Focus on Common Discussions Points to Make Your Business Negotiations in China more successful

When visiting your suppliers’ offices the meeting normally is held in their showroom. Taking a close look at their presentation and product displays should give you a pretty good idea how well or poorly that company is organized.

Ugly, untidy, and dirty showrooms do not reflect well on the supplier’s diligence. However, that impression may deceive you because your supplier may still live up to your expectations.

I have found that at least 50% of most supplier’s showrooms in Hong Kong look like a garbage dump and you might be too scared to work with these suppliers. Rest assured that you can work with these suppliers but you need to take some precautions. If you follow my checklist and receive satisfactory answers from your suppliers, you may still want to give your new supplier a try.

It is all about competence and if you have the impression that your new supplier has enough of it, go ahead and make his day.

Effective Questions for the Supplier

Which questions should you ask during your meetings with each of your suppliers? You want to ask at least the following questions:

  • What is your Fob price in US$?
  • What is your usual port of loading? They can sometimes offer you a choice of several ports.
  • Do they have their own factory, what is the name, and where is it located?
  • When was the company established?
  • Who are the owners?
  • How many production lines do you have?
  • How many workers does your factory have?
  • What are your main export markets? If the answer is Europe, your next question should be: Which countries there?
  • Who are your main customers? Of course you are mainly interested in customers from your country but it would be interesting to know if large companies like Wal*Mart or Carrefour are buying from them.
  • What is your delivery time during normal season and peak season?
  • Are you subcontracting part of your production and if so which parts?
  • Does your factory have their own injection machines?
  • Is your factory ISO 9000 approved?
  • In the event the quantity from your shopping list is not sufficient: What is your minimum order quantity per product?
  • Which laboratory are you using for your approvals?
  • What approvals does your company already have?
  • Which certificates have been obtained?
  • What new products do you have that are not on display?
  • When can I see sketches, drawings, or photos of these new products?
  • Can you please e-mail me your bank details? You will need this to pay the sample cost when you order product samples

Here is more detail about what should be discussed based on the previous questions:

Delivery Time and Order Backlog

You need to ask the factory management about their delivery time during the low and peak season so that you have information about how long it will take for your goods to ship. This is also important to understanding the lead time needed when placing purchase orders.

Something else that needs to be asked is their current order backlog. This indicates how well the factory is doing. If they do not have many orders, there may be a reason for it, which can be important in your decision making. If the factory won’t talk about low order backlog, there is a chance that their competitor knows which proves one more time how important it is to visit the factories in person.

Port of Loading

Since factories sometimes can use different ports of loading, you need to inquire which one is usually used because the applicable freight charges will apply and you need that information to properly calculate your landed cost. Some ports have only one vessel departing per week and you must know this in advance when planning tightly scheduled shipments.

Closest International Airport

I want to mention that some products can only be shipped by airfreight. Notebook computers and MP3 players are typical examples. The key components of these products are ICs that constantly fluctuate in price. At present, the prices are in constant decline. Buyers need to receive their goods within a short time or they will not be able to make a profit. The price they need to charge will be higher then the price being charged for goods that were air shipped. That makes air shipment unavoidable.

Banking Details

When discussing the payment terms with factory management, ask them for their banking details, which will allow you to do a background check before placing your orders with them.

Payment Terms

Finally, you need to negotiate the payment terms, which are usually by irrevocable letter of credit at sight (L/C). This is usually the safest way to pay the factory and also allows them to obtain loans from their bank to start the production on time.

Never ever let the factory convince you to remit a down payment of let’s say 20 or 30% of the total order value by T/T to enable them to start your production. Ask yourself why are they asking for this? There is only one reason, which is that the factory has no money and obviously no other orders. They want to jumpstart production with your cash. If something goes wrong and the likelihood is rather great something will, you lose your money and never receive a shipment.

If the staff member you are meeting with can answer most of these questions, you can be relatively sure that it is not a trading company. Even if they pretend that they have several factories working for them, they are not likely to know all these details.

I should point out that you should have already disclosed the content of your shopping list before asking all of these questions.

About Your Shopping List

Here is the information your shopping list should include. It needs to include all of the products that you want to source. Your specific requirements may go beyond this basic list:

  • Product description
  • Target Fob price in US$
  • Quantity of the first shipment
  • If possible an estimate of your yearly quantities
  • Requested earliest delivery date
  • Destination port
  • Packaging information if other than standard
  • Number of samples needed

It is not wise to inform all suppliers about your target price right away. You could end up with prices matching your target price but you may have actually been able to negotiate a lower price.

On the other hand, inform your supplier of your target price if they quote a price that is not even close to what you want to pay.

It is essential to provide your company’s specifications before asking for price quotes. Of course, you can play the hide and seek game by not disclosing your requirements to the supplier. The big disadvantage with this is that you will be drawn into lengthy negotiations later because the supplier will tell you that his price was based on his own standard and everything above that must be added to the originally quoted price. There can be no doubt that the supplier is right.

I believe it is part of fair play to fully disclose your requirements up front. To do anything less may force your supplier to lower the product quality by using cheaper materials in order to obtain the purchase order.

Posted April 1st, 2012 in China Business Negotiations.

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