Tips for Newcomers – China Sourcing Industry Terms
Below, you will find a list of China Sourcing industry terms. This section is constantly growing. Contact us if you have terms you would like to have explained or added to the list.
3rd Party QC
Independent quality inspection/quality assurance agents.
AA – Absolute Advantage
A country has an absolute advantage when it is more efficient than any other country at producing a product.
Acceptable Quality Level
MIL-STD-105E / ISO 2859-1 (1999)
The Acceptable Quality Level (AQL) is defined as the maximum percent defective (or the maximum number of defects per hundred units) that, for purpose of sampling inspection, can be considered satisfactory as a process average. The sampling plans most frequently used by the department of Defense are based on the AQL.
Acceptance Quality Limit
The Acceptance Quality Limit (AQL) is the quality level that is the worst tolerable process average when a continuing series of lots is submitted for acceptance sampling.
AQL – Acceptable Quality Level
The AQL has two different definitions due to standard changes.
Acceptable Quality Level / MIL-STD-105E / ISO 2859-1 (1999)
The acceptable level (AQL) is defined as the maximum percent defective (or the maximum number of defects per hundred units) that, for purpose of sampling inspection, can be considered satisfactory as a process average.
ATO – At time of Order.
A condition usually spelled out in a PO, MOU or other contract/ that requires a specific item must be provided or completed at the time the order is commissioned.
ATS – At Time of Shipping.
A condition usually spelled out in a PO, MOU or other contract/ that requires a specific item must be provided or completed at the time the order is shipping from the supplier/manufacturer.
B or BR – Buyer or Buyer’s Representative
Similar to trading companies, buying entities often specialize in buying in specific industries in China for foreign companies. Ideally, they achieve markets of scale, have better pricing than would otherwise be available and some degree of local representation/QC in production. Unscrupulous buyers can often represent factories rather than clients, sell lower grade product to foreign clients that have limit options for recourse and can “double dip,” getting paid from both clients and suppliers.
Balance of Payments Accounts
National accounts that track both payments to and receipts from foreigners.
Bill of Lading
A document issued to an exporter by a common carrier transporting merchandise.
Fuels derived from recently dead biological material, most commonly plants (vs. fossil fuels, which are derived from longdead biological material). Biodiesel, vegetable oil, and ethanol are all examples of bio fuels.
BP – Breakeven Point.
Point in time (or in number of units sold) when forecasted revenue exactly equals the estimated total costs; where loss ends and profit begins to accumulate. This is the point at which a business, product, or project becomes financially viable.
CA – Comparative Advantage
The theory that countries should specialize in the production of goods and services they can produce most efficiently.
Computer Assisted Drawing/Drafting. 2D and 3D drawings for design, drafting, documentation and manufacturing processes.
Cap and Trade
An environmental policy tool aimed at reducing greenhouse gas emissions. Under a cap-and-trade system, the government sets a mandatory cap on greenhouse gas emissions for businesses, utilities, government agencies, agricultural producers, etc. Once this cap is set, the government distributes allowances or credits to regulated organizations, and then allows them to trade credits to meet the cap. Organizations that need to increase their emissions allowances can buy credits from entities that pollute less (and thus have allowances to spare). This is the “trade” in “cap-and-trade.” The American Clean Energy and Security Act, passed by the House of Representatives in 2009, would establish a cap-and-trade system as the primary vehicle for reducing greenhouse gas emissions in the U.S. Cap-and-trade systems are already in place in Europe and in the Northeastern and Mid-Atlantic U.S. (Regional Greenhouse Gas Initiative).
A measure of the amount of carbon dioxide produced by a person, organization, or location for a specific amount of time. An entity’s carbon footprint is used to describe its contribution to the dangerous levels of greenhouse gases in the earth’s atmosphere.
A financial tool aimed at reducing greenhouse gas emissions. A polluting entity (individual or organization) can purchase carbon offsets to mitigate the effect of the carbon emissions it produces. The money from that purchase funds a project that prevents greenhouse gas emissions (e.g., reforestation efforts, wind farms, solar installations). This “offsets” the purchasing entity’s polluting activities (e.g., driving, flying, shipping, etc.). There are currently two main markets for carbon offsets: a compliance market and a voluntary market. In the compliance market, companies, governments and organizations purchase offsets bring their net carbon footprint into compliance with legal caps on emissions set by regulatory agencies. In the voluntary market, individuals and organizations purchase offsets to mitigate the greenhouse gas emissions caused by their activities. A variety of organizations offer carbon offsets, which in turn fund projects to reduce global greenhouse gas emissions.
Any substance that, when exposed to living tissue, may cause the development of cancer. For example, breathing chromium fumes is known to cause lung cancer. Hundreds of chemicals are known to be carcinogens.
CIF – Cost Insurance and Freight
Goods are delivered to the import port. Duties, fees and local delivery is the responsibility of the buyer.
CLI – Container Loading Inspection
This inspection is performed at the manufacturer’s warehouse or at the forwarder’s premises. The aim of this inspection is to verify your products, the quantity and the loading process.
Sometimes used interchangeably with global warming, “climate change” refers to sustained changes in weather statistics or distribution over long periods of time (decades or longer). The scientific community overwhelmingly — albeit not unanimously — believes that human activities are accelerating climate change, posing a threat to humans, wildlife and habitats throughout the world. Some of the potential impacts of climate change include higher temperatures, rising sea levels, melting glaciers and arctic ice, severe droughts and reduced water supplies, severe fires and floods, stronger storms, and increasing rates of mosquito-borne diseases.
Cost of Poor Quality
These are the extra expenses caused by delivering poor quality goods to customers. These expenses have two sources: internal failure costs (from defects before customers get the product) and external failure costs (costs after a customer receives the poor product or service).
Cradle to Cradle
A philosophy that evaluates products for sustainability and efficiency during each stage of the lifecycle: design, material(s) sourcing, manufacturing, consumer usage, and post-consumer usage. The key element of this philosophy is to design products that are reused, recycled, or composted, rather than those that end up in a landfill (the latter being the more common alternative, referred to as “cradle to grave,” with the landfill being the grave).
A document that includes list a list of goods, the buyer(s) and seller(s) involved, the country of origin, and the tariff codes. The CI is a customs declaration for goods that are to be shipped internationally.
DDP – Delivered Duty Paid
Goods are delivered to the buyers warehouse. All duties, logistics fees and duties paid.
Defects and Defectives
A defect is any nonconformance of the unit of product with the specified requirements. A defective is a unit of product which contains one or more defects. Failure to meet requirements with respect to quality characteristics are usually described in terms of defects or defectives.
Double Sampling Plan
This is an inspection technique in which you inspect a first lot of n1 size, which leads you either to accept or reject it. If you reject it, then we inspect a second sample of a larger lot size n2, which in turn leads to a decision to accept or reject the lot.
DP – Deferral Principle
Parent companies are not taxed on the income of a foreign subsidiary until they actually receive a dividend from that subsidiary.
See “Double Sampling Plan” above.
A logo or seal used to distinguish a product or service as environmentally friendly. These logos are typically a sign that an independent and reliable third party has reviewed and certified the product or service. Examples of eco labels include: GreenSeal, Green America’s Green Business Seal of Approval, Cradle to Cradle certified, and Fair Trade Certification.
The likelihood that events, including economic mismanagement, will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a particular business enterprise.
A tool or service designed to assess how much energy a home or office building consumes, and to evaluate possible ways to improve its efficiency. Individuals can perform simple audits themselves or have a professional energy auditor perform a more thorough audit for increased savings.
A broad term encompassing a range of technologies that use less energy to provide the same level of energy service as standard or traditional technologies. An example is a fluorescent light bulb, which provides the same amount of light as an incandescent bulb, but lasts longer and consumes less energy. An energy-efficient home may have energy-efficient appliances (which typically come with an Energy Star label), and may be weatherized or retrofitted to optimize efficiency.
EXW – Ex Works
Good ready to be picked up at factory. All transportation, insurance, fees and duties is the responsibility of the buyer.
FC – Fixed Costs.
Fixed Costs-Periodic cost(s) that remain(s) (more or less) unchanged irrespective of the output level or sales revenue of a firm, such as depreciation, insurance, interest, rent, salaries, and wages.
FER – Fixed Exchange Rates
A system under which the exchange rate for converting one currency into another is fixed.
FER – Floating Exchange Rates
A system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand.
FOB – Free on Board
Goods are delivered to boat, domestic fees paid. International shipping, fees and import duties is the responsibility of the buyer.
GATT – General Agreement on Tariffs and Trade
International treaty that committed signatories to lowering barriers to the free flow of goods across national borders led to the WTO.
GoM – Globalization of Markets.
Moving away from an economic system in which national markets are distinct entities.
There is considerable debate these days over what makes a product “green.” In general, if a product’s design, packaging, manufacture, or source materials have a lower environmental impact than other similar products available on the market, then it could be considered a green product. Examples include non-toxic cleaning supplies and compostable plastic utensils.
HTS – Harmonized Tarrif Schedule
Tax tables for goods imported into the US.
Infant Industry Argument
New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations.
In Process Quality Control or Quality Assurance
JV – Joint Venture
This is a legal entity between two or more parties to do business together. In China, companies with foreign partners can carry out manufacturing and sales. There are multiple types of foreign-Chinese JV’s and each has various advantages, limitations and restrictions.
L or B – Lot or Batch
The lot size is the total number of units available for random sampling. The lot size only includes packed products. Also called “inspection lot” or “inspection batch”, it is a collection of units of product from which a sample is to drawn and inspected to determine conformance with the acceptance criteria.
The Leadership in Energy and Environmental Design (LEED) green building rating system, developed by the U.S. Green Building Council (USGBC), provides certification standards for environmentally sustainable construction. These standards take into account energy and water efficiency, CO2 emissions reduction, improved indoor environmental quality, and responsible raw material sourcing.
Life Cycle Assessment (LCA)
A way to investigate, estimate, and evaluate the environmental burdens caused by a material, product, process, or service, throughout its life span. Environmental burdens include the materials and energy resources required to create the product, as well as the wastes and emissions generated during the process. Examining the entire life cycle creates a more complete picture of a product’s environmental impact, as well as the trade-offs in impact from one period of the life cycle to another.
LP – Law of One Price
In competitive markets free of transportation cost and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.
LS – Lead Strategy
Collecting foreign currency receivables early when a foreign currency is expected to depreciate, and paying foreign currency payables before they are due when a currency is expected to appreciate.
A major defect is one, other than critical, that is likely to result in failure, or to reduce materially the usability of the unit of product for its intended purpose. A major defective is a unit of product that contains one or more major defects. You can provide your own list of Major Defects to be inspected.
A minor defect is one that is not likely to reduce materially the usability of the unit of product for its intended purpose, or is a departure from established standards having little bearing on the effective use or operation of the unit of product. A Minor defective is a unit of product that contains one or more defects
Buyer pays 100% of PO value 30 days after delivery
A currency is not convertible when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency.
PO – Purchase Order
Also known as a Wire Transfers or a Bank Transfer, the TT is fastest and most direct way to wire money from one account to another. Money wires can be sent to domestic or international recipients via banks’ SWIFT Codes.
PP – Predatory Pricing
Reducing prices below fair market value as a competitive weapon to drive weaker competitors out of the market
PQM – Product Quality Manual.
A list of specific product standards that must be met for the product to be “approved.” Product spec’s, design details, testing or material standards, functionality and any other product requirements should be included in the document prior to the start of production.
Energy generated from renewable natural resources, such as sunlight, wind, tides and geothermal heat. Because these resources are naturally replenished, they can be considered infinite (unlike fossil fuels).
RO – Representative Office
This is an office set up within China by a foreign company for non-transactional operations; for example, contracts cannot be signed and profit cannot be made by the RO. RO’s have become less popular as WFOE’s have become easier to set up in China and have more rights to conduct business within China.
SOE – State-Owned Enterprise
State Owned Enterprise in China is a corporation that is governed in whole or part by local and/or central governments. While many SOE’s in China are being privatized a significant portion of China’s annual GDP comes from these businesses.
A system that captures energy from sunlight, and uses a heat exchanger to heat a liquid. This is different from a photovoltaic, which converts sunlight directly into electricity.) Solar thermal water heaters are commonly used as an energy-efficiency tool to heat water for buildings, thereby reducing the amount of energy needed to heat water.
SR – Systematic Risk
Movements in a stock portfolio’s value attributable to macroeconomic forces affecting all firms in an economy, rather than factors specific to an individual firm.
As described by the Bruntland Commission, “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”
TC – Trading Company
Typically a third party entity that has either offices in China/HK or has some special industry skill set or connections to factories. Chinese laws in the recent past limited sales activities that would normally be handled by the same company as manufactured a product to trading or marketing companies that had no direct involvement in the manufacture of the products they were selling. Advantages include bulk purchasing power, local knowledge and connections, on-the-ground personnel and often foreign staff and/or offices in foreign countries. Problems with trading companies include difficult verification, can disappear easily, limited legal controls and they are often connected with factories rather than loyal to buyers.
TD – Trade dress.
The non-functional physical detail and design of a product or its packaging, which indicates or identifies the product’s source and distinguishes it from the products of others. A trade dress may acquire legal exclusivity as a type of trademark.
Unit of Producuction
The unit of product is the thing inspected in order to determine its classification as defective or non-defective or to count the number of defects. It may be a single article, a pair, a set, a length, an area, an operation, a volume, a component of an end product, or the end product itself. The unit of product may or may not be the same as the unit of purchase, supply, production, or shipment.
VC – Variable Costs.
Periodic cost that varies in step with the output or the sales revenue of a firm. These include raw material, energy usage, labor (wages), distribution costs, etc. This difference affects the financial structure of the firm as well as its pricing and profits, The breakeven point in such firms (in comparison with high fixed cost firms) is typically at a much lower level of output, but their marginal profit (rate of contribution) is also much lower.
Anyone that provides goods or services to another company. A vendor may or may not be a supplier or manufactory.
VER – Voluntary Export Restraint
A quota on trade imposed from the exporting country’s side, instead of the importer’s; usually imposed at the request of the importing country’s government.
Protecting a building and its interior from external forces (i.e. sunlight, wind and precipitation), with the ultimate goal of reducing energy consumption and optimizing energy efficiency. These measures can dramatically reduce household utility bills, and are often times referred to as the “low hanging fruit” of the clean-energy equation because they are relatively low-cost and require very little advanced technology, making them easy to implement.
WFOE – Wholly Foreign Owned Enterprise
As the name suggests, these corporations do not require any mainland Chinese investors or owners. Like other types of entities in China there are specific restrictions to WFOE’s activities; for example they do not automatically have the right of domestic Chinese distribution. Advantages include currency exchange, total administrative control and protection of IP.
Wind Energy or Wind Power
The conversion of wind energy into electricity, often times through the use of wind turbines, which can be located on land, offshore, or mounted on buildings.
ZSG – Zero Sum Game
A situation in which an economic gain by one country results in an economic loss by another.