The Right Suppliers at the Right Price; RFQ Strategy and Cultural Considerations

Finding the best supplier to manufacture your product and negotiating the best price can be a lengthy process requiring a great deal of research, a bit of strategy, a dash of cultural understanding and perhaps even a touch of luck.

We came across an interesting company called PassageMaker, headed by a gentleman from the United States named Mike Bellamy. According to their website, in 2006 PassageMaker became the first (and perhaps only) medium sized, 100% US-owned, assembly/inspection company in Shenzhen possessing the following: In-house licensed custom’s brokers, Full import-export rights, and authorization by the Chinese government to process Value Added Tax (VAT) rebates.

Mike has done some speaking engagements over the past few years and one of them is titled, “Sourcing Strategies - Find the right suppliers, assure quality and avoid knock-offs on a limited budget”. The videos are posted on YouTube in 4 ten minute clips. We’ve watched the first two, which are quite good, and have our ‘takeaway notes’ for our readers to review. In addition, we’ll post links to the videos below for easy access.

GENERAL

1. China, although uniquely different from the West, is very open to western business practices and you should not be worried about cultural mistakes. The Chinese don’t expect you to know their culture or language and are very forgiving of mistakes and cultural misunderstandings.

2. There are many factories that make excellent products but aren’t good at marketing themselves to the world. There are other companies that are excellent at marketing but aren’t factories themselves and misrepresent themselves to potential customers to win deals.

3. The areas to focus on are the Pearl River Delta which is in the Hong Kong/Guangzhou area and the Yangtze River Delta around ZheZhang and Shanghai. They both have different histories. The Pearl River Delta was designed from day 1 for manufacturing for export. The Shanghai area has a long history of manufacturing but developed to service the internal market.

4. How to qualify a vendor on a limited budget - use web directories and trade shows to find new suppliers but visiting the production area and walking the line is the only way to see that they really make the product.

5. The issue with dealing with trading companies is that there is no direct line of communication when there is a problem. Trading companies may not understand the product as well as the factory and may not be able to handle the issues that arise.

6. Hold negotiations at the factory. To see if they’re really making the product, try to spend as much time at the factory as possible. Look for signs you’re being duped such as the business card addresses of all the people not matching or if the person who is giving the tour of the factory doesn’t seem to know all the people.

COSTS

1. Tooling and setup costs should be quoted separately and compare the quality of the tooling among factories. Often longer lead times are required for better quality tools with higher grade materials such as steel.

2. Gather your quotes using the same incoterms - Mike prefers to use EXW (Ex works), which essentially means ‘finished and available at the factory’. SourceJuice wrote an article comparing FOB and CIF, detailing what’s included and what’s not.

3. Be clear on your quality standards and acceptable levels of defects as this may significantly affect pricing and you want to be able to compare applies to apples across factories.

4. Specify the grade of the materials in your bill of materials. There are many grades of metals and plastics and you need to be clear!

5. Ask them to identify their VAT structure. Some of the smaller suppliers are not paying VAT on raw material purchases and thus not getting the rebate when they export. This is ok for small quantities but when you need to ramp up, they may not be able to keep the same deal. In this case, you can expect a spike of 10% or more! For large companies, if you dont ask about the VAT refund, they may pocket it. For more information on the recent changes (and a general explanation) on VAT rebates, check out the SourceJuice article 4 Reasons Why Sourcing in China Will be More Expensive in 2008.

NEGOTIATIONS

1. Orient yourself towards the decision maker and not necessarily the guy who understands you best because of language.

2. The guy at the top usually doesn’t speak as much English since he’s older and grew up when China was a closed society.

3. Watch the Bai Jiu!!! For those who don’t know, Bai Jiu is a traditional Chinese alcohol made from rice. It’s very strong and it’s typically part of dinner banquets and can be abused easily with repeated calls for toasts. You don’t want a lopsided agreement and if you start to drink and then stop you may offend. Better to just say you’re allergic or that you can’t drink. Mike commented that he brings a bottle of tequila and when they do Bai Jiu shots, Mike requests that everyone do a tequila shot! That stops the drinking!

4. If you’re looking for a little strategy, bring a translator with you even if you or your colleagues speak Chinese. Don’t speak any Chinese during the negotiations. After a round of price discussions, the translator should excuse herself to go to the bathroom. The Chinese factory may continue to talk about pricing strategy with you in the room. — Just be sure they don’t pull this on you with English!

TRANSLATION

1. Use a professional translator who is familiar with your field if you don’t speak Chinese!

2. Go over the technical terms in advance and make sure you’re in sync. Otherwise your translator may not know the details of what you’re trying to communicate.

Last 5 posts by The SourceJuice Team

China VAT Changes List for December 2008 - November 19th, 2008
Expect More VAT Rebates with the new Economic Stimulus from China - November 15th, 2008
China VAT Changes for 2008 and 2009 -- Rebates and More - October 23rd, 2008
One Man's Challenge is Another Man's Treasure - Home Building Materials, part 4 - August 25th, 2008
Export to China – Selling, rather than Buying, from China - August 19th, 2008

Comments

6 Responses to “The Right Suppliers at the Right Price; RFQ Strategy and Cultural Considerations”

Tom Kirkland on February 21st, 2008 8:20 am

I’ve been buying in China for 17 years now and I would have to say there is something to be said for not talking Chinese even if you know it. As a foreigner who knows Chinese very well, mind you, it is a pleasure hearing what my potential suppliers say when my aid has left the proverbial room!

How true, how true.
Nick on February 29th, 2008 3:15 am

not sure if this is working…
Nick Muessig on February 29th, 2008 3:18 am

Thanks for the note taking. I never heard the tequila suggestion before. Ha ha!

Mike Bellamy has also written some articles for our website http://www.smartchinasourcing.com. His most recent article on the China VAT rebate:

http://www.smartchinasourcing.com/negotiating/avoid-overpaying-understand-china-vat-rebate.html

is definitely worth a read!
Paul Tittmann on March 9th, 2008 6:44 am

One may gain short term benefits in single transaction, but if you are trying to build long term relationships , pretending not to speak Chinese when you do will only reflect on your credibility.

An analogy -

If you were dating someone, you might get lucky the first night by not mentioning you were married, but you can’t hide it for too long.
Sourcing Phase: Finding the right supplier to manufacture your products in Asia. | The ACF China Co - Millstone Trading on September 8th, 2008 5:25 am

[…] show is really just the beginning. The most difficult part is not finding the supplier, but rather finding the right China supplier, managing that supplier and the process AFTER the paperwork has been signed.Â Communication will be […]
Roger @ millstonetrading on September 8th, 2008 7:47 am

“Iâ€™ve been buying in China for 17 years now and I would have to say there is something to be said for not talking Chinese even if you know it. As a foreigner who knows Chinese very well, mind you, it is a pleasure hearing what my potential suppliers say when my aid has left the proverbial room!”

After 11 years, I can say this is an excellent point. Another downside to speaking Chinese is one can throw “Bull” at you at an exponentially faster rate.