Negotiating With Chinese Factories

I had an interesting experience today with a factory that is working with us on a couple of projects.Basically the owners and the manager came to talk with me about the fact that we are "too strict" on our quality standards and the high number of rejected products is costing the factory more than what they originally budgeted for.Of course there were lots of issues that they, as owners and not project managers, didn't know about, like late delivery, dirty product, incorrect product, torn product packaging, incorrect molds, etc.Once we got rid of the self-serving manager and listed out all the details we were able to have a relative straightforward discussion.

 

Below are a few of the major strategies and some tips for negotiating in China.

 

  1. It's all a show.If you don't know that your negotiations, factory visits and dinners are planned and scripted then you don't know what you're doing in China.Roles are defined, what can and can't be offered is clear before negotiations start and who you will meet and what you will see is typically controlled to a large degree (as it is in the US and anywhere else-think about it).Learn to play the game and play your role-just like in the West, you have a job description and a specific responsibility.The difference is that that in China you are expected to know and play your part in the CHINESE script whether you speak Chinese or know their culture or not.The obvious problem is that Western and Chinese scripts are radically different.As one China hand put it, this is their sandbox and if you want to play in it, you'd better know the rules.This is easier said than done, after 15 years in Asia I find that there are still many little twists, turns and subtleties that are hard to pick up (in Cantonese/Mandarin).
  2. Save your breath.Talk with the people that have the authority to do something about the problem.Just like anywhere else, the higher up the food chain you can climb the easier the resolution will be.If the owner of the factory will attend than you know you have both a serious issue and the opportunity to get the real story and a real answer.
  3. There is often both a cover story and the real story.The only way to get to the real story is to ask tons of questions and take copious notes.The stories will come out in the end.As important as finding the real issues are, this is often where Westerners most often fall short-we take too many things at face value.McGregor, in his One Billion Customers book, states clearly that foreigners come to China with way too much trust-we transfer our legal system and cultural baggage to China because the suites, office buildings and computers put us at ease that all is the same.The latest news about the absolutely NON-independent judiciary should leave you with no doubt that things are different here.
  4. Don't openly push the inconsistencies too hard-i.e. don't cut off your (or some one else's) nose to spite your face.There are stories and white lies (and big black ugly lies sometimes too) you'll find and when you put the puzzle pieces together. Once you figure out the real situation you'll have the upper hand-remember, if you can name the game you no longer have to play it.The trick it is to find out what's really going one and then deal with it in way that allows the most people the most face as possible.If your goal is to get someone fired or make someone so angry that they spit on your burger before they serve it too you, you certainly can do this.But the really goal ought to be getting production done on spec and as close to on-time as possible-keep this in mind even if you feel that you have been totally wronged.
  5. White face, dark face.This is a very common and very conscious strategy employed by many negotiators, both Chinese and foreign.A.k.a. good cop, bad cop, in this scenario one guy will be the instigator and a partner will be calming voice of reason.This both raises the stakes and gives the instigator the ability to be the peacemaker at the same time.Threaten to cancel or not deliver with one hand and offer a (advantageous to you) solution with the other.Typically Chinese like to have the boss be the white face (good cop) and the manager be the black face (bad cop).I usually see foreigners doing the opposite.But since face is more "expensive" for the boss than the manager it most often works this way in Chinese culture.Set this up with a Chinese speaker being the good cop and let the English speaker rant and rave-can be effective if done right.
  6. The sacrificial lamb.Like the black face, white face, this strategy allows the instigator to cut someone loose or give in on a specific issue without losing the war.This is another fairly common strategy in China where labor is (over) abundant and replacing people is easy.For example, it's often much easier to fire a QC manager and blame the issues on him than to accept the face losing issues that could be the real concerns.The use of this strategy is not just convenient for the instigator but often a sign that the factory is willing to make some significant concessions, if they don't publicly lose face or privately lose money.Often times a manager will be both the black face and the sacrificial lamb-he gets angry forces issues and then will be sent off or just leave the negotiations thus allowing cooler heads to continue.I even fired myself once to make a point over a ? million dollar project (I told them that their mistakes had cost us so much that my boss fired me).The down side is that this is now a permanent "firing."I've never worked with that factory again.
  7. The closing offer.Once everyone is friends again and all the issues are worked out there will invariably be a last issue that's just thrown in at the very end.Often literally on the way out the door-"Oh, by the way, this material is going to cost more on the next order.We'll eat it this time, but the price is now this much more."My theory is that this happens because meetings between Chinese usually end with dinner or Karaoke so there is still time to work out issues.But foreigners usually have work meetings during the day and then go home at 6pm.Whatever the reason, it's almost comical to me-it's something they have to bring up, but don't want to so they wait until there is no possible way to procrastinate it any longer and then, just off the cuff, throw it out.Unless is absolutely affects the present deal let it go until the next order.
  8. The way out.Whenever I've been asked to pay more, I always come back with "I can ask my client to pay but the order has been placed."Which of course really means: "Where do you expect that this extra money is going to come from?"And the answer that the supplier won't say is: "you'll just have to lose some of your margin because of our mistakes."That's not going to happen and they know it, but they're hoping against hope.What they usually do, after some hemming and hawing is to offer me another way out-just not in so many words.It typically goes like this: The supplier will offer an improvement to the product that will cost very little but could be added to existing production and then used to cover the costs of the price increase so the end client doesn't realize that they're paying for both the (unnecessary, but perhaps useful) alteration and the other cost increase.I personally don't ever add costs that cannot be specifically account for-it's not worth the potential fall out with a longtime client.But sometimes the offer can actually be helpful because you can always procrastinate making a decision (if necessary) by saying you'll talk with the client about the "improvement."In addition, these options, if you remember them, can give you leverage for future negotiations as well as inside pricing information directly from a factory that's trying to cut a deal.
  9. A way out, part II.When you know that you've got someone trapped in a lie or that you have your supplier over a barrel it's not a time to gloat.Instead offer them a way out.Give in on something that you can afford (i.e. something that costs less than a damaged relationship).Don't change you position or standards, rather offer them a way to achieve the desired goal without losing face or at least give them ability to achieve the desired results with their own methods-remember the goal is resolution and cooperation.
  10. A show of anger vs. a loss of face.For me this one of the hardest things to understand-at what point is a Chinese conversation (argument) too personal and offensive?As a foreigner, I see/hear Chinese people negotiating (even shopping) and yelling like a beating is immediately forthcoming.But two minutes later the transaction is done and both parties walk away as if nothing happened.It's not just me that think this either, Thai's say about the Chinese "Chinese people talk like Thai people fight."It's quite amazing if you've never experienced it before.If you have then you know that it's not totally inscrutable.There are a couple of general rules that will keep you within the lines of acceptability.First, don't make it personal-don't be rude, condescending or insulting.This is a given in any culture and especially true in face conscious China.Second, try not to throw any one specific person under the bus unless that is your specific strategy.The factory boss may disrespect his own manager, but you can't.Likewise, you can chew out your own QC manager, but they can't.Detail issues that are specific to one person without pointing fingers at him directly.Third, try to resolve specific concerns with general solutions.I know that sound's crazy, but if, for example, you can both agree that your QC is the final say in the production process you then don't need to bust their chops over all the minutia that got the product rejected in the first place.
  11. Know the numbers better than your counter parts.This is straight from Sunzi's art of war and the Chinese know it well and will beat you with it every time-unless you're prepared.Know the costs, the production times, the delivery schedules, who's in charge of what, where the break downs occurred and what are the specific options to fix things.If you know the numbers you can't be taken advantage of-no mystical Chinese wisdom in that.It's just good business sense. You can always counter price with price and times with times-abstract details about processes and products aren't as offensive as or don't cost as much face or good will as personal accusations.
  12. (Warning! Over generalization ahead.)Chinese don't know the concept of win/win.True, this may be a sweeping generality, but everything I've experienced and read agrees.Why?Two reasons.First, most of the upper level people you're dealing with in China are products of China tumultuous past that has forced them to be survivors.Second, the lack of an effective legal culture means that change is the only constant.Under these circumstances wining is still a zero sum game.If you can win the money game and they can win the face game without losing money, that's probably about as close as you can get to win/win.The guys as Sinocidal said it best: As far as most Chinese are concerned "Win Win is a panda bear in SichuanProvince."
  13. No one, not anyone ever makes product for a loss (not to be confused with dumping which is selling your own product for a loss to gain market share).Don't ever believe the line "I'm losing money on this."Regardless of the negotiations, every factory I've ever talked in China, Vietnam, Thailand or India with has brought this excuse up at one time or another.In my book, it's the dumbest line ever.No one agrees to make product for a loss and usually the price increase are so minuscule that there is no way that the factory's margin is that small.The answer to this excuse is simple, call the bluff."Ok, let's call this deal off and I'll move on to another supplier."In 10 plus years in Asia I've only ever had one factory take me up on this offer-they were so busy they didn't need my business.In China it's common to find factories that think that they have their Western counter parts by their nether regions. Sometimes it's true, but usually only if you've not been careful and/or on-site.In most situations if you're committed to a project financially, unless you've been seriously lied too, so is your supplier.At that point no one really wants out-and if you've planned ahead, you can counter their temptation to raise the prices.Additionally, in today's China if push does come to shove, there is always someone else who can make your product.If you've got the time and patience to find someone else, they are certainly out there.Now I'll admit, there are times that I've agreed to pay more to just get what I initially contracted for-and even felt good about it.Sometimes factories make honest mistakes and miscalculations.The RMB strengthens, oil prices rise, etc.There are legitimate reasons for price increases just make sure it's not just a rouse to get you to pay more.But no one makes product for a loss.
  14. Time is on their side.Sometimes called the "iron ass" strategy, this is definitely something that China has learned that the West has not.The longer they wait, the more desperate we typically become.We are an instant gratification society.The classic Chinese tactic is to have meaningless meeting after meaningless meeting to overwhelm you with nothing.The solution?First, arrange a meeting with someone that is important and has other business to do-e.g. a factory owner or high level manager, like you, has little time to waste doing nothing.Second, a couple of days is not a long time-learn to wait.Third, if you need to, sit them out.They can't put you off forever and they will be increasingly uncomfortable the longer you hold them to their promises of "the boss will be here soon."This strategy then extends to meetings as well-they may be long, but keep on your points and get what you came for.I've see many foreigners leave China with less than they wanted on a project worth hundreds of thousands of dollars because they had a two thousand dollar flight to catch to get back home.
  15. Way too much trust from West to East.This comes back to me almost daily.I assume that everyone starts off on equal ground and that I can take anyone at their word until they prove me otherwise.In the West there certainly are crooks and cheats, but there is also a well functioning and easily accessible legal system to back you up if trust is violated.Business is based on a foundation of trust first, and a lawyer to back you up, if necessary.It's just not that way in China.There are historical reasons why Chinese people prefer to work with people they know.There are structural reasons (lack of a legal system) too.You do not have the luxury to trust complete strangers, $0.25/hr line workers or even $300/month factory managers.This isn't racist, rather it's economics-if a manager can make money by giving you cheaper product and you don't know why wouldn't he do it?If you don't believe this happens go talk to Mattel.
  16. No trust at all from East to anywhere. Chinese people don't trust you or anyone else-they've been taught not to.There is no historical or even recent precedent for trusting strangers in China-even other Chinese people from different regions.In negotiations here you are considered both a potential source for big profits and a stranger (read: target).That means factories start from the position of: we don't know you and don't trust you until you prove to me otherwise.This isn't morally vacant, as many critics like to complain; rather it's necessary for survival in a system that does NOT have an effective legal system.If you have no (or are unfamiliar with options for) official/legal recourse your only options are to take care of yourself first.It's not only smart, it's absolutely mandatory for success in China.Like it or not, that's the system here and you're not going to change it.
  17. Leverage is the key to any negotiations no matter where you are.If you have no chips to play you are out of the game.You've got to keep something from the factory to make sure that you have some control when (not if) problems arise.For large orders an LC is a great option.But for orders smaller than $100k LC's are not typically used.So be sure that you have a contract that gives you clear options, outs and specifies penalties in detail.Ultimately, hold you cash as long as possible to make sure that you get what you've ordered.
  18. Face is totally misunderstood, often to the Westerner's demise.I'm constantly amazed at how Westerners are willing to be totally rude to Chinese-is it the language barrier that makes it OK?Is it the dirty streets and bad toilets that make someone assume they are better than the locals?I'm not sure what it is, but it's wrong.You need to give respect to them, if for no other reason than so they have no reason to screw you.As a Westerner you probably won't appreciate (or even recognize) when face is given to you.You've probably thought more than once "I just wish they'd tell me directly when there is a problem."(I think this daily.) I don't think that Westerners will ever understand the all complexities of face but a simple key is just be polite to others.Yes, just like mom taught you.Yes, even if they screw up.You wouldn't stomp out of a supplier's office, call him names and scream obscenities at factory workers in the US so don't do it here either.One thing you can understand is that if you threaten or embarrass a Chinese factory owner you'll not move negotiations forward-and I promise they'll take revenge too.You can argue and even get angry.Everyone does at some point.But if you embarrass someone you'll also never now the depth of the consequences.So be polite or script the arguments so there is always options/way out and so that fights are not personal.The goal is to fix your problem and allow them to maintain their dignity.
  19. History is very important.Personal relationship history between you and your supplier will be the deciding factor if you hit a roadblock.The longer you've been working with someone the more "credit" you have with them-especially if you've always paid on time and never tried anything cheeky.Honestly is the best policy and your good standing in the past will go a long way to resolving current concerns.
  20. The "higher ground' means nothing in China.You will not successfully appeal to anyone's (Western style) moral virtue or get product by trying to pull on heartstrings or detail your current emergency/sob story.This is business, same as back home-money talks.You're not going to get a supplier to "help you out just to be nice" in the West so don't think that you can get it here either.More than just "help" this would include trying to get Chinese to do something that's financially difficult for them just because it's "the right thing to do."There is a reason why there are massive environmental problems in China-money is more important than morality (for both Chinese and Westerners working here).
  21. Verification is the key to success.This means check everything not just finished product!!This includes raw materials, money transfers, and specific production processes.If you can't personally certify that it happened, it probably didn't-it's better to be safe than sorry, so check everything.
  22. Scarcity vs. abundance-you need to have a totally different frame of mind to understand China. Historically Chinese have never had enough-not enough money, freedom, food, health care, good chocolate cake, legal recourse, etc.But in the West we all grew up with too much of all of these things.These different situations change dramatically how our different cultures think.You have to understand that your supplier may have never gone past junior high and built his own factory from nothing just in the last 10-20 years.Your supplier can probably tell you what it feels like to be hungry-really, honestly hungry.Your supplier probably has parents or other relatives that have died or been seriously injured because of "political problems."This is not the land of plenty (except for plenty of people).This is probably the angle that your supplier will negotiate from when there are problems.For many in China business is still a zero sum game-so either be prepared to win or do some serious long-term re-education to get what you want.
  23. The ends justify the means.The goal is resolution of a problem, correct production, and finished quality product.Who cares if it's not done the same way that you'd do it back home?!You shouldn't, for one.If methods affect quality, then you can care.If not, let them do it their way.Remember, in the US time is money, but in China time (labor) is almost free and most factories would rather throw labor/time at a problem than additional materials or technology.Maybe they aren't as efficient as the West. Ok, no maybe; stats show they are much less efficient and getting worse, but the point is that they do it differently but can, more often than not, achieve the desired results.Control the quality and let them do their job.
  24. There is always another problem.This was number 3 already, but it bears repeating: Find your suppliers real problem and you will resolve many of your own production issues.No Ancient Chinese Secret here-this is Covey's 5th habit-Seek first to understand then to be understood.If you are willing to take the time to discover the real issues you will save time (and emotional energy) in the long run.
  25. Take copious notes.I promise you that your Chinese factory will not keep records of the changes made over dinner and on phone calls between secretaries-so it's up to you to detail the evolution of the project.Much of negotiations are never written down so it's up to you to record everything.And I mean everything!Side Note-Text messages can be used in court but faxes can't.Notes from meetings should be detailed, translated and sent to all parties-if you're the instigator of all negotiation's records you've go the upper hand.Phone calls to your secretary where the factory or whomever tell you that they'll be late or are changing something in the contract are the killer-you've got to keep track of all these changes.I have never been in a meeting where things were written down unless I asked someone to keep notes or unless we were at the end and trying to create a list of action items.Learn a lesson from the CCP: If you control the history then you control the present.
  26. Be prepared to renegotiate everything.In China contracts are just a starting point for future discussions.So to the Chinese it's not coming back and renegotiating, it's part of the process that was started with the contract.Know this now-that contract you signed will never again be looked at once the qtty's are pulled from it unless you pull it out and force them to read it with you.Never.If you don't keep referring back to it, no one will.When the renegotiations come, and they will come, pull out the contract and stick to it.
  27. No matter what be completely honest.Make sure that you are following the law to the letter.Don't cheat, lie, double cross, play word games or sneak you way into the country.Don't double cross your Chinese partners and don't play them for fools.If you expect the law to be on your side you had better be on the right side of the law yourself.It is the best feeling in the world to go into a negotiations session knowing that you have been completely honest and have the records to support your position.I'm sure its tons easier for your lawyer too.
  28. If you are ever in a situation where you are scared that you could lose what you've already contracted for, remember you have a contract (and it better be in English or you're probably already dead) and China's fledgling legal system does give you some rights and you can pursue those to their legal ends.It not too expensive to hire legal representation in China and if you have a lawyer chances are you will turn the tables on whoever is pressuring you-they'll claim to have hired a lawyer, but probably have not.
  29. One thing that I believe that Chinese factories don't or won't understand is that sometimes you can't fix a mistake-sometimes there just isn't a second chance.Maybe the window of opportunity is passed.Maybe the money is gone.Maybe the buyer has moved on, cutting their loses for a better supplier.Whatever the case, my experience is that Chinese factories honestly believe that "with a little more time we'll get it right" or "if you just give me another week we can fix it."It can be like beating your head against the wall sometimes to get suppliers to understand that buyers don't want fixed or late product.The difficulty is often in the fact that money is at stake-not just a deposit that may need to be returned but investment in product that is now most likely wasted.
  30. NEVER NEVER NEVER change your contract-it's like opening Pandora's Box and once it's open you'll never get it closed again.Here me now, believe me later!
  31. Finally a nod to the physical realities of the Chinese supplier.There are limits to what can be done financially, emotional and physically.This is just the reality of life. There are only so many "extra" workers that a can be added to a production line.There are only so many pieces per hour that a machine can make.There is only so much money that a factory can spend at any one time on any one single problem.There is only so much arguing that is tolerable before it just not worth it any more.Despite what your contract has committed you both too, physical realities are often less optimistic.You, at wits end, may be frustrated that you supplier is just not cutting it for you.But maybe they honestly can't meet the standards you've set.If you are willing to accept this reality you'll be able to refocus you frustration or negotiations to meet the physical/financial capacities of the supplier.Of course, don't just take their word for it-check it out.Time the production, check out shift logs and understand what is really going on on the production floor.

David Dayton the owner of Silk Road International and currently lives full-time in Shenzhen China.He speaks English, Thai and Mandarin and has worked in Asia for more than 15 years.You can contact him at david@silkroadintl.net or at www.silkroadintl.net.


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