You can find the products you are looking for in China and at the price point you like. Just make sure you do it right.
This blog article was first published on www.sourcingallies.com
Amazon wholesale suppliers abound in China. You can discover thousands of them on the Google and Baidu search engines, Alibaba, Global Sources and Made in China. That part’s easy. Partnering with a reliable supplier and motivating them to contribute their best efforts to your business isn’t exactly a cakewalk. Here are some useful insights garnered from working with Amazon sellers and Chinese manufacturers.
Quality looks different at different Chinese factories. If the supplier agrees to a price substantially lower than the market price, the result is typically inferior quality.
Quality across the suppliers you’ve shortlisted can be alike but minimum order quantities (MOQs) and lead times may differ substantially. A comparison on various parameters is necessary to understand who can offer a better overall deal.
Experience working with western suppliers is an advantage. The supplier will be familiar with applicable product quality and safety requirements. If your product needs to be tested at a lab, you don’t have to be overwhelmed by the process.
The sample you order will give you additional information on comparing suppliers. Some amount of skepticism is needed as the sample may be exceptional yet without diligent scrutiny during the process, that same quality may not be reflected in your order. Discrepancy in quality is particularly noticeable when the supplier has cut corners to match the price or the manufacturer is actually a middleman.
The latter case is a result of partnering with a trading company, a risk arising from not vetting suppliers thoroughly. The middleman may send you a sample from one supplier but once you’ve given the go-ahead, turn around and use a cheaper factory to increase their own margins while saddling you with an inferior quality product at an inflated price tag.
Precautions from your side should include the following:
- Do a background check of suppliers, even if you found them on leading online directories. Ask the right questions (ex: factory headcount, what is subcontracted), and copies of their business license, customs registration certification and ISO 9001 certificate/internal quality check documents.
- Visit the factory if you can. If you can’t, engage a third-party quality inspection service. If this is also not possible, see if you can verify the factory’s reputation and credentials with one of your contacts in China.
- An inspection of finished goods prior to shipment will tell you if the order meets your requirements. You can have a trusted associate or a sourcing agent carry out the inspection. Any issue with the order can be brought to the supplier’s notice because once shipment is out, you’re ultimately stuck with sub-par products that never sell, leaving you no choice but to either reorder with the same or find a different supplier.
Getting a good price
There are differing opinions on how to negotiate prices with your Chinese suppliers and to what extent you should persist in getting the best possible price. Although suppliers expect you to negotiate prices, not everyone will give you what you’re hoping for, and some will agree but at the expense of providing terrible quality.
Suppliers often ask for your target price. Some may ask for it before they even provide a quote. You can determine your target price by contacting different suppliers and getting quotations. Factor in the costs of the main raw materials and components needed to build a quality product. This will help you judge what a reasonable price for the product looks like.
You will see many similar quotes. You can disregard prices that are 10–20% higher or lower than the baseline price. Unless you are interested in higher quotes — as they can imply better quality — set your target price from this list.
When you cannot get the first pricing from a supplier, share your target price. You can ask the supplier to match this price or give you a better price. The alternative is not to provide your target price, and ask the supplier to give you their best price. If you plan to stick to one supplier for the long-term and anticipate large order quantities, you can make this known in your email. This may encourage the supplier to adjust the quote downwards.
Is the supplier unresponsive? Send a follow-up email saying you’re interested in their company but you’re getting compelling pricing from other manufacturers. Do share an Excel spreadsheet of supplier comparisons to indicate the overall value offered by the competition.
If the suppliers you are interested in give you a quote that is very different from your target price, ask them to justify their pricing. It is possible that they may be taking a chance hoping to see if you will accept this price.
It is advantageous to have an associate with boots on the ground in the location where many of your shortlisted candidates are based. If this is not possible, continue negotiating via email and phone, and finalize 2–3 candidates for a factory audit.
Unscrupulous suppliers may attempt to rip you off by jacking up the price just when you’re ready to place your first order. If it feels wrong, don’t give in just because you’ve come so far. If this happens, continue to do your search, because with a little more effort an honest supplier can be found waiting in the wings.
Drafting the contract
Make sure you’re entering into a manufacturing agreement with the contract manufacturer that owns the factory and not a third-party company unaffiliated with the manufacturer. If you need to sue for product defects, you will not be able to take legal action against the actual maker of your product if dealings are via a third-party company. If the third-party is the manufacturer’s holding company in Taiwan or Hong Kong, verify that it is not a shell company without any actual assets.
The key factors to consider when negotiating a manufacturing contract are: scope of engagement, intellectual property, and contract term/termination. You can avoid disputes by clearly stating what you and your supplier agree to, including what you will do if something goes wrong (more on this in the next section).
Scope of engagement: Your manufacturing contract should clearly state what you’re partnering with the manufacturer to do. As an Amazon seller, you’re engaging the company to manufacture your product. If the manufacturer is expected to distribute the product as well, this should go in the contract. The scope of work will have a bearing on terms and conditions pertaining to quality assurance, delivery, payment, defective goods and so on.
Intellectual property: Protecting your intellectual property is essential to prevent two types of risk. One, that the manufacturer will mass produce your products and sell them to your target market at a lower price, hurting your business. The other, claiming to own the IP rights to your product. So, product ownership should be explicitly mentioned in the contract. At the minimum, the agreement should have provisions covering (a) the product to be made (b) the technology/tooling the manufacturer and you will contribute © who will provide the product specifications and (d) who will own the IP rights to the manufactured product.
Contract termination: Manufacturing agreements are generally enforceable for a specific period of time as consented by both parties, or it can be terminated by either party whenever they wish. Determine what works better for you. Instances where you may want to make a quick, hassle-free switch include a decision to stop selling the product, a cheaper supplier that offers better terms, or serious problems in your relationship with the manufacturer.
Enforcing the agreement and resolving disputes
Generally, when you enter into an agreement with a foreign manufacturer, you need to consider which country’s laws will be applicable to the agreement. If the agreement is prepared by the supplier, it will be governed by Chinese law. If your attorney has drafted the agreement, then the agreement will be interpreted in accordance with American or European laws. To understand why contract enforceability is a critical aspect, consider these facts:
- It is difficult to prove the existence of a contract before Chinese courts by submitting evidence such as invoices, emails or phone calls. The court will want to see a written contract naming the two parties. You need a written agreement that can be executed in line with what Chinese commercial law requires.
- Rarely do Chinese courts honor foreign judgments. For a contract to be enforceable in China, it must meet the following conditions:
o Be governed by Chinese law. The defendant may assert that foreign law does not apply. Proving foreign law can be difficult, uncertain, time-consuming and expensive.
o Written in Chinese. Chinese courts will not accept any other language. The translation from English to Chinese is done by a translator appointed by the court. If the translation isn’t accurate or is simply plain wrong, your case is affected. The defendant may challenge the translation, leading to delays and uncertainty in reaching a verdict.
o Location matters. The contract needs to be enforceable in a Chinese court located in the district which is the supplier’s principal place of business. Additionally, the litigation between parties should occur in the district which is the supplier’s principal place of business.
Rather than being governed by the courts of a particular country, you can choose to resolve a dispute through arbitration. International arbitration allows parties belonging to countries that have different linguistic and cultural backgrounds to find mutually acceptable solutions without being bound by the rules and formalities of their own legal systems. A neutral arbitrator hears your case and makes a final and binding decision known as an ‘award’. You have autonomy over whether you want to disclose the details of the arbitration and award.
Maintaining relationships with your Chinese supplier
Chinese business culture is different from how business is generally conducted in western countries. It’s less stiff and more about engaging business partners on a personal level, and respecting cherished values of humility, hierarchy and respect. For instance, it is common to discuss business at a casual restaurant or karaoke bar. In the west, relationships are based on a mutual understanding of requirements as well as cooperation between parties. If you say you’re going to try and submit the work within the deadline, it means that the work will get done. But a Chinese supplier that tells you they’re “doing their best to get shipment out by the week” is letting you know that “it’s impossible to get the shipment out by the week”.
When a Chinese supplier nods along with you, it doesn’t necessarily mean they agree. It may imply that they hear you but respectfully disagree. As with the concept of gaining or losing face, one of the ways that Chinese suppliers show that they’re on their best behavior is by assuring you that they understand all your requirements and your order is coming along just fine…. even if they’re confused about your exact specifications and your order is behind the target schedule. Misreading these cultural nuances can be impactful in a negative way.
While your Chinese supplier will go the extra mile to save face and maintain good relationships as prescribed by their culture, you can overcome the cultural differences in a few ways. Here are some proven tips:
- Engage the supplier respectfully right from the time you make initial contact. Let the supplier know that you’re interested in ensuring that business flows both ways.
- Avoid further haggling on price if it’s close to or meets your target price.
- Work with the factory to decide realistic timeframes. Offer them a bonus payment for meeting quality expectations on a large order or delivering the shipment on time.
- Share your business vision with the supplier. If you show that you’re aiming for growth, the supplier will regard you as a prime customer because your success is linked to theirs.
- Try to visit the factory and meet decision-makers once a year. Regard your supplier as a friend, keeping their desire to gain social capital at the back of your mind.
You can change what your supplier thinks about you over the course of your relationship. If you’re not confident about navigating communication styles, cultural differences and the language barrier, seek expert advice or team up with a China sourcing agent in order to help you find a supplier that meets your exact requirements and target price, and watch over production, quality control, shipping and customs — offering an end-to-end service that allows you the freedom to focus on other aspects of your Amazon business.