Great post by Dan over at CLB again today. Talking about the difficulty in getting your supplier/manufacturer to give you and then stick with a fixed price. Basically, it’s not going to happen. But there are things that can be done about it to save both your bottom line and your sanity.
Price changes happen all the time and it’s a source of never ending frustration to just about everyone working in China. But there are other parts to the issue beyond just changes input costs.
One that Dan mentioned is the reality of changing nature of raw materials. But other companies in other countries deal with this all the time. Is China more volatile than anywhere else (Vietnam? Indonesia? India?)? NO. The real problem with changing prices is not that they change but that there is a serious lack of forecasting by any chinese supplier/manufacturer. Basically, this practice just does not exist in the Middle Kingdom.
While changes in prices (due to a lack of forecasting) is partial understandable, what’s not acceptable is the fact that prices will NEVER go lower than the contracted price. If the supplier gets a raw-materials windfall for some reason, there is no sharing of the profit. Price changes ONLY go in one direction. I think that this is explained/justified by the ideas that a) Chinese think of business as a relationship and not just a transaction. The contracts are never the most important part of the negotiations so there is no reason to not go back and negotiate again. b) Unless you’re getting completely ripped off, profit margins are typically so thin in competitive industries that there isn’t any room for raw-mateiral price changes and there is no way that a Chinese factory owner will lose money just because his salesman signed a contract with you. c) They think you can afford it.
Another issue is that it’s not just materials costs, but labor, electricity, taxes, transportation, holidays, water, etc. can be used to ask for a cost increase. Any current item in the news can be (and will be) presented as a reason for rising costs that were not considered before. The list of possible factors for price increases is practically endless, leaving the buyer constantly on the defensive and constantly on the look out for (conscious) product fade. I know that there are legitimate fluctuations in China that can’t always be accounted for, but I also know that actively taking advantage of the fact that most foreign buyers are ignorant of the Chinese market is a conscious method to getting more money in many many deals.
The only way to beat this is to have a well designed and informed plan BEFORE you get started in CHina. a) Have good contracts. Sure they may not save you in the end, but if you’re bases are all covered before you start then you’ve got both ground to stand on and some amount of legal leverage if things go really bad. b) Try to have more knowledge about your industry (in China) than your supplier; or at least be as well informed as he is. This means that you have to do homework and you likely have to speak Chinese (or hire someone that you TRUST that can do it for you). This may also mean that you’re slower to market than you previously expected. But, in my experience, you can take time up front and learn the road ahead of time or you can use at least as much and likely much more time later down the road in unprofitable re-negotiations, rejects/replacements and missed dates later. c) You must also have constant on the ground monitoring/testing to assure against quality fade. If you don’t have a & b (maybe you’re already into production) this can often make up for your lack of preparation–it won’t solve any pricing or contractual problems but it can at least defend against poor quality due to a factory trying to save money when you won’t pay the additional requested costs.