Creating Shared Value between Chinese Suppliers and Foreign Importers
In the arts & crafts industry, there are a hundreds of factories that can create plastic toys or products. However, for the foreign importer, this oversupply of potential partners creates a strategic advantage because of the relative scarcity of deals incoming into China relative to available suppliers. Factories in some industries in China are desperate for business. Understanding and explaining your value as an importer in the market place is
an excellent way to reduce costs so that Chinese suppliers can see long-term opportunity. Typically, when we approach a Chinese supplier, depending on the complexity of the product, IPR, and various other factors, we outline our client’s advantages in terms of relationships, expertise, experience, and market position. Once suppliers can see the long-term potential, they will be more willing to take a lower margin. Creating shared value between supplier and importer is a valuable way to
approach negotiations when negotiating with Chinese suppliers.
Many importers are terrified that their product will be “ripped off” in China. However, in some industries, this problem is not a significant risk depending on which factories you are approaching. The vast majority of smaller and mid-sized factories in China do not have the sales force, international sophistication, retail relationships, or willingness to knock off your product in an attempt to speculatively undercut you. Certainly, you should retain some strategic information, knowledge, or assembly, but in general, I believe showing the long-term picture and “win-win” for both Chinese supplier and importer is a good way to reduce costs. Moreover, many of these smaller factories can offer significantly less expensive products because they need the business. For example, our client’s original supplier provided their product at $5 USD FOB unit cost. By negotiating with multiple suppliers simultaneously, we found a supplier that reduced this cost to $2 USD FOB. Moreover, often many suppliers will outsource the production of your products to smaller factories if they are too busy or lack some of the component machinery. Does this create much value for your organization? Not really.
Know and Isolate your China Costs
When we perform a detailed market survey for our clients, we arm them with the means to more effectively negotiate with Chinese suppliers. If your product requires additional sub-components beyond the primary piece of hardware, you should explore what these costs are. For example, we recently conducted a market survey for a house ware importer. With 9 sub-components, we isolated out each costs on a per unit basis. We then compared these costs to other suppliers to ascertain how competitive our supplier was in providing these products to us. We also sourced these products individually to confirm costs. Ultimately, we recommended that the primary
component of this product be outsourced to another factory that could manufacture this piece for 1/5 the cost of the original supplier. Knowledge is power.
Always Negotiate and Always Test the Market
As a trade services company, we like to think that our clients love us for who we are, but we know they love us because we provide more value to them than any of our competitors. By far, one of the worst generally accepted China business proverbs is that “Relationships are the key to everything in China (Guanxi)” and without them you are toast. Maybe, and relationships are certainly important, but every adage should be taken with a grain of salt. Often American or Australian importers who do not have as much China, on-the-ground, business experience mistakenly believe that Mr. Wang or Ms. Ping is the absolute linchpin to their import business. Without this person, the business would fall apart. Yes, relationships are important, but often, we see American or Australian importers who are taken advantage of because they follow this rule too closely. They start to lose margin because of “cost increases” or some other excuses. Rather than test the market, they stick with their “trusted” friend. When negotiating with Chinese suppliers, you must ALWAYS TEST THE MARKET. You will lose more long-term growth opportunities or contracts because you failed to continually and competitively reevaluate your supply contracts.
Hammersourcing.com is a trade services business based in Shenzhen. We love discussing China, entrepreneurship, and negotiating with Chinese suppliers. Email us at firstname.lastname@example.org