If you are new to sourcing from China, this read will be a good starting point.
This blog article was first published on www.sourcingallies.com
The beginning is always the hardest. You’re trying to work out a deal with an overseas supplier. A wrong move leaves a bitter taste in your mouth. You emerge wiser but wish you had started on the right note.
As a beginner seller, you need to be aware, informed and alert while establishing relationships with Chinese suppliers. Here are a few pointers to help you along the way.
Negotiating with Chinese factories
You may have heard grumblings about how Chinese products cannot match the quality of their Western counterparts. This is partly true and is usually a result of importers’ tendency to be penny-pinchers because Chinese factories can make their product ‘at any price’.
There is also a known factor that some Chinese suppliers use unethical ways to trap buyers. Usually, beginners are easy to dupe as they are overly permissive and don’t come prepared with the right questions. It is easy to get lured in by a suppliers’ promises.
Informed and prepared buyers are wary of this and evaluate suppliers’ declarations critically. They focus on finding a supplier that can serve them for the long term. Here’s a look at some mistakes to avoid as a newbie seller sourcing from Chinese suppliers.
Overstating your order volume
A large order can be a bargaining chip for a lower price, but inflating it just for a price advantage never bodes well for a long-term relationship. Sure, factories will be more interested in working with importers that need thousands of units versus a few hundred. However, baiting a manufacturer with a tall promise is a bad idea. Any deception in greatly misstating the initial order volume may create misgivings later on.
When it comes to setting expectations, it is better to be close to on target than to significantly overestimate product quantities. A Chinese factory receives several inquiries from foreign importers. Losing your business might ot affect them much. On the other hand, finding a new supplier is a hassle you don’t want after you’ve set up shop.
It is better to start with a trial order to get a feel for the factory’s quality and service. If you wish to proceed you can then discuss a realistic order quantity.
Driving a hard bargain
Not negotiating a lower price with a Chinese manufacturer may seem counterintuitive. Manufacturers are open to discounts on large volume orders and the assurance of a long-term relationship. As long as you get the desired quality for the price, you have nothing to worry about.
The trouble starts when you want to push the price down to a level that affects quality. The manufacturer may agree to your price but they’ll make adjustments and quality will suffer. That means substandard raw materials and other concessions that become apparent in product reviews.
Another risk is a delay in lead times. As you drove a hard bargain, you’re not a priority any more. The factory will place their focus on the importer that hasn’t given them a tough time at the negotiating table.
Unfortunately, there are sellers who are fine with retailing cheap ware– another reason why products from China have acquired a global reputation for questionable quality. It may not be a reflection of the production processes but is actually tied to driving the price down considerably. Ultimately, you get what you pay for.
Explaining requirements in broad terms
The factory manager may not know about your target market. Fill them in on the details as well as your plan to grow your business. By telling your supplier that you’re a serious seller, you can gain a few advantages. This could include a lower price per unit, attentive care to product quality, and consistent on-time deliveries.
While established factories may not have a problem fulfilling their customers inventory, they are taking a chance with every importer. If they’re convinced that business can flow both ways, they will regard you as a valued customer.
Speaking to the factory’s junior staff
Factories in China will have an English-speaking employee to engage with their foreign customers. Often, the employee is a younger member of their team and doesn’t have bargaining or decision-making power. Getting your requirements relayed to a senior manager via a younger staff member can create confusions and misunderstandings. It’s also possible that the person may misrepresent terms to make them more acceptable to you. The risk here is that you may buy into something that has been embellished and doesn’t represent the full truth.
Bring along a translator to talk to the decision-maker at the factory. You can get answers to your questions immediately rather than waiting. You will also get more reliable information as you’re talking directly to the manager and not going through a junior employee. As the translator has no incentive to make terms agreeable to you, there are fewer chances of getting misled.
Dropping your guard
If your Chinese supplier wines and dines you, it’s part of the informal relationship-building that is cherished by their countries business culture. Be gracious and enjoy your time, but don’t sign any agreement in haste. Finalize the deal only after you’re done negotiating and each party’s obligations are clear.
This aspect of ‘guanxi’ may not be necessary for new sellers looking to do business in China. As long as you’re communicative and cooperative, you should have no problem keeping things flowing smoothly. The idea is to not get too close to the supplier during your initial meetings. But don’t be too distant with them, such as declining their offer to take you out to lunch or socialize after business hours. While on your China business trip; moderation, politeness and having your wits about you can help ensure a pleasant sourcing experience.
Flitting from one supplier to another
A change in prices and fluctuations in the economic landscape create challenges and opportunities for sellers. In a dynamic sourcing environment with hundreds of suppliers ready to take you on, you may be tempted to jump from one factory to another. The strategy to avoid locking-in to a vendor and building relationships can be damaging to your business. If the manufacturer labels you as a ‘bad buyer’, they won’t pay a great deal of attention to your orders, which can manifest as quality issues or delayed shipments.
Contracts and IP rights protection
If you’re selling private label products, taking the right steps to safeguard your intellectual property rights is paramount. Drafting a solid manufacturing contract helps.
An NNN agreement
The sellers’ main concern is the potential use of their product information by their Chinese supplier to create a similar product and compete directly with them. A non-disclosure agreement (NDA) is concerned with protecting trade secrets by preventing its disclosure to the public, making it insufficient fora client-supplier partnership. Moreover, laws that apply in the West may not apply equally in China. A Western-style NDA is not enforceable in China, requiring you to instead consider a China-specific NNN agreement to protect your IP. Such an agreement offers three types of safeguards:
- Non-use, wherein the supplier cannot use your IP.
- Non-disclosure, wherein the supplier cannot make your IP public or share it with others.
- Non-circumvention, wherein the supplier cannot make your products and sell them at a lower price to capture your target market.
An NDA can work against if you’ve ended up partnering with an unscrupulous supplier. They will know that you’re unsure about protecting your IP in China, and attempt to steal it. Imagine a scenario where your supplier is selling your product to customers at a 40% lower price.
If your NDA states that all disputes will be heard in an American court, in accordance with U.S laws, you’re in trouble. This is because Chinese courts don’t enforce judgments issued by courts in the U.S or any western country for that matter. Ideally, you should try to settle any dispute amicably through arbitration.
Product Development Agreement (PDA)
This agreement is relevant when you’re collaborating with the supplier o design and develop your product. It is not necessary when your product is already developed and only needs to be mass produced at the factory.
The PDA sets forth terms and protections covering the product to be developed, the technology and associated costs that will be contributed by you and the supplier, which party will provide the specifications, and who will own the IP rights to your product, among others.
Manufacturing Agreement (MA)
The manufacturing agreement explains the nature and details of your relationship and cooperation as client and supplier. Each party knows what it’s supposed to do, and there’s no room for contract interpretation. The MA can include a number of points, such as payment terms, deliverables, quality control, inspection procedures, tooling and breach of contract.
Working with a reliable supplier protects you against infringements and unauthorized activities that can impact your business. However, there is no guarantee that your supplier will satisfy you consistently. When you have a problem with a consignment, arbitration is preferable to litigation.
Suppliers are generally open to sorting out disputes to avoid reputational damage. You can work out a solution that involves replacing your products, getting a complete or partial refund, or — if possible — fixing the products. A strong contract will put you in an advantageous position in an arbitration or even a lawsuit if you’ve suffered considerable damage after being supplied witha large volume of faulty products.
The contract should include the product specification, and the acceptable and unacceptable limits of the manufactured product, and evidence that you’ve paid the supplier (not the third-party). Your supplier should have assets that can be attached, and they must be located in the jurisdiction stated in the contract.
Improving business cash flow
It’s common for sellers to experience a cash crunch after they’ve already received a large order. Dealing with cash flow problems later on in the process can be overwhelming. Opting for purchase order (PO) financing ahead of time can protect your cash flow and allow you to take on new customers. PO financing is a short-term loan that provides your business with the capital it needs to fill orders.
A PO financing company pays your suppliers for the orders you’ve placed, funding up to 100% of your purchase costs at a rate of 1.6% to 6% per month, applicable every 30 days on utilized funds. The company may tailor your loan term to coincide with invoicing your order or receiving payment. It is a great option when you’re sourcing from a manufacturer and reselling without customizations or modifications.
Amazon sellers leverage proven cash flow strategies that allow them to scale up without constraints. You can reduce inventory, lead times, or MOQs. Negotiate payment terms that keep your cash flow positive, such as 20% down and the balance on shipment. On mass orders, consider a 30:40:30 split of down payment, payment after quality inspection, and the balance upon receiving shipment respectively.
Keep tabs on reviews
Product quality and innovation are key to business success. Ordering multiple samples helps you get a better sense of quality than a single sample that’s bound to be excellent.
Once you place your first order and bring products to market, keep an eye out for customer reviews. Their response will tell you if your product quality is satisfactory or it can be better. When you know what aspects of the product can improve, you’ll be able to advise the manufacturer on the changes needed to bring quality up to 100%. If you’ve made your specifications clear and the factory has followed all quality control procedures, you should see very few or optimally no negative reviews.
Innovation should be at the back of your mind, especially if you’re competing in a tightly contested space. Brainstorm customizations and new features that can make the product more valuable to customers. You can retail your premium products at higher prices, and strengthen the business proposition with your supplier.
Of course, your supplier should also have the capabilities to make a better product. Partnering with a sourcing agent with boots on the ground in China can help you find an established factory that is right for your needs, or if so required, upgrade to a supplier when you’re ready to innovate.