Negotiating with Chinese Suppliers: Are Chinese Business People Willing to Take More Risks?

by Julian Righetti on February 17,2013 in China Trade ,

Are Chinese suppliers more willing to take risks than American or German manufacturers? When you negotiate with Chinese suppliers, how could each sides’ relative approach to risk impact negotiations? What types of terms would your supplier be willing to accept?

Recently, we priced out a small consumer product for an

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American importer. We found several suppliers that were credible and qualified to produce this simple high-volume product. While negotiating, the sales agent said he could personally open a small workshop to produce this product and undercut his own boss by 25%. Well, our clients were certainly interested to hear that, but is this the type of risk-taking behavior that we should embrace? Would suppliers in Germany or the United States do this?

Risk and risk tolerance are viewed differently in many places. Personally, I have generally found many Chinese business people to have a low tolerance for risk. When I think of Chinese attitudes towards risks, the phrase “peaceful development” 和平发展 comes to mind. I always imagine an army of black suit office workers marching towards some grey concrete building.

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From Gallup,

More than 8 in 10 Americans agree they are generally willing to take risks, compared with nearly 2 in 3 respondents in China and the European Union as a whole. Within Europe, however, opinions vary: Romanian, Cypriot, and Irish views align closest with those of Americans, with 73% each saying they are generally risk takers. Lithuanians and Hungarians are least likely to share this attitude; 46% and 43%, respectively, see themselves this way.http://www.gallup.com/poll/143573/entrepreneur-mindset-common-china.aspx

Some data indicates that Chinese business people are actually more open to risk than Americans or Germans. Professor Christopher Hsee is a researcher at the University of Chicago, he has found some surprising insights:

“Results from the study showed that both the Americans and

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the Chinese predicted that the Americans would be more willing to take risks. The Americans underestimated the Chinese propensity to seek risk, and the Chinese overestimated the Americans’ willingness to take risks. Contrary to these predictions, the authors found that the American

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participants were considerably more risk-averse than the Chinese.”-http://www.chicagobooth.edu/capideas/sum98/hsee.htm

Negotiating With Chinese Suppliers: Designing Contracts that Create Shared Risk Between Buyer & Seller

I think you should consider one question:

Will I purchase from this factory more than once?

If you only plan to purchase once, then you may want to adopt an adversarial approach to negotiations. Work hard to drive prices down in negotiations. However, if you plan on working with this supplier for a long-period of time, consider developing a cooperative approach. Considering their business model in tandem with your business model may be a superior strategy to generate long-term ROI. From the beginning, define your strategy so that you can maximize your negotiating power with your Chinese supplier.

For example, do your suppliers’ raw material costs fluctuate significantly? Are these cost fluctuations impacting your business? Are you accurately gauging these costs to ensure that you monitor your suppliers’ current and future cost structure? If you ruthlessly demand more and more concessions from your supplier, ultimately, he or she will fold. This will negatively impact your business.

Can you hedge your risks and help your supplier hedge his or her risks? Consider using a “minimum profit” contract, “buy back” contract, or setting high minimum order quantities. Typically, in China, many medium sized suppliers have difficulty meeting the large MOQ’s for raw materials (minimum order quantities) set by large state-owned enterprises. They will rely on larger, “partner” manufacturers to help shift off some of the excess raw material input costs, but pay premiums for smaller quantities. Accurately forecasting your sales will help them save tremendously.

Chinese companies, if they receive significant concessions, may be much more willing to provide optimum terms and prices for you if you can demonstrate your long-term, cooperative approach to the business. The key to obtaining those terms is to clearly communicate the opportunity.

Negotiating with Chinese Suppliers: Our Approach

In our business, when we source a product from a Chinese factory, we typically evaluate each supplier through the following prism: price, reliability, performance, and compliance.

Building a profile on a factory is difficult because a factory’s reliability, performance, and compliance histories are vague and

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difficult to obtain.

Once we compile the basic due diligence, we start to look for ways to transition from an adversarial relationship to a cooperative relationship when negotiating with Chinese suppliers. For some spot orders or smaller volume projects, certainly, this is difficult to do, but ultimately, we have assets (retail sites, relationships, sales teams in our home country), that Chinese suppliers do not have. If we can persuade our supplier to see our client’s-market position, strategic relationships, retail assets, and competitive advantage, we can usually obtain superior terms from excellent suppliers. Chinese suppliers are willing to take risks if they feel they can accurately perceive the total risks to a project. Communicating that risk and your business importation opportunity is an excellent way to build more margin.

Hammersourcing.com is a trade services business based in Shenzhen, China. We love negotiating with Chinese suppliers. You can contact us at import@hammersourcing.com.

 

 

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