My other eBooks with the titles How to Make Business Negotiations in China More Successful and How to Make Chinese Factory Visits More Successful cover this subject thoroughly. Here, I give you a brief summary of what you need to consider when negotiating with the factory management. The in-depth eBooks on the subject are available from our website and are a must read for all importers.
Arranging the Meetings
Visiting one or more factories is relatively easy because they will arrange transportation for you and don’t even mind taking you to their competitor.
Since the transportation takes a lot of time, you are well advised to make inquiries first with your factories for their exact locations. If you set your schedule according to their suggestions, you can save substantial time, which is better spent in discussions. It should be obvious that it makes more sense to visit your supplier at their factory instead of meeting them in your nice hotel, which would be so much more convenient. This would deprive you from meeting the factory team you will be dealing with.
The Importance of Business Cards
Before visiting any company in China, whether a factory or trading company, make sure you have your business cards ready.
There is really no excuse for not having enough business cards with you. In all major cities, there are print shops that can print your name cards for you in a very short time. It looks very unprofessional if you cannot hand out enough name cards to your negotiation partners.
It would be also unwise, considering that staff in factories frequently change and move on to other factories. If they have your name card, you can bet that they will contact you sooner or later. These are people who already know your requirements and visiting them in their new factory could be very helpful. They would do anything to convince their management that your company is an important customer and you will receive better quotations for that.
I recently read an article from another author stating: “In my experience almost every sales person that I have met in China who is not the owner of the business, has shown interest in either setting up on his own by “stealing” his employer’s customers and product designs or simply doing his own deals on the side through friends, contacts or family.”
There is some truth in this although I cannot fully endorse it or maybe I have been lucky all these years. On the other hand, Chinese people want to be recognized. When sitting around the conference table you can only address them with their correct name after you have received their name cards first. For visitors from western countries it is usually quite difficult to memorize all the different names and without their name cards you are likely to fail.
If you have a notebook computer, bring it to every meeting. If you do not have one, consider purchasing one. Believe me, that purchase will be worth all the money you spend for it. Your notebook computer provides you with all necessary information for your business negotiations, plus allows you to show background information about your company or your packaging concept for the product. This is very helpful for factory management. You should also input vital information during your discussions without the need to take extra notes. That is of course easier if you have an associate but with a bit of practice you can manage it alone after a while. The notebook computer saves precious time once you are back home or you could send your daily reports to your head office for further instructions or recommendations.
Before the Meeting
Don’t be surprised if the sales manager or even the company owner meets you at the airport or hotel. This is a good thing because the driver in most cases is not capable of speaking English and you can and should use the time it takes getting to the factory for some small talk with the manager. In this way you gain a first impression with whom you are dealing before the more serious negotiations start. Try to learn the position your contact person occupies in the management hierarchy, along with who is in control of the factory, and who makes final decisions. This is important because the Chinese may want to delay decisions and will tell you that they have to wait for the decision maker who is not available. Since the whole concept of visiting the factories is to reach your final conclusion about who will be selected as your business partner in future, it is understandable that you need to talk to competent decision makers and not middle managers.
After arriving at the factory, you will be shown around the premises. Be sure to take your time studying the production lines, their QC arrangements, and the amount of technical equipment the factory is using. Additionally you must check whether the factory is complying with the Chinese labor laws, which prohibit the use of child labor and excessively long work hours. It is important to include a clause in your P/O later to protect your own interest. Since you are only asking the factory to comply with existing laws, there is nothing wrong with it.
When the factory manager walks you through the building(s), you should check out what is in production currently and who the customer is. Ask to see packing materials or shipping samples. These give you a clue about who else is buying from that factory. Sometimes factory management may be reluctant to disclose that information but they cannot stop their production to prevent you from seeing it.
Don’t be shy about taking photos. You should ask before but I have seldom been prevented from doing so. Examine cleanliness and tidiness. If there is no space available to store the manufactured products before they are packed, you can expect that some of them will be scratched or covered by dust, which leads to scratches when the dust is cleaned up.
Seek out their QC management to learn about QC processes for defective products. Are problems simply registered, without taking any further action? Or are they proactively working to eliminate the cause of defects. It could be that a single less experienced worker is creating the problem and if this worker is not replaced, the problem will continue and cost the factory money because they have to rework the products or simply through them away. Whether the factory has achieved ISO 9000 or ISO 9001 certification is not so important as long as they take action to improve their production quality on continuous basis.
Engineers and Laboratories
Also, check whether the factory has a decent or fully equipped lab. Of course, this depends of the factory size and the kind of products they are producing. Check whether their engineers are familiar with your home country requirements. This is a must because it would be very difficult to teach them if they do not already have the necessary know how. If you want to import to the EC, the factory must only deliver products that comply with the ROHS directives, otherwise you would get into deep trouble. If they say there is no problem, ask them how they can guarantee it. You can also ask them to provide lab certificates or in case of electronic products, they must be able to show you their existing approval certificates from internationally recognized labs. You should refrain from accepting certificates from local Chinese labs because they are difficult to verify.
You need to ask the factory management about their delivery time during the low and peak seasons so that you have clear information about how long it will take to have your products shipped out. It is also good to ask them about their present order situation, which gives you an indication how well or poorly the factory is performing. If they do not have many orders, there should be an understandable reason. Good or bad, it is important for your decision-making. If the factory won’t tell you, there is a chance that their competitors know which proves one more time how important it is to visit the factories in person. A middleman may have his own interest in mind and would not inform you.
Another very important factor is whether the factory needs outside help for some production processes, these can include plastic injection molding, metal punching, painting, PCB injection, etc., or whether they can do everything in house. If a major part of the production cannot be done in house, there is always the risk that they cannot completely control the plastic injection factory and receive their plastic parts too late for timely assembly.
Factories are usually very reluctant to let you visit their subcontractors and for good reason. They work for other factories as well and the managers don’t want to introduce you to competitors you are not currently considering.
Another subcontracting practice to discuss with factory management, is transferring part of the goods to other factories for assembly or production. By all means, avoid this because you will often receive inferior goods. What is the point if you have selected a factory based one a good impression, but your products are really manufactured elsewhere. Include these subcontracting requirements in your P/O to protect your interest in the event of a claim after the goods arrive at your home country. In many cases, factories have relatives involved because of the firmly held Chinese tradition of “Guanxi”. This literally means “relationship” and demands they help each other. Guanxi may have more importance than your request for stable production quality.
Since factories sometimes 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 calculate your landed cost properly. Some ports will only have one vessel departing per week and you must know this in advance when planning shipments for promotions. I should not forget to mention that some products should only be shipped by airfreight. Notebook computers and MP3 players are typical examples. The key components of these products are ICs that fluctuate in price and at present, their prices are in constant decline. Buyers must therefore receive their goods quickly. Otherwise they will not be able to make any profit because the buying price could exceed the achievable selling price in their home country. Shipments by air are therefore unavoidable.
When discussing the payment terms with factory management, ask them for their banking details which allows you to do some background checking before you place orders with them.
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 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 volume by T/T to them 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 their production with your cash. If something goes wrong and the likelihood is rather great, you will lose your money and never receive a shipment.
Now you can negotiate your prices with the factory. Inform them about your requested specifications, quality standards, and terms. Otherwise you will receive very competitive prices but for a substandard quality which will cost you dearly later on.
Most important is making sure that the factory management understands your specifications. What sort of things do you need to specify? Have you included labeling, marks, packaging, including the quality of cardboard etc. as well as materials or components to be used? What type and colors of paints and finishes, instructions in a single language, or several languages suitable for your customers? Instructions in Chinese don’t go down well in Europe or the USA.
Many importers use the Pantone Color Chart numbers to inform the factory about their color or color combination requirement. I can tell you from my experience that the results will not be very good. Especially if you have several factories involved which need to meet your color specifications. It is much more practical and produces better results, when you use color chips instead. You can buy items having the correct color in your home country and cut off pieces of the plastic material. Always keep several reference samples for yourself and handover to each factory a piece of a reasonable size. Reasonable does not mean a thumbnail sized one because it is not large enough for the factory to make the injection color accurately. Also, consider the testing requirements necessary during manufacturing and upon completion. Do you need CE or ROHS approvals for importing electrical goods to Europe? If wood is contained in the product or the packaging are fumigation certificates required?
Be Wary of Fake Goods
Does the factory or supplier own the intellectual property rights of the product? Don’t believe you can import well known international brands unless you intend to buy them from the brand owner. Gucci, Samsung , Sony, or Philips or any owner of a well known brand certainly won’t allow a Chinese supplier to sell their branded products at low prices through the back door! China is probably the world’s largest source of fake or pirated goods with well-known logos and branding that are simply copies or worse just a logo stuck on a similar looking product.
Not only will there be little or no warranty but worse, you risk serious legal action and possibly a criminal conviction if you cannot show proof of ownership of the brand name or an agreement with the brand owner when you import. You have been warned now and please don’t even consider trying importing fake goods; it would destroy your reputation at home besides the legal proceedings.
Your request automatically sets the standards for the sample preparation, mass production, and inspection. You now understand why negotiations should be done in person by talking to the responsible managers.
If you use identical procedures for all your negotiations; you will receive directly comparable quotations from the different factories to make your choice from.
Since you will visit one or more factories on the same day or soon after, you will have a pretty good impression about their performance, which also needs to be considered besides the price for your important decision making.