Negotiate with Chinese: Mafan Index

by Julian Righetti on September 5,2012 in China Trade ,

THE MAFAN INDEX: DON”T THINK THAT THE CHINESE SUPPLIER CAN “FIGURE IT OUT”-Learn how to more effectively negotiate with Chinese

After working with a small but very talented USA company that is developing a set of new products for major arts & crafts suppliers and Walmart, I noticed several negotiation problems

they had that would have improved their margins in the long-run. They were making mistakes and assumptions about how to negotiate with Chinese.

As a general rule in China, I

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is important to always understand your position or power relative to the person you are working with. For example, in many of those cultural tip books about China, the authors talk about seating arrangements. Your placement next to the “leader” is a testament to how important the Chinese think that you are. Don’t be naive, Chinese are always calculating position and power. If you aren’t thinking about this in terms of negotiations, you are not negotiating effectively.

Which brings us to suppliers. First, ask your self:

  • How big is my company?
  • How established is my business?
  • How solid is this business (is it speculative or do you have a purchase order in your hand)?
  • How will the Chinese see my business (as an opportunity or headache)?

Ideally, in China, you should always try and work with large suppliers.

  • They have better quality and cheaper prices
  • They won’t go out of business in the middle of the night
  • They are much less likely to steal your money
  • They should be more professional
  • They will expose you to less risk
  • They should have a lot of the export permits that will also reduce your costs

This small USA company was originally very bullish about their products success in US. They had a purchase order from a major USA retailer. There was a lot of interest on the buy side in the US, but they made some errors (some forced by their retail buyer) that could have improved their margin.

The Chinese buyer knows this is a small company. The supplier does about $60,000,000USD in business a year. The total order volume was $20,000USD. Not a large order. Moreover, the order was extremely complicated. The products were very intricate, they had multiple components that needed to be packaged together. There were various designs that needed to be matched. The buyer also changed volumes 4 times from our initial meeting to when we wired the deposit. This was frustrating to the importer because the initial quote was very competitive and the quality was very good.

Warning: Chinese suppliers will almost always quote something for you. The quote will be based on their real costs and, I believe, often the 麻烦 MAFAN Index. Mafan literally means troublesome. Are you a troublesome client? Do you require a lot of attention relative to the value of your order? Are you rude, difficult to work with? Are you inconsistent? Does your order volume, product characteristics, or payment terms change a lot?

How to negotiate with Chinese more effectively:

  • Emphasize long-term business-If Chinese companies get the sense that you are going to cut and run, they are very likely to do the same. Long-term relationships and stable business are the key to getting better terms and preferential treatment. Always, at least, communicate this and share the long-term picture of your business. Help them understand why it’s a good opportunity.
  • Don’t demand crazy things from large companies-Again, once your product is on the line, its in the hands of the 工人 (Workers). It might as well be automated. If something happens, it won’t be easy to fix. If you need every other box to have a sticker on it, or every third box, or every green box to have a blue sticker and grey box to have a red sticker, this will complicate the order and a manager will need to watch the workers. The more complicated it gets, the more expensive. These companies, ideally, want super high volume, low-headache products-they will give you amazing prices with these types of orders.
  • Adopt a humble attitude. Consider that you may be “small” compared to them. Your attitude may need to reflect this. If they are a big company and you are small, they may see you as less important. Adopting a more meek approach in communications (I am not saying that you should let them walk all over you), but humbleness in the way you communicate can help. I think this is especially true if the factory is a state-owned enterprise where the sales people really don’t care at all about the client if it’s small.

Therefore, when considering which factory to use, don’t assume that the lowest price and the largest factory are necessarily the best option for your small company. It’s possible to work with large suppliers if you are experienced and savvy. If you are small and inexperienced, you may want to use a smaller supplier. Your business will be more important to them and they are less likely to get frustrated or upset with you (and thus raise prices).

Thanks for reading about how to negotiate with Chinese more effectively! Tell me what you think!

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