Negotiating with Chinese Suppliers

Having identified your potential partner, it becomes time to negotiate the prices – but how easy is that to do at the early stages of the relationship. Here is what we do and why:

The initial stage of the research phase will include gaining pricing from a high number of companies and provide an indicative range on pricing that is achievable. On the basis that you have visited the supply options, it is now about trying to negotiate fair and sustainable prices that will support your company over the long term.

The majority of products developed will require some form of upfront financial commitment by the customer – whether tooling, fixtures or gauges and this leads to the first significant financial undertaking. The majority of suppliers are prepared to offer a 50% upfront cost commitment, with the balance paid after the samples are approved, but this will generally only be offered if the supplier is confident in the sincerity of the customer to honour the commitments to future sales, and the status of your company.

Whilst our standard terms will include the release of all tooling and fixtures (after full payment), the realities of moving tools in any country are at best ‘complicated’ and there will be no guarantee that the tools will produce better parts at an alternative supplier. As such, the initial 50% payment must come with a clear understanding from all parties about what can and cannot be achieved and the related consequence. All production methods have tolerances and it is important that a detailed assessment of all drawings is carried out prior to any payments being made – the initial upfront payment is made at the customer’s risk.

Part of the negotiation with suppliers should include agreeing the minimum tool life and responsibility for maintenance and replacement cost. We often look to negotiate a full replacement cost into the unit price.

Customers must be clear that factories will often increase their initial unit cost once in-depth discussions start. This is often linked to gaining an increased understanding of the requirements of the parts to be made, and not necessarily blatant opportunism. Our view is that it is better to have an open and honest discussion in advance to avoid surprises later on – in our experience customers are often able to offer technical support to help the factory to minimise their production cost, and most factories will welcome such constructive support. We can offer full support in the technical translation and passing this information.

We are happy to negotiate on your behalf and need your input to ensure that we reach an acceptable positon. It is crucial that the relationship is managed at this point and that all conversation remains positive – the majority of our customers have single source production, and cannot afford any nasty surprises once commitments are made. Negotiation in China takes time and is relationship based, a difficult skill for foreigners to master.

In our view forcing suppliers into a ‘no profit’ situation is counter-productive and not one we would support. There is no point going through the whole exercise if a supplier in unable to make a reasonable return – prices in China have been increasing steadily for a few years, and there is only so long any manufacturer can afford to offer such an artificial price.

It is important to understand the cultural differences, and the Chinese will rarely express strong opinions if they disagree with your position, but this lack of reaction does not necessarily mean that they agree with you. Adopt a respectful, modest and friendly approach, and allow pauses in the conversation for your potential partner to consider their responses, and listen carefully to what is and is not said. Your potential partner will be looking for a win win situation that is not based on contracts, but on the understanding of what is being discussed.

Other factors to consider are exchange rate and commodity cost fluctuation. Recent falls in commodity prices should filter into lower unit cost if a formula is agreed in advance. In addition, it is important to understand the VAT rebate that applies to your specific goods; 17% is added to the goods and paid out by the factory when exporting. Depending on the classification of the product, the manufacturer receives back some or all of the money paid out. The greater the rebate, the greater the risk you face should there be a change in policy, and buyers should be aware that there is often a high percentage of a manufacturers profit linked to receiving the rebate. Understanding the rebate will help buyers understand the risk they face should the rate change – as it has in the past.

We are able to do all the negotiation for our customers, and aim to always secure the win win deal that will allow the long term business that your supplier will be after. Once business develops, we will further develop the ‘guanxi’ on your behalf, and this will provide a strong stable platform from which your business can grow.