction sector but with focus on polycarbonate and aluminum plates for building facades.
His company has sourced diverse products from China for seven years (as of 2013) and has planned to join a Chinese partner to start building a factory together in Brazil.
24 The results were then compared with commentary received during the survey on the frequency of the risks, in order to validate the opinions received and create a basis for comparison.
25 Chapter 4. Research Results
4.1. Risks of Sourcing In China
The research started responses in February 1st of 2013, when the first topic was created in Linkedin, and finished in June 1st, 2013. Altogether, 36 professionals answered the questionnaire and 30 total comments were left in the Linkedin communities, discussing the topics of risks of sourcing in China.
These participants were mostly from Brasil (19) and the USA (11), while 3 respondents were from China and 3 from other countries (France, United Kingdom and Canada).
In terms of demographic characteristics, 28 different industries were part of the research, including four from the automotive sector, two import agents, two from the furniture sector and two from the stationery sector. 24 companies classified their sourcing type as direct purchasing, and nine respondents indicated the use of intermediaries in their sourcing activity, while three informed that they had direct investment and partnership in China (WFOE / JV). Regarding the size of the companies in the survey, three were classified as Big (over 500 employees), 10 as of Medium size (from 100 to 499 employees), 13 as Micro business (up to 19 employees) and nine as Small (from 20 to 99 employees)..
Regarding the location of its sourcing partner in China, 11 locations were mentioned overall (most cited were Shanghai (9 mentions), Ningbo, Shenzhen, Shandong, Jiansu, Shanxi and Guangdong (2 mentions each)), while 11 respondents did not specify which places they source from (8 indicated various unspecified locations and 3 respondents left this in blank). 17 respondents replied that they only sourced from 1 specific location
(Beijing,Ganzhou, Guangdong, Hebei, Hunan, Jiangsu, Jiujiang, Ningbo, Shanghai, Sichuan) and 15 mentioned various sourcing locations in China.
26 In the online survey, the respondents were asked to rank each of 13 diffenre risks of sourcing in China on a five point Likert scale the frequency of the problem of sourcing from China in which 1 stood for “Never” and 5 for “Very frequently”. In the figure, the average mean frequency of each risk was calculated and rank the risks from the most frequent (higher average)to the least frequent (lower average). Table 4.1. shows the statistical summary of the research findings.
Figure 4.1. Mean frequency per sourcing risk, from most frequent (bigger average) to least, according to survey findings.
Analysin the data, the risks that were considered more frequent (avarege higher than three) were “13. Constant delays on the delivery time”; “2.Supplier failed to meet quality requirements/standards, due to lack of capabilities”; ” 11. Quality fade: loss of product quality over time”; and “9. Risk associated with social stability, and social, cultural language, and customs differences between organization and vendor/supplier”.
0,00 0,50 1,00 1,50 2,00 2,50 3,00 3,50 4,00
27 The least frequent (whose avarege was less than two) risks were “12. Fraud: the sourced supplier does not deliver or does not exist” and “3. Company's Staff start to be unmotivated or fearful of layoffs, because of outsourcing activities”.
All the other risks were considered to be of intermediary frequency (average between 2 and 3).
28 In the next sections, the results were used to compare the perception of risk of
companies with different backgrounds, in order to achieve more insight on the subject.
4.1.1. Comparison of the risk frequency by different industries
The data was analyzed using the One-way Anova method, in order to compare the average means of different types of industries and to assess if there is any major important difference in the view of respondents from each industry.
Of the total 36 sample, 28 different industries were mentioned in the survey, which were then separated in 4 different groups for its analysis as the sample of the individual industries were too small. The different groups were classified based on the following assumptions:
Agents (n = 10): import agents, or sub-contracting agent, or any other service providers and intermediaries related to sourcing.
Distributors/ retailers (n = 9): who purchase finished products to be commercialized in their countries
Manufacturers (n = 14): respondents that were sourcing for industrial parts and materials or its production output from China;
Others (n = 3): other whose industries that could not be identified and classified
accuratly Table 4.2
Number of respondents per industry
Industry Number of
respondents
Agents 10
Distributors/ retailers 9 Manufacturers 14
Others 3
29 The results of the ANOVA test showed that only two types of risk presented barely significant difference depending on the type of industry: 8. Changes in market conditions make sourcing not beneficial (Sig =0.104) and 12. Fraud: the sourced supplier does not deliver or does not exist (Sig = 0.002). The other risks did not present significant mean difference between different industries (Sig >0 .10).
Analyzing the post hoc Tukey test (shown in the table 4.3.) of the risks with
significant difference and ignoring the risks without significant mean difference, for risk 8, the main difference was between the means of agents and distributors/retailers (Sig = 0.098), while for risk 12, the main differences were in the mean of by agents and the other types of industries.
It can be argued that, as agents act as an intermediary for other parties, they are more vulnerable to market changes, as they could lose their clients in both ways: Chinese sourcing company and the Western client company. Likewise, because of the nature of their operations, they must evaluate and consult with more Chinese companies to present to its Western clients, thus they could be more likely to encounter fraudulent companies and should be more likely to identify false companies, therefore, in their perception, they would be more prone to encounter these risks.
30 Table 4.3.
Post Hoc Tukey HSD Comparison of the risks with significant results between different industries
8. Changes in market conditions make sourcing not beneficial Mean 12. Fraud: the sourced supplier does not deliver or does not exist
Mean
Note: not significant results were omitted.
31
4.1.2. Type of sourcing
The data was tested using the One-way Anova method, in order to compare the average means of different types of sourcing and identify any major important difference in the view of respondents from each type of sourcing methodology. The typology used to define the different types of sourcing came from Nassimbeni and Sartor (2006).
Table 4.4.
Number of respondents per sourcing type
Sourcing type Number of
respondents Direct investment and
partnership in China (WFOE / JV)
3 Direct purchasing 24 Use of intermediaries
(trading/ consulting company)
9
The results of the ANOVA test showed that only two types of risks had significant difference between types of sourcing: 3. Company's Staff start to be unmotivated or fearful of layoffs, because of outsourcing activities (Sig = 0.028) and 6. Leakage of confidential
information due to openness and information exchange (Sig =0.005). The other risks did not present significant difference between types of sourcing (Sig >0.10).
32 Table 4.5.
Post Hoc Tukey HSD Comparison of the types of the risks with significant results based on their sourcing type
3. Company's Staff start to be unmotived or fearful of layoffs, because of outsourcing activities of the risks with significant results
Mean Difference Std.
Error Sig.
Direct purchasing Direct investment and
partnership in China (WFOE / JV)
partnership in China (WFOE / JV)
-1.111 .553 .126
6. Leakage of confidential information due to openness and information exchange Mean Difference Std.
Error Sig.
Direct purchasing Direct investment and
partnership in China (WFOE / JV)
partnership in China (WFOE / JV)
-3.111* .883 .004
* p < 0.05
33 Analyzing post hoc Tukey test (shown in the table 4.5.) of the risks with significant difference and ignoring the risks without significant results, for risk 3, the main difference was between the companies that had direct investment and direct purchasing (Sig = 0.023).
This is consistent with the logic that workers from companies that have direct investments in other countries should be more worried about their job situation, as this investment indicated that there is a possibility of the company outsourcing its activities overseas and cutting domestic operations, thus this problem would appear more frequently. Companies that only purchase directly would have less fearful workforce, as no investment could mean that intrinsic operations or activities are not being taken over to other countries.
For Risk 6, the difference was mainly from the results of direct investment. This result was consistent as companies with direct investment sourcing would have to share with more information about its operations methods and knowledge than other companies that only use intermediaries or do direct purchase thus have more chances of its confidential information being leaked. The use of intermediaries would lower the occurrence of this risk, according to the data.
4.1.3. Size of the company
The data was tested using the One-way Anova method, in order to compare the average means responses of companies of different sizes and its effect on the risk frequency.
The ANOVA test results showed the risks did not present significant difference between industries (Sig > 0.10), which is disappointing as it was expected some kind of difference in the results. This result can be attributed to the low sample.
34 Table 4.6.
Number of respondents per size
Size Number of
respondents Big (over 500 employees) + Medium (from 100 to 499
employees) 14
Small (from 20 to 99 employees) 9
Micro (up to 19 employees) 13
4.1.4. Suppliers from Inner China vs. Suppliers from the Coast
Of the total 36 sample, the survey received 25 valid replies regarding the sourcing supplier location in China (4 blank, 7 responses did not specify the location). The results were them sorted by their position in China, if they were located in located at coast or were at Interior China, based on the provinces they were located on:
Table 4.7.
Number of respondents per sourcing partner (s) location in China
Location of the sourcing activity Number of
respondents Located at the Coast (Shanghai, Shenzhen, Anhui, Jiangsu,
Guangdong, Shandong, Zhejiang, Shaanxi, Ganzhou, Ningbo, Hebei)
20
Located at the Interior of China (Hunan, Sichuan, Jiujiang) 3 Both in Interior China and at the Coast (Zhejiang, Jiangsu, Hebei, Shanxi / Shanxi, Inner Mongolia, Hebei, Liaoning, Shandong)
2
This result is conformity and expected, as coastal areas receive more foreign direct investment, are more developed and more open to foreign companies, so more companies would find more partners there (Wei, Liu, Wang, & Wang, 2012). Because of the low amount of replies, it was advised not to run an ANOVA analysis and only a normal comparison of their average means:
35 Table 4.8.
Average mean frequency per sourcing risk & location
Risk At the
Coast
At the
Interior Both 1. Extras costs that arose during
production
3.07 3.50 3.00 2.Supplier failed to meet quality
requirements/standards, due to lack of capabilities
3.21 3.00 4.00
3. Company's Staff start to be unmotivated or fearful of layoffs, because of outsourcing activities
1.93 2.50 1.50
4. Bad contract terms that led to future problems and difficulties
2.14 5.00 2.50 5. Entering into a long-term contract
with suppliers that diminish the company's flexibility
2.36 2.00 1.00
6. Leakage of confidential information due to openness and information exchange
2.64 5.00 2.50
7. Transferring control of resources to supplier, which become hard to reverse back when relationship ceases
2.71 4.50 1.50
8. Changes in market conditions make sourcing not beneficial
2.36 2.50 2.00 9. Risk associated with social
stability, and social, cultural language, and customs differences between organization and vendor/supplier
2.93 4.50 3.00
10. Chinese government laws and regulations that are to comply with
2.21 1.50 3.00 11. Quality fade: loss of product
quality over time
2.71 3.00 3.00 12. Fraud: the sourced supplier does
not deliver or does not exist
2.29 1.00 1.00 13. Constant delays on the delivery
time
3.29 4.00 4.00 Total Average Mean per Location 2.60 3.23 2.46
The results showed in table 4.8. that companies with Chinese sourcing partners located at the interior of China had a higher perception of risk (total average mean = 3.23),
36 which is consistent with the literature (Wei et al, 2012), that indicated that inland regions of china have less developed infrastructures and economy than coastal areas, thus can be concluded that companies sourcing there are more prone to encounter risks, though the sample is very small and not conclusive.
4.1.4. Multiple locations vs. single location.
Of the total 36 sample, the survey received 32 valid replies (4 blank) regarding the location of their sourcing activity, in which 15 respondents informed that they had sourcing activities from multiple location, while 17 respondents mentioned single locations (ranging from Shanghai(x6), Sichuan, Ningbo(x2), Hunan, Ganzhou, Guangdong, Jiansu, Jiujiang, Beijing, Zhejiang, Hebei).
The data was then tested using the One-way Anova method, in order to compare the average means difference of supplier location quantity, and identify any major difference in the risks based on the number of sourcing suppliers.
The results show that only two risks present real difference between companies that sourced from only 1 region from China and companies that sourced from different and multiple regions: 8. Changes in market conditions make sourcing not beneficial (Sig = 0.03)
& 11. Quality fade: loss of product quality over time (Sig = 0.084). The other risks did not
37 present significant difference and between different variables (Sig > 0.10) and were omitted from table 4.10.
Table 4.10.
Summary of ANOVA per risk based on sourcing location – only the significant results
8. Changes in market conditions make sourcing not beneficial
11. Quality fade: loss of product quality over time
From the results shown in table 4.10., multiple sourcing locations present more chances of problems, and risks are more frequent, in regarding market conditions (e.g. more places where the economy could change or that the environment turns negatively) and the problem of the quality fade. However, overall there is no significant difference in the results of companies that source from only one location as compared to multiple locations, which is consistent with the findings from Blome and Henke (2009), that argue that there is no
evidence that indicates with certainty that single sourcing or multiple sourcing creates higher risk.
38 4.2. The Most Important Risks of Sourcing from China
The interviews were conducted semi-structured, where it was asked the following questions to the respondents:
Which are the most important problems of sourcing from China that companies need to be aware of, the ones that have more impact on the company?
How does your company manage and minimize these risks?
What is your view of sourcing in China?
Afterwards, they were asked to comment which are the most important risks based on the online questionnaire about risks frequency.
The first interviewed manager (A) was a CEO of a company in Brazil that has been sourcing from China for over 12 years, mainly directly purchasing of spare parts and finished products for the welding industry and machinery, and once with a trading agent. Its company has over 100 employees. Its suppliers come from many locations in China.
Overall, his opinion on present-day China’s infrastructure is very positive; and comments that 10 years ago doing business in China was a lot more unsafe, probably 30%
higher risk.
Here is a list of the main risks with sourcing in China:
When using a trading company (an intermediary to broke its business), the costs
are usually higher, as they can monopolize the prices and change suppliers without the knowledge of the sourcing company – which in result leads to poor quality and
are usually higher, as they can monopolize the prices and change suppliers without the knowledge of the sourcing company – which in result leads to poor quality and