The China Syndrome Featured

9:56am EDT July 22, 2002

From launching a company without a clue of how to produce, market or sell your products to sourcing items from China in a little over a decade is a pretty healthy leap in sophistication. Carol Herzing says she bridged that gap by learning early in her entrepreneurial career that it pays to get top-drawer professional advice. Here’s how she quickly put together the deal for her new Beanie Babies-like product, Coolbeans, produced by a factory in Shanghai.

The first step was ensuring that the trademark was secure. The toy industry is extremely competitive, says Herzing’s attorney Deb Wilcox, and at the time Custom Edge was eyeing the new product line, a boatload of copycats were trying to climb aboard the Beanie bandwagon.

Chicago-based Ty Inc., developer of the wildly successful toy, was determined to stop them. The company and its famously reclusive CEO were becoming increasingly litigious to protect its niche just as Herzing was about to launch her product. “They were starting to sue a lot of people at the time,” says Herzing.

To guard against a trademark infringement suit, says Wilcox, “basically, what you do is make sure your designs are original.” Hiring a toy designer to draw up a fresh design was a good start, “and adding the licensed NFL, NHL and MLB clothing certainly adds to the distinctiveness.”

Once the intellectual property beachhead was secured, the next major hurdle was finding a manufacturer. “What you want to find is a factory you can trust, so they’re not selling [your designs] out the back door, putting somebody else’s name on them,” says Wilcox. “It’s not an uncommon problem in China right now.”

To find a factory, Herzing made two trips to China in six weeks, the first time with an interpreter, the second with an import agent. That, despite her extreme discomfort with flying.

“You know how they say you’re cruising at 30,000 feet? I want them to say we’re at three feet, so if I want to get out, I can.” With the help of a Chinese government agency that serves as a liaison between foreign nationals and Chinese factories, she found a plant with which she was comfortable.

While Key Bank and its international division, under the direction of 30-year veteran Horst Redetzki, helped finance the transaction with $220,000 worth of letters of credit, that didn’t remove Herzing’s anxieties.

“The biggest fear in all these letters of credit is quality control,” he says. Why? Redetzki notes that “the most misunderstood situation in letters of credit by newcomers is that they think having them in place guarantees quality [of products], or even the right material. It doesn’t.”

With letters of credit, adds Herzing, who came to understand the lack of guarantees only too well, “once they start clearing, they could ship you grapefruits if you’re not there inspecting it.”

In the end, Herzing did receive her seven shipments of plush dolls outfitted in various team logos — not grapefruits. But there was an unplanned three-week delay in clearing customs. And there was that $1.3 million in orders that had to be scrapped for failure to produce the items fast enough (over which she has considered litigation).

In the end, the drawbacks were no doubt worth the effort. In the new world of low-margin American merchandising, an ability to source from low-cost areas of the world such as East Asia is quickly becoming not just a competitive edge, but an admission pass to play the game.