Lessons From Yiwu to Xiamen: Optimize Your China Negotiating Strategy

by Julian Righetti on September 7,2013 in China Trade ,

In a perfect world, you would prepare 20 samples of the same product. You would thoroughly research your supplier base and list and divide trading companies and manufacturers. You would research raw material costs and regional labor costs. Then, you would send out your samples to each

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supplier and request quotations. Unfortunately, this is not always possible. Here are some considerations about how to optimize your China negotiating strategy:

These last two weeks, I traveled to Yiwu, Ningbo, Quanzhou, Xiamen, and Jinjiang. I looked at many different products, but all low-cost, high volume based. I try to use the strategy outlined above to evaluate

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all of our suppliers. First, most of the time, there is a large disconnect between the way a Chinese factory represents itself on Alibaba.com and the actual facilities.

The Middle Kingdom is Full of Middlemen

In Yiwu, I visited one factory that from its Alibaba page, appeared to be extremely large and impressive. At their sales office, arriving in their showroom, I saw thousands of different products from plastics to textiles to electronics. Later, we drove to the factory. Here I saw that their facilities only produce small metal products. There is no way this company was directly producing all the products in their showroom. Certainly, they could source these additional products, but now I saw that several middlemen existed between what I needed and who I was speaking

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with. There is nothing wrong with middlemen-our company is exactly that. However, middlemen need to add value. In China, because the market is opaque and price transparency does not exist as it does in Australia or the United States, middlemen can exploit this lack of transparency to gain margin. With a little more work, you can find the real suppliers.

Things to Watch Out For:

  • Look at the factory names on buildings-if you are being taken to several different places, do these places have the same name? Are these “alliance” factories or just somebody’s cousin who makes what you need?
  • Many seemingly “large” companies are simply amalgamations of smaller partnerships and entities. Legally, this can be problematic because you do not actually know who is receiving the money.

Labor Costs Are Major Costs Drivers

If you need a product assembled at multiple points or you need some hand assembly, expect your costs to rise significantly. Consider in the design process, how to cut out excessive assembly costs because this will account for 40% to 60% of your costs for some products. For example, we can make a paper color bag for $0.04/USD. If we add some string as a handle, we need holes punched. Someone needs to do this. Next, if we add some glitter, this will increase the bag cost by $0.10/USD. If we add a plastic hanger hole to hang the product in a store aisle from, someone needs to glue this on. Each step will add $0.02/USD to $0.05/USD per product. In this type of high-volume market, we cannot afford to give away pennies. If you design your products to minimize labor costs, then your products will become much more commercially viable.

 

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