I think that it’s a crutch, or at least an excuse. The constant negotiations over already-signed contracts is getting really old. Especially when I can’t go back and renegotiate contracts with clients from the West. If I can plan out costs and times, mock up packaging and labor needs, make safe bets on currency and inflation changes 30 days out, why can’t Chinese factories do the same?
Now, I’m an anthropologist so in my training I’ve read that Chinese love to sign a contract to start a relationship and then the “real” negotiations begin afterward. But I’m also a businessman and so I’ve also read/experienced that Chinese companies rarely, if ever, do DD or forecasting on future costs of projects. I’ve heard more than once that most factories here have no idea what it actually costs them to make any give product.
(On a related note, there is a great post on China Vortex about why Chinese don’t like lawyers.)
So, is it culture or just an accepted lack of planning?
Many Chinese tell me that they can’t forecast out the prices of raw materials more than 30 days out—ok, but 30 days out is all I’m asking for; that’s what I give my clients. I mean, if you commit to a price and sign a contract shouldn’t that price for a one-time order or raw materials be good for an order at anytime within that 30-day window? Isn’t buying raw materials the first step once the deposit is paid? Can’t you give me a price that is both competitive and safe for you over a one-month period?
I’ve also been told a thousand times “labor is more expensive than we thought.” So…what did you think and why? If I don’t change the order details from the bid details where is the change in thinking coming from? If you are consistently under bidding (or under annalysing your costs should you change what you’re doing? If nothing less it’ll save you an awkward discussion about changed prices later.
As I understand things you can “buy” labor for a price per action or a price per person/hour. Either one of these methods of pricing lends it self to testing and forecasting, does it not? If you know exactly how something is going to be packaged you can both time the total labor per piece as well as count the actions and bill accordingly, right? I mean, can’t a factory just have one “guinea pig” employee whose job it is to test/time the labor necessary for all new projects? If you’re not doing this what’s the point of a bid in the first place? It’s really not just to placate the Westerner is it? I’m begging here. Tell me that some really thought and calculations went into the bid. Please.
Now figuring out Inflation, I admit, takes you a bit by surprise the first month of a jump and also requires a bit of research. But come on—we’re talking about 6 figure USD amounts here. I’m sure you can take the time to look of the last 6 months of CPI numbers and make an educated projection for the life of the production process, right?
Finally, over the last two years the RMB has risen from 8.25 to 6.9 to the Dollar. That’s big, but the rise has been pretty much expected. Sure, changes are random and driven more by politics than the market. But the changes have rarely been bigger than 0.1 a month. So can’t you assume that rates now (6.9/1USD) will be 0.1 different in the next 30 days? Sure it’s not rocket science, but it’s safe, it’s probably pretty accurate and it’s more understandable than “I know we gave you a bid in Dollars but now you have to pay in RMB. Oh, yea, and it’ll cost more too.”
There are cultural differences in the understandings for sure, I won’t totally discount that. For example, in the West, when I bid on something, barring an act of God, I’m committed to that price. Chinese, on the other hand, will bid on something but will not lose money. So if the price changes as the projects progresses and pricing variables change the price (contract) to the client will change accordingly—it’s just smart, financially. Chinese companies have no western moral qualms about “updating” your price and, I’ve found, are honestly bugged that westerners, get so bent out of shape when the Chinese are just trying to preserve their originally agreed upon margin/percentage. “You don’t really expect me to do this for little or no profit just because we have a document, do you? Why would I do that?!”
So what do you about all this “culture?”
Here’s what we do.
1. We educate our factories on these ideas presented above. We mock up packaging with them, we commit to spec’s before the order. We confirm that prices are in RMB and we take into account inflation and the changing RMB too.
2. We walk through contacts and details with managers, QC people and engineers BEFORE the contracts are signed. This is huge. The guys on the line are the ones that have the most valuable input as to where there will be both cost increases and saving. These guys know what’s really difficult and where they will personally spend extra time and have issues.
3. We get all our bids in RMB. Despite my wounded national pride, we do everything in RMB now; we have no choice. Unless you have enough qtty to buy futures and guarantee the exchange rates, you’re stuck working in daily rate RMB or losing out on both the exchange and ever-changing rates. Side-note: we hearing here that the RMB will be at 6.5 before August. True? Who knows?! But it’s probably a safe bet that it will be close to that (or higher).
4. When possible (not very often) we try to negotiate fixed mark up percentages that are agreeable to everyone involved in the deal. This assumes that you have a very accurate assessment of the market price for raw materials and that you have a very clear idea of the cost structure of you supplier. Not to mention a great working relationship with your supplier.
Tags: Business, Culture by david
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