Expert opinions, STARTUPS

Watch out! Challenges of doing business with Chinese partners

Numerous Chinese-made products are sold in Russia under Russian brands; sellers do not bother with improving the products but simply change the logo. This approach is often unproductive. Vladimir Borovoi, founder of the Russian brand of electric scooters Halten, shares the secrets of working with Chinese partners.

Selling Chinese-made scooters

I received my first engineering degree at the Belarusian National Technical University, specializing in electric power plants, grids and systems. In 2014, I received an MBA degree in innovative and project management at the Russian Presidential Academy of National Economy and Public Administration. In 2002-2004, I worked in readership positions in major Russian and foreign companies in the electric energy sector. I was in charge of overseeing the organization of large investment projects in smart energy. I was quite familiar with engineering and electronics and wanted to develop my own business in this area. I started with investing RUR 500K to open a hoverboard shop in 2014. We received them from China, but we knew that without special control, we will be supplied short-life products. So we developed and introduced a quality control system: ensured the compliance with all requirements, introduced a practice of controlling the production processes at Chinese factories, involved local experts, created our own technical enquiries, and organized inspections at factories by Russian engineers.

With time we understood that hoverboards were only a toy and would soon be out of fashion. And sure enough, a couple of years later, in 2017, the sales went down. However, we noted the growing popularity of electric scooters and launched the Halten brand. After registering the brand, we purchased the first batch for RUR 25 mio, to which end we got a bank loan for RUR 15 mio, and took the rest from the revenue of the hoverboard business.

Having learned to sell hoverboards, we knew that Chinese manufacturers produced low-quality junctions and parts, which lead to 15%-30% throw-outs. We needed to fix that.

Common problems

The most common challenges in working with Chinese plants are related to product quality. We receive products that do not comply with the specifications and many faults are revealed during the use. Producers in China can even replace the materials and parts with cheaper ones, and the selling company receives complaints.

Once there was a case when Chinese manufacturers replaced some elements the night after the inspection, and we saw that the scooters did not comply with the requirements only during tests in Russia. Naturally, we terminate all agreements with such contractors immediately. After that situation we developed a process of interaction and outlined the responsibility of suppliers and assemblers for unscrupulous work. If the Chinese partner fails to fulfill their obligations, the contract is terminated.

Another problem is personnel. The issue is not specific to Chinese workers, but is rather a standard situation for any country including Russia. There have been cases of theft, incompetence and delivery mistakes. There have also been challenges with lack of working capital. Once I had to pawn my own car and sell my belongings to pay for the delivery.

How to avoid Chinese manufacturers’ mistakes

We began re-engineering Chinese models from the very beginning of working under the brand Halten and then moved on to the joint development of new models with Chinese companies. Everyone who works with Chinese partners should know that the result will not be ideal, so I recommend the following:

 1. Look for the weak spots of Chinese products and develop your own solutions.

For instance, a common problem with Chinese-made motorized scooters is the poor waterproofing of the hub motor. Due to the vulnerability to water, dirt and sand, their scooters last only one season. To deal with this issue, we equip our hub motors with bearings and hermetic seals that protect them from water and dirt. We also install batteries with a charge monitoring and balancing system. This allows us to extend battery life twofold. For this end, we launched a development department in 2018 to create our own technological solutions for scooters in the current realities in Russia. Currently, the company has two laboratories, one for electric motors and another for power electronics and software.

 2. Controlling the quality of components supplied by China as well as production process at enterprises.

Unannounced inspections allow our engineers to detect technological disturbances during production of components at China-based enterprises, so we can make proper adjustments to the manufacturing process and achieve acceptable quality of parts and components.

 3. Creating a system to control the acceptance of products from Chinese partners.

The less attention paid to quality monitoring, the higher the risk of receiving a faulty product. To minimize these risks, we have developed and implemented a three-stage system for product quality control. All components are checked and tested at the factory located in China. Upon receiving each batch at the warehouse in Moscow, we randomly examine the quality of electric scooters assembly as well as the compliance of components with stated specifications. This allows us to detect possible faults in devices and get the idea of how they could be improved. The third stage involves field tests, with scooters traveling a distance of about 1,000 km to help us detect failures that can only be found while in operation. Due to this system, out product defect rate stands at only 4%, several times less than that of most Chinese manufacturers.

 4. Gradually abandoning Chinese-manufactured components.

During the product development stage, it is difficult to allocate large investments in creating a unique basis for the product. Initially you can limit yourself to your own specific developments and strict assembly control. Eventually, this becomes insufficient, and you can consider reducing dependency on Chinese products. For instance, our current task is to build a fully domestically manufactured scooter – that is, a 100% our own solution developed from scratch, not a reengineered model based on a Chinese-made scooter.

By early 2022, we created our own platform which includes a battery with a multistage protection system, a motorized wheel with enhanced torque drive, and a controller. This platform is the “heart and brain” of the scooter that determines its technical characteristics. The platform helped us increase scooter range from 70 to 120 km on a single charge, while the motorized wheel became more powerful, with enhanced torque. The charging time has reduced tenfold: it takes only 2 or 3 hours to charge our off-road model with a range of 120 km, making it drastically different from similar-capacity Chinese models that take about 24 hours to charge – that is, we have developed a device that boasts higher quality. 

5. Cut supply chain to boost profits and reduce product costs, if possible.

As regards China-based production, manufacturing of the finished product (in this case, an electric scooter) involves several dozens and even hundreds of enterprises: some produce several types of parts, while others assemble units. Obviously, each of the participants in the process is eager to receive their share of the profits. Accordingly, the shorter the production chain, the more finances can be saved. For instance, we chose to produce the most expensive components on our own, their cost being up to 80% of the cost of the entire device. This allowed us to keep the price of our products on level with Chinese-made models of similar weight and size and make a profit.

Since 2018, when we launched a department responsible for our own developments, the company’s revenue has grown over tenfold.

We spent some RUR 60 mio ($995K) on the development of our own models. Halten plans to relocate electric scooter production to Russia, with certain parts to be produced independently or in cooperation with Russian manufacturers. In Asia, we plan to purchase only a small amount of electronic components, whose production has yet to be launched in Russia. Relocation of production facilities has also been facilitated by the support provided by the Russian government to domestic IT companies.

Working with Chinese manufacturers serves as a good start, with such cooperation having become almost a sole option amid the current sanctions. Yet, you should not put your trust in Chinese developments and expect your product to continue thriving in the market and compete with other companies without making additional investments in your own solutions.

By Vladimir Borovoy, Founder of the Russian brand of electric scooters Halten

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