Many retailers in the west are turning east for their suppliers, due to the availability of low cost manufacturing. The level of English of many Chinese business owners has improved considerably in recent years, meaning expensive translators are no longer as necessary as they once were. Outsourcing to China is undoubtedly is not just cost effective. China is on the way up in terms of becoming an economic superpower and it is always good to build networks for the future. While there are benefits, there are also numerous pitfalls in going so far to find your ideal manufacturer. The Chinese culture is completely different from the west, and it is good to be aware of some nuances of Chinese business practices before contacting a supplier. Even in the west many countries have many different ideas about business and trade. Below is a list of 6 techniques to be mindful of when negotiating with Chinese vendors
Tip One – Keep it Friendly
There was a time when you were the boss at any Eastern business negotiation table. You were from the west and they were from the east. You had more money and they needed your business. This is absolutely not the way to approach the table in the 21st century. The tone needs to be polite and respectful. They will not tolerate being disrespected, and do not like “big talkers” with artificial deadlines, bracketing and threats to walk out. Displays of anger are also off the table. In Chinese business, entertainment is part of the culture, and the first couple of meetings may be informal and personal. Gifts from your home country could also be a good way to end the encounter on a good note, and can be given after the negotiation.
Tip Two – Don’t get greedy
It is important to understand that most Chinese suppliers have very small profit margins. But many importers push for as much as a 20% reduction for the sake of it. The importer is already getting a much cheaper deal than possible in the West. The best-case scenario is that the supplier politely tells the importer that the deal is off. However, it is also possible (or even more likely) that the vendor will tell you that the reduction is ok and reduce quality control and the quality of the product itself accordingly. Any reduction of more than 2% and you are more than likely cutting into the manufacturing profit margins. Negotiate the price bearing in mind that you are not likely to get much more of a deal. If you have a product with a higher profit margin, then you can push a little in negotiations. This is becoming more important as the price of Chinese products is experiencing upward pressure due to a combination of rising wages and inflation.
Tip Three – Payment Terms
Payment terms refers to the method of payment, timing of payment and prepayment percentage, if required. The more leverage you have, the better payment terms you will be able to negotiate. Leverage largely depends on the value of your order, the credit rating of your company, the scale of the supplier, the industry and the suppliers risk appetite. Larger suppliers are typically less flexible than smaller ones. Do not negotiate too hard in payment terms. This will result in a lack of response from the Chinese vendor, as the Chinese have an aversion to saying “no”. They would prefer to ignore the conversation. Suppliers get defrauded too and they may reject your payment terms to avoid risk. Just because a seller refuses to accept PayPal and insists on Western Union does not mean they are fraudulent. And just because a seller agrees on a popular method such as letters of credit or international wire transfer does not mean they are legitimate. Always do due diligence. The general standard in China is 30% pre-payment and 70% on completion of production, usually by international wire transfer. If you have a unique product the prepayment may be higher, around 50%. Make sure you are clear on when exactly the payment of the balance is due before signing the contract. If a proforma invoice reads “Balance on completion” this could mean when the goods have been produced, when the goods have passed pre-shipment inspection or after the ship has sailed.
Tip Four – Enlist a middle man
Chinese business and culture can be complicated, and there is quite lot to it. There are many subtle formalities and nuances when negotiating with Chinese suppliers and any slipups could have a huge impact on the results of the negotiations. This can be avoided by enlisting a well recognized third party with experience in dealing with Chinese suppliers. For start-ups and small businesses, it is often much easier to simply outsource the work to an efficient third party, due to their competitive rates and strong supplier network. Since they are constantly placing large orders with suppliers, they’re able to negotiate far lower prices and smaller order quantities than you would be able to obtain on your own. A good agent is definitely a valuable asset to any company sourcing from China while a bad one is rather like a liability as the factories they selected might not be the most qualified to manufacture your products. However, the cost of hiring a sourcing agent is not low. It might take probably 6-15% of your total order amount with the manufacturer as the service fees. Some reputable sourcing agents emphasize on absolute transparency and no strings attached, which means they disclose you the supply origin. If you feel yourselves not familiar with dealing with your Chinese counterparts, you can take advantage of these good agents. Just pay a little more from the beginning to save you tons of time, help you skip the unnecessary troubles and assure a sustainable and secure business model. After several orders, you will be good enough to deal with the supplier directly on your own without any troubles.
Tip Five – Quality Control is key
Make sure that the terms and conditions of the quality control process are clear before signing anything. This is very important when doing business in China. Make sure the manufacturers have an effective quality control regime in place. It’s far better if you can have a representative monitor the process. There have been a number of issues with quality control in China, so make sure that acceptable standards are agreed upon. You can ask for references and testimonials of other foreign companies. Defects will arise without an effective quality control process. Before making any payment:
- Get pre-production samples that represent your specific requirements (in 90% of product categories this is not a problem).
- Ensure the product meets your country´s safety standards.
- Ensure the supplier knows exactly what you expect in terms of packaging.
Unfortunately, even if you do make out the quality control procedures in detail in the legal contract, this is often not good enough. They have a tendency to simply either ignore them by replying that the QC was too strict or do something completely unexpected, like change the color of the product, stating that it was not stated that the color of the product was not to be changed. This has led to many infuriated business owners. Pursuing legal action can be very difficult in these circumstances. If you are not dealing with a well-known supplier, the only way around QC is to have one of your own on the ground, or else have an iron clad argument drafted with a legal firm experienced in drafting these types of agreements.
Tip Six – Research the Manufacturing Process
It is always good to know the exact cost of every component that makes up your product, and to know the production process inside out. It can also be a good idea to track commodity prices used in the production of your product. A large increase in a certain commodity can significantly reduce the production profit. This is when the manufacturing plants start cutting corners to maintain previously estimated profit margins. By knowing the process, you can communicate more effectively in negotiations and have a greater understanding of difficulties that may arise from the manufacturer’s perspective. If the manufacturer goes out of business, it is bad news for your contract and your product. Chinese vendors see the first agreement as a starting point, and will renegotiate at every new contract. You can identify whether there is a real need for them to increase their prices if you know the process. While there are issues with health and safety within the manufacturing industry this is improving
Sarah Kaiser is a digital marketing manager at casino global sourcing, the sourcing division of a French retailer Groupe Casino. She’s in charge of godirek.com, the digital product catalog of casino global sourcing, which offers helps and handles enquiries about private label manufacturing and sourcing. She’s a fan of water sports and has studied business management in France. Her works have been published on dozens of websites and blogs.